Tax Implications on Capital Gains Earned by NRIs

• NRI capital gains tax on shares is a tax that NRIs are required to pay on the profits earned from the sale of listed and unlisted shares.
• The tax is categorised as short-term capital gains tax and long-term capital gains tax.
• The Union Budget 2024 changed the STCG rate to 20% and the LTCG rate to 12.5%.

The Indian stock market has always been attractive for earning good returns based on extensive company and market research. A majority of investors in the stock market are Indians, including Indians who do not reside in India. These individuals, called Non-resident Indians (NRIs), also invest in the Indian stock market to buy shares of listed companies and make profits by selling the shares when their price reaches a higher price target. However, the Indian government and the Finance Ministry levy a tax called capital gains tax on the sale of listed and unlisted shares. In the Union Budget 2024, the Indian Finance Minister, Ms. Nirmala Sitharaman, announced numerous changes to the NRI capital gains tax on shares.

If you are an NRI who invests in listed and unlisted shares in India, it is important to know the updated changes to the NRI capital gains tax on shares. This blog will help you understand your tax liability by learning about the changed NRI capital gains tax on shares.

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What is NRI capital gains tax on shares?

NRI capital gains tax on shares refers to the tax levied on non-resident Indians (NRIs) based on the profits earned from the sale of shares in India. The tax levied on the sale of shares, units of business trusts, and equity-oriented mutual fund units is categorised into two types of capital gains tax:

• Short-Term capital gains (STCG): Gains from selling shares, units of business trusts, and equity-oriented mutual fund units held for less than 12 months, taxed at 20% (previously 15%), along with applicable surcharge and cess.
• Long-term capital gains: Gains from selling shares, units of business trusts, and equity-oriented mutual fund units held for more than 12 months, taxed at 12.5% (previously 10%), along with applicable surcharge and cess.

The change in NRI capital gains tax on shares in the long term also relates to the overall exemption limit. Before the Union Budget 2024 announcement, the LTCG tax was 10% on capital gains arising from the sale of shares, units of business trusts, and equity-oriented mutual fund units that exceed Rs. 1 lakh. However, in the Union Budget 2024, the threshold limit was changed to Rs. 1.25 lakh, and the rate of long-term capital gains tax for NRIs was changed to 12.5% without indexation. Indexation is used to adjust the value of the shares to account for inflation.

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Tax exemptions on capital gains tax for NRIs

Here are the situations when NRIs are not required to pay NRI capital gains tax on various assets:

• Exemption for long-term residential property: Under section 54, NRIs can claim tax exemptions if they reinvest the capital gains made from selling a residential property to buy a new residential property. The NRIs can buy two residential houses from the sale proceeds of a resident property and claim a tax deduction if the sale proceeds do not exceed Rs. 2 crore.
• Exemption for other long-term capital assets: Under section 54F, NRIs are allowed to claim a tax deduction on capital gains made on selling a long-term capital asset that is not a residential property.
• Conditions for exemption: The NRI must purchase new residential property under both sections within a specific timeframe set by the government from the date of transfer. The property must be held for at least three years after the purchase date.
• Exemption on specific bonds: Under section 54EC, NRIs can claim a tax deduction on capital gains if they reinvest the amount in specific bonds within a set timeframe. The threshold limit for an exemption under the section is Rs. 50 lakh.
• Capital gains account scheme: NRI can invest the LTCG amount in a capital gains account offered by designated banks if they have not invested the capital gains amount until the ITR filing due date. The amount invested is exempted from tax. The NRIs can withdraw the amount within a specific time frame.

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One of the most important changes brought about by the Union Budget 2024 was the change in the Tax Deducted at Source (TDS) on capital gains. The change was made applicable to both Indian citizens and Non-resident Indians. The new TDS provisions as a part of NRI capital gains tax on shares and other assets are as follows:

• The TDS rate on listed shares from which short-term capital gains have been earned has been hiked from 15% to 20%.
• The TDS rate on listed equities from which long-term capital gains have been earned has been hiked from 10% to 12.5% without indexation benefits.

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NRIs make up a substantial part of the Indian stock market as they invest in Indian equities from their resident country. The Indian government, along with the Finance Ministry, have set various rules and regulations to tax the capital gains arising out of the sale of shares, units of business trusts, and equity-oriented mutual fund units. In the Union Budget 2024, the tax rates were changed to 12.5% for LTCG and 20% for STCG. It is important that you analyse these changes and ensure that you comply with the tax laws effectively.