NRI Capital Gains and Their Taxability in India

An NRI needs to pay tax only on the income they earn from an Indian source. This may include income from bank deposits, shares of listed companies, jewellery, business ventures, and any immovable property. The most common transaction that an NRI does is selling a property in India. However, do you know that these transactions draw capital gain taxes? In this blog, we will discuss everything that you need to know about the applicable taxes, meaning, and the impact of capital gains on an NRI in India.

What is Capital Gains Tax in India?

Any profit or gain that is derived after selling a "capital asset" is known as income from capital gains. Capital assets include land, buildings, house property, patents, machinery, leasehold rights, etc. It can also include having rights, management, and control in an Indian company or any other legal right. These gains are taxable in the year in which the transfer of the capital assets occurs. There are two types of Capital gains: short-term capital gains, known as STCG, and long-term capital gains, or LTCG. Before discussing the types of capital gains, let's understand the types of capital assets:

What are the Types of Capital Assets?

There are two types of capital assets, which are as follows:

Short-term Capital Asset (STCA)

Any assets that are kept for a period of less than 36 months will be considered as Short-term capital assets. So, if the asset is sold within 36 months of acquisition, then it will be called a short-term capital asset.

The following are the assets that will be determined as Short-term capital assets even when they are held for 12 months or less:

• Units of UTI don't matter if quoted or not.
• Equity-oriented mutual fund units or zero-coupon bonds, whether quoted or not.
• A recognised Indian stock exchange company's equity or preference shares.
• Any security that is listed on a recognised stock exchange in India. It can include debentures, bonds, government securities, etc.

Long-Term Capital Asset (LTCA)

An asset that is kept for more than 36 months will be determined as a long-term capital asset. In short, if you sell the asset after this specified period of 36 months of acquisition, then it would be known as a long-term capital asset. Capital assets like land, buildings, and house property will be considered as long-term capital assets if the owner does not sell them for a period of 24 months or more.

The following assets shall be considered as Long-term capital assets if held for more than a period of 12 months:

• Equity-Oriented Mutual Fund Units
• A recognised Indian stock exchange company's equity shares.
• Units of UTI.
• Listed securities include debentures, bonds, and government securities traded on a recognised Indian stock exchange company.

STCG vs LTCG Holding Period

Things that Will Not Be Considered as Capital Assets

1. Special bearer bonds (1991).
2. Stock, consumable, or raw materials that are kept for professional or business purposes.
3. Items held for personal use, such as clothes and furniture.
4. Gold deposit bonds issued under the Gold Deposit Scheme (1999) or a deposit certificate issued under the Gold Monetisation Scheme 2015, and 2019, notified by the Central Government.
5. 6% gold bonds (1977) 7% gold bonds (1980), or national defence gold bonds (1980) issued by the Central Government.
6. Agricultural land in rural India

What is a rural area?

To determine if a land is rural agricultural land, we need to first identify if it is rural land. In terms of capital gains, rural land is determined depending on the distance of the land from its nearest municipality or cantonment board and its population. The following will be considered as rural land:

Taxation for NRI Capital Gains in India

Depending on the residential status of a person, the applicability of the Indian Tax laws will be decided. An Indian resident is liable to pay taxes on global income, while an NRI (Non-Resident Indian) will have to pay taxes on the income that is accrued in India. The tax effects of investments made by an NRI will depend completely on the nature of the investment, which can be either Short-term Capital Gains (STCG) or Long-Term Capital Gains (LTCG):

• Short-Term Capital Gains (STCG): The STCG refers to the income that is derived after the sale of capital assets, which are held for less than the specified holding period. The holding period may differ based on the asset type:
  • Debt mutual funds, Market-linked debentures, and Unlisted bonds or Debentures are considered short-term always.
  • An equity-oriented mutual fund, units of UTI, and listed equity shares: Held for less than 12 months.
  • An Immovable property, such as land or a building: Held for less than 24 months. 
• Long-Term Capital Gains (LTCG): In contrast to STCG, Long-Term Capital Gains are derived from the sale of capital gains held beyond the specified holding period.
  • Listed equity shares, units of UTI, and equity-oriented mutual funds: Held for either 12 months or more.
  • An immovable property such as land or a building: Held for either 24 months or more.

