The Non-Resident Indian (NRI) can make investments in the equity shares of both listed/unlisted Indian companies and India’s mutual funds subject to the restrictions or conditions in the Foreign Exchange Management Act (FEMA) and as per regulations laid down by RBI. The government permits NRIs to invest in government securities, debentures, listed non-convertible debentures, etc., either on repatriation or non-repatriation. The tax rate depends upon the type of instrument and the period for which the non-residents hold them before selling.
The tax liability on a capital gain can be classified as below, depending upon the class of instruments and the period held by the non-resident before the sale of investment:
- Long term capital gain on equity shares (listed) or equity-oriented mutual funds
- Long term capital gain on other assets
- Short term capital gain on equity shares (listed) or equity-oriented mutual funds
- Short term capital gain on other assets
How are capital gains taxed for NRI?
Long term Capital Gain On Sale Of Equity Shares (Listed) or Equity Oriented Mutual Fund Units:
The equity shares that are listed or equity-oriented mutual funds held for a period above 12 months are long term instruments. Sale of such instruments shall be taxable at the rate of 10% if the gain on sale is more than Rs. 1 lakh. In case the long term gain is less than Rs. 1 lakh, then the gain is exempt from tax. Provided the Securities Transaction Tax (STT) paid on acquisition and sale of equity shares. In the case of equity-oriented mutual funds, STT must be paid on the sale of units. Also, no indexation benefit is allowed on the cost of acquisition.
Long Term Capital Gain On Other Assets
The unlisted shares (other than debt mutual funds) or securities of an Indian company, if held for more than 24 months, are classified as long term capital gain assets. However, the tax liability of such securities is 10% without indexation benefit.
In the case of debt-oriented mutual funds, if the units are held for more than 36 months by the NRI, then they are termed as long term capital gain assets. The tax liability on such a type of transaction is 20% after indexation.
Short Term Capital Gain On Equity Shares (Listed) Or Equity Oriented Mutual Funds
If the equity shares and equity-oriented mutual fund units are sold before 12 months of its acquisition, then the gain is classified as short term capital gain. Such short term capital gain will be taxable at 15%. Provided STT should be paid on such transactions.
Short Term Capital Gain On Other Assets
To qualify as short term capital gain, the securities (other than debt mutual funds) and shares holding period must be less than 24 months. If the instruments are held in such a manner, then tax on short term capital gain is calculated as per the slab rate applicable to the non-resident.
The debt oriented mutual funds shall be classified as short term if they are held for less than 36 months. However, the gain on such instruments is calculated based on the applicable tax slab rates.
How Non-Resident pays tax On Capital Gains
The above rates mentioned are excluding the health and education cess that chargeable at the rate of 4% over and above the given income tax rates and surcharge. Unlike the resident Indians, the non-residents are not eligible to benefit from the basic exemption limit.
It is important to note that any redemption made by a non-resident is subject to tax deduction at source at the highest tax rates. For any short term capital gain on unlisted securities, the TDS shall be the highest tax slab rate, i.e. 30%.
Relief From Double Taxation
The Non-resident can take relief from double taxation if India has signed the Double Taxation Avoidance Agreement (DTAA) with the country of his residence. As per the treaty, the NRIs can pay tax at either of the countries or pay the tax in both the countries and claim tax relief in the country of their residence.