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Non-resident Indians (NRIs) investing in property, shares, and other assets must deal with complex tax implications often applied to profits they earn from the sale of non-inventory assets. The profit is termed as capital gain tax, and it is essential to understand how it is applied.
The landscape of this tax for NRIs isn’t limited to property but extends to shares, bonds, and other assets. In this blog, we will delve into long-term and short-term capital gains and how they are taxed.
What is the Difference Between Long-Term & Short-Term Capital Gains?
Short-Term Capital Gains (STCG)
Long-Term Capital Gains (LTCG)
Profits earned from selling assets are held for a shorter duration (less than a year for shares and three years for property).
Profits from assets held for longer periods (more than a year for shares and more than three years for real estate).
What NRIs Should Know About Capital Gains Tax on Property?
NRIs need to be aware of several key points regarding capital gains tax on property:
Type of Gain: Property held for over two years results in a long-term capital gain (LTCG), while property held for less is a short-term capital gain (STCG).
Tax Rate: LTCG is taxed at 20%, whereas STCG is added to the NRIs income and taxed according to the applicable slab rate.
Exemptions: NRIs can reduce tax liability by reinvesting the sale proceeds in another property in India or specific bonds within a stipulated time.
TDS on Sale: Buyers must deduct 20% TDS on LTCG and 30% on STCG when purchasing a property from an NRI. NRIs should obtain a tax certificate from the buyer for documentation and tax filing.
What NRIs Should Know About Capital Gains Tax on Shares?
Understanding capital gains tax on shares in India is crucial for NRIs:
Nature of the Gain: Shares held for over a year result in long-term capital gain (LTCG), while shares held for less than a year result in short-term capital gain (STCG).
Tax Rates: LTCG exceeding ₹1 lakh is taxed at 10% without indexation benefits. STCG is taxed at a flat rate of 15%.
Indexation: Shares do not receive indexation benefits, unlike property.
TDS on Capital Gains: Brokers deduct TDS on capital gains when NRIs sell shares.
DTAA: The Double Taxation Avoidance Agreement (DTAA) between India and the NRI's resident country can offer tax relief, preventing double taxation on the same income.
What Are the Implications & Tax Rates on Long-Term Capital Gains for NRIs?
Understanding the implications and tax rates on long-term capital gains (LTCG) is essential for NRIs:
Tax Rates:
Property: LTCG on a property is taxed at 20% with indexation benefits.
Equities: LTCG on shares is taxed at 10% if the gain exceeds ₹1 lakh, with no indexation benefit.
Indexation: This adjusts the purchase price for inflation, effectively reducing the taxable capital gain amount. It is particularly beneficial for property sellers.
Exemptions: NRIs can reduce their tax liability by investing LTCG in specific bonds (such as NHAI or REC) or by purchasing another property in India.
Tax Deduction at Source (TDS): Banks or property buyers deduct TDS at 20% on LTCG for NRIs. NRIs need to ensure TDS is correctly deducted during transactions.
Foreign Exchange Factor: NRIs should consider the impact of the rupee-dollar exchange rate on their gains, as fluctuations can affect the overall returns from their investments.
What Are the Implications & Tax Rates on Short-Term Capital Gains for NRIs?
Understanding the implications and tax rates on short-term capital gains (STCG) is crucial for NRIs:
Tax Rates:
Equity Shares: The STCG tax rate is 15% for shares sold on a recognised stock exchange with paid Securities Transaction Tax (STT).
Other Assets (e.g., Property): The STCG tax rate for NRIs is typically 30%.
Tax Deduction at Source (TDS):
Property: When a property is sold, the buyer deducts TDS at a rate of 30%.
Shares: TDS for shares can vary based on the transaction mode.
No Indexation: Unlike long-term capital gains (LTCG), STCG does not have an indexation benefit. This means NRIs cannot adjust their purchase cost for inflation, potentially leading to higher taxable gains.
Tax Treaty Benefits: NRIs should consider the Double Taxation Avoidance Agreement (DTAA) between India and their resident country. The DTAA may offer specific relief and help reduce overall tax liabilities.