Investment Types and Their Tax Implications

Understanding the tax implications for different types of investment is vital for NRIs wanting to maximise their returns while following the Indian tax law rules. Below are the main types of investments and their tax implications:

Debt Funds and Any Other Capital Assets Taxability

This is for investments in other shares apart from unlisted securities and other capital assets; the difference between short and long-term is vital. If kept for nearly 24 months, it's considered long-term, and if not, then it is deemed as short-term. Long-term gains from these types of investments are liable to a tax rate of 12.5% without indexation. While short-term gains are combined into the taxable income and are taxed as per the applicable slab rate. Moreover, both the gains are subject to an extra education and higher education cess of 4%.

Capital Gains on Shares for NRI

Based on the duration of the investment, the tax implications on capital gains for a listed equity share or equity-oriented mutual fund will be different. A shorter duration of less than 12 months falls under the category of short-term capital gains, in which the NRI is liable for a tax rate of 20% along with a corresponding TDS of a similar rate.

Investments held for longer than a duration of 12 months are considered long-term capital gains. 12.5% of the tax rate is applied here; however, it is only applicable to gains that exceed Rs. 1.25 lakhs. Furthermore, a TDS deduction of 10% applies to these long-term capital gains. The difference between short-term and long-term capital gains gives a more subtle understanding of the tax liabilities. Along with offering incentives for long-term investments, it also ensures to provide a fair taxation system for short-term gains.

Did you earn capital gains as an NRI recently? Don't worry, if you want to know how your gains and dividends will be taxed, contact the experts at Savetaxs and minimise your taxes. Their experts can guide and help you with everything you need to know to comply with the Indian Tax Laws.

Fixed Deposit Investments Taxability for NRIs

NRO Account Fixed Deposits

• A 30% TDS (Tax Deducted at Source) will be applicable on all interest that is earned, and that too without any threshold exceptions.
• The interest on fixed deposits earned from an NRO (Non-Resident Ordinary) account will be fully taxed in India.
• It includes FD interest received from various income sources like rent, dividends, pensions, and any other earnings that occur within India.
• NRIs need to pay TDS on the entire interest amount, unlike an Indian resident, who has the benefit of a deduction threshold of nearly 40,000 rupees.

NRE Account Fixed Deposits

• An NRE account can be an ideal choice for an NRI looking to invest in India with better tax efficiency.
• In contrast to an NRO account, interest earned on FD or savings from an NRE (Non-Resident External) account is completely free from any kind of tax liability in India.

Tax Rate When Selling Unlisted Shares

In case you sell the unlisted shares within 2 years of purchasing them, then the gains will be considered Short-term capital gains (STCG). The applicable tax rate will depend on the individual's income tax slab. In contrast, if sold after 2 years, the gains will be classified as Long-term capital gains (LTCG), and the tax rate will be a flat 20%.

Tax Rates on Capital Gains on Sale of Property by NRIs

An NRI faces specific tax rates on capital gains earned from property sales. LTCG on property is taxed at a flat rate of 12.5% without indexation. For Long-term Capital gains on equity shares and equity-oriented mutual funds, the tax rate is also 12.5% on gains exceeding the limit of Rs. 1.25 lakhs, while other assets incur a tax of 12.5%. Notably, taxpayers can choose between a 12.5% tax rate without indexation or a 20% tax rate with indexation for any immovable property purchased before the 23rd of July 2024.

Short-term Capital gains will depend on whether Securities Transaction Tax (STT) is applicable or not. If STT applies, a tax rate of 20% is charged. However, if STT is not applicable, then STCG will be taxed at the regular income tax slab rates.

