Long-Term Capital Gains (LTCG) tax is a crucial element of financial planning for Non-Resident Indians (NRIs) who invest in India. Understanding the applicable tax rates and exemptions can help NRIs optimize their tax liabilities while complying with Indian tax laws. Additionally, Tax Deducted at Source (TDS) plays a significant role in NRI taxation, as it is deducted at the time of the transaction.

This blog provides an in-depth look at the LTCG and TDS rates for NRI, their applicability, and key considerations.

What is Long-Term Capital Gains (LTCG) Tax?

LTCG tax is levied on profits earned from the sale of capital assets, such as real estate, shares, mutual funds, and other financial instruments, held for a specified period. In India, the holding period to qualify for LTCG varies based on the asset type:

• Real estate: More than 24 months

• Listed equity shares & equity mutual funds: More than 12 months

• Debt mutual funds & unlisted shares: More than 36 months

• Other assets (gold, bonds, etc.): More than 36 months

If the holding period is less than the above limits, the gains are categorized as Short-Term Capital Gains (STCG), which are taxed differently.

LTCG Tax Rates for NRIs

The LTCG tax rate for NRIs depends on the type of asset sold:

1. LTCG on Sale of Immovable Property (Real Estate)

• Tax Rate: 20% (plus applicable surcharge and cess)

• NRIs are subject to TDS at 20% when selling property in India.

• Exemptions may be available under Sections 54, 54EC, and 54F if reinvestment is made in residential property or capital gain bonds.

2. LTCG on Listed Equity Shares & Equity Mutual Funds

• Tax Rate: 10% (plus surcharge and cess) on gains exceeding ₹1 lakh in a financial year (under Section 112A).

• No indexation benefit is available for NRIs.

• Securities Transaction Tax (STT) is applicable on transactions.

3. LTCG on Debt Mutual Funds, Unlisted Shares & Other Assets

• Tax Rate: 20% (plus surcharge and cess) with indexation benefit.

• For unlisted shares, the tax rate is 10% without indexation.

4. LTCG on NRO Fixed Deposits & Other Investments

• Interest income from NRO fixed deposits is taxed as per individual slab rates.

• Gains from bonds and other fixed-income securities are taxed at 10-20% depending on the instrument.

TDS Rates for NRIs

TDS is applicable on different types of income earned by NRIs, including capital gains. The TDS rates vary as follows:

• Sale of Immovable Property: TDS at 20% on LTCG, deducted by the buyer.

• Sale of Listed Equity Shares & Mutual Funds: No TDS on LTCG, but gains must be reported in tax returns.

• Sale of Debt Mutual Funds: TDS at 20% on LTCG (with indexation benefits).

• Interest from NRO Fixed Deposits: TDS at 30%.

• Interest from NRE & FCNR Accounts: No TDS, as these accounts are tax-free in India.

How NRIs Can Reduce LTCG Tax Liability

NRIs can reduce their LTCG tax burden through the following strategies:

1. Utilizing Exemptions Under the Income Tax Act

NRIs can claim exemptions on LTCG tax under the following sections:

• Section 54: Exemption on LTCG from the sale of property if reinvested in another residential property in India.

• Section 54EC: Exemption on gains from real estate if invested in specified bonds (such as NHAI, REC) within 6 months.

• Section 54F: Exemption on LTCG from other capital assets if the entire sale proceeds are reinvested in residential property.

2. Investing in Tax-Free Instruments

NRIs can explore investment options such as NRE Fixed Deposits, FCNR accounts, and tax-free bonds to minimize taxable income.

3. Claiming DTAA Benefits

NRIs from countries that have a Double Taxation Avoidance Agreement (DTAA) with India may benefit from lower TDS rates or claim tax credits in their resident country to avoid double taxation.

LTCG Tax Filing Requirements for NRIs

Despite the deduction of TDS, NRIs must file an Income Tax Return (ITR) in India if their total taxable income exceeds the basic exemption limit. Key points to consider:

• Filing ITR helps claim refunds on excess TDS deducted.

• Capital gains must be reported under the appropriate schedule of the ITR.

• Proof of investment for exemption claims (e.g., purchase deed, bond certificates) should be maintained.

Conclusion

Understanding the LTCG and TDS rates for NRIs is essential for effective tax planning. By leveraging exemptions under Sections 54, 54EC, and 54F, investing in tax-free instruments, and utilizing DTAA provisions, NRIs can optimize their tax liability while staying compliant. It is advisable to consult with tax professionals for better financial planning and compliance.

For personalized assistance with LTCG tax planning, reach out to Dinesh Aarjav & Associates, experts in NRI taxation and financial advisory.