How to Minimise Capital Gains Liability? Smart Tax Strategies for NRIs
For NRIs, strategic planning can help minimise tax liabilities associated with capital gains. Here are some intelligent tax strategies:
Holding Period: Hold equity investments for over a year to qualify for long-term capital gains (LTCG), which usually have more favourable tax rates than short-term gains.
Use Exemptions: Claim exemptions on LTCG from property sales by investing in specified assets, such as capital gain bonds, within six months of the sale.
Tax Jurisdiction: Check the Double Taxation Avoidance Agreement (DTAA) between India and your resident country. Some countries offer credits for taxes paid in another country, providing potential relief.
Gift Assets: Consider gifting properties or shares to family members in lower tax brackets. However, recipients should be aware of the tax implications when the assets are eventually sold.
Indexation Benefits: Use the Cost Inflation Index (CII) to adjust the purchase price of your property, reducing the taxable capital gain amount.
Re-invest: Reinvest gains into new properties to defer tax liabilities, ensuring they align with the stipulated time frames of Indian tax laws.
Seek Expert Advice: Consult tax experts familiar with Indian and foreign regulations to tailor a specific strategy.
What are the Tax Exemptions for NRIs in India?
NRIs can benefit from various tax exemptions in India. Here are some critical exemptions:
Interest Income: Interest earned on NRE and FCNR accounts is tax-free.
DTAA: Prevents double taxation on the same income in India and the foreign country.
LTCG on Equities: Tax exemption on gains from equity investments held for over a year, up to a limit.
Reinvestment Benefits: Exemptions on capital gains if profit is reinvested in property or specified bonds.
Indexation Benefit: Adjusts purchase cost using the Cost Inflation Index for assets like debt mutual funds.
RNOR Status: Foreign income is not taxed in India unless received or accrued in India.
Gift Exemption: No gift tax on money gifted to parents or children; only the income generated from it is taxable.
How to Smartly Manage Capital Gains?
For NRIs, managing capital gains tax is crucial. It's not just about buying low and selling high; it's about understanding tax implications and planning strategically to optimise returns.
Stay Updated: Regularly check for updates on Indian tax laws to ensure compliance and make informed decisions.
Leverage Exemptions: Reduce tax liability by reinvesting gains in specified assets or bonds. This strategy helps avoid hefty taxes.
Diversify Your Portfolio: Spread investments across different assets to manage risk and benefit from tax implications.
Seek Professional Advice: Consult tax professionals or financial advisors familiar with NRI taxation for personalised strategies.
In Conclusion
Managing capital gains and taxes levied on them is essential to managing finances. For NRIs, it's not just about making investments but making them smartly, ensuring every rupee works as hard as they do. It is advisable to seek professional advice to maximise your return and reduce your tax liability.
FAQs
Q1. Are there exemptions available for NRIs on capital gains?
Yes, NRIs can avail specific exemptions under sections 54, 54EC, and others based on the type of asset and reinvestment.
Q2. What is the exemption of capital gains tax in India?
Capital gains tax exemptions in India include reinvesting profits into specified assets or real estate (under sections 54, 54F, etc.), investing in capital gains bonds (Section 54EC), and setting up a specified business (Section 54GB).
Q3. Is TDS applicable on capital gains for NRIs?
Yes, the buyer must typically deduct TDS when purchasing a property from an NRI.
Q4. How can NRIs avoid double taxation on capital gains?
NRIs can avail themselves of benefits under the Double Taxation Avoidance Agreement (DTAA) between India and their resident country.
Q5. Can an NRI get a refund for excess TDS deducted on capital gains?
Yes, if excess TDS has been deducted, NRIs can file an income tax return in India to claim a refund.
Arnav is a dedicated product leader with a passion for finance and fintech. He graduated from IIT Bombay and IIM Calcutta and heads the Product team at Vance. He has extensive experience in the financial sector, with a deep understanding of the cross-border space. In his free time, he enjoys playing the guitar, rock climbing, and training for triathlons.
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