Tax Implications on Purchase or Sale of Property by NRIs

For property valued over Rs 50 lakhs, an NRI must deduct 1% TDS from the payment made to the seller under Section 194-IA of the Income Tax Act. The applicable tax rates will depend on the period of ownership or holding period, which are as follows:

Tax Rates on Capital Gains for NRIs

Tax Savings Option for NRIs on Capital Gains

An NRI can take several exemptions and investment advantages for long-term capital gains and use them to enjoy tax benefits:

• Section 54: This applies to LTCG from the sale of a residential property. An NRI can claim an exception if they reinvest the LTCG amount in any other residential property within 2 years, or construct a new property within 3 years.
• Section 54EC: This section is relevant to long-term capital gains from the sale of land or buildings. To avail of this exemption, an NRI must invest the LTCG amount in specific bonds, like REC (Rural Electrification Corporation) or NHA (National Highway Authority of India), within six months of the sale. These bonds have a five-year lock-in period.
• Section 54F: It applies to LTCG from the sale of any asset other than a residential property. An exemption is available if the LTCG amount is reinvested in a residential property within 1 year before or 2 years after the sale. Or if a new residential property is constructed within 3 years.

How to Calculate Capital Gain Tax for NRIs?

To calculate capital gains tax for an NRI, you need to follow a simple formula:

Short-Term Capital Gains (STCG)

Step 1: Start with the sale price
Step 2: Add purchase price and transfer expenses
Step 3: Subtracted the added value from the sale price
Step 4: The resulting amount is the short-term capital gain that needs to be taxed.

Formula to calculate Short-term capital gains

STCG = Sale Price - (Purchase Price + Transfer Expenses)

Long-Term Capital Gains (LTCG)

Step 1: Start with the Sale Price
Step 2: Add Indexed Cost of Acquisition and Indexed Improvement.
Step 3: Subtract the added value from the sale price
Step 4: The final amount will be the long-term capital gains. 

Formula to calculate Long-term capital gains

LTCG = Sale Price - (Indexed Cost of Acquisition + Indexed Improvement)

Special Tax Regime for NRI Investors 

NRIs investing in certain specified Indian assets, whose income is the only income during the year and for which the TDS has been deducted, do not require an NRI to file an ITR. Investments that qualify include:

• Any security of the Central Government.
• Deposits made with any public company or bank.
• Shares of public and private Indian companies.
• Debentures from a publicly listed Indian company
• Any other Central Government assets as stated in the official gazette for this purpose.

Note that no deductions under section 80 can be claimed while calculating investment income.

Special Provisions for Long-Term Capital Gains

For LTCG from the sale of these assets, indexation and deduction under section 80 are also not available. However, an exemption under Section 115F is available if the profit amount is reinvested into any of the following assets:

• NSC VI and VII issues.
• Securities of the Central Government.
• Indian company shares.
• Debentures of an Indian public company.

If the newly acquired assets are sold within 24 months, then the previously exempted profit will be added to the taxpayer's income and will be taxed accordingly. NRIs can benefit from these provisions even if they later become residents, as long as they do not convert the funds to cash. Additionally, if the NRI wishes to withdraw these special provisions, the income will be subject to tax under the regular provisions of the Income Tax Act.

Considerations for Choosing the Special Tax Regime

NRIs should carefully consider the following before choosing the special tax regime:

• Loss of Deductions: Choosing this regime means losing deductions available under Chapter VI-a and the perks of indexation.
• Simplified Compliance: To make compliance simple, NRIs with income from only specified assets with deducted TDS do not have to file a tax return.

Terms You Must Know

• Cost of Acquisition: The amount for which the capital assets were obtained by the seller.
• Cost of Improvement: Costs associated with a capital nature that arise while making improvements or modifications to the capital assets by the seller.
• Full Value Consideration: The consideration that is received or to be received by the seller against the transfer of his capital assets. Capital gains are subject to taxes in the year of transfer, regardless of whether any consideration has been received.

To Conclude

Being an NRI, this blog will help you learn about the tax implications on capital gains earned from different sources and the exemptions under Section 54 and Section 54F. Understanding these provisions is not only important for making timely investments but also for availing all the benefits related to tax available for an NRI. If you are an NRI seeking to reduce your capital gains tax burden, then Savetaxs is the perfect destination for you. Our experts can assist you in navigating complex tax obligations and provide you with the best solutions for tax situations. Book an appointment with our expert team today

Note: This guide is for information purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult with either a Chartered Accountant (CA) or a professional Company Secretary (CS) from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.