LTCG Rate for NRIs: Understanding the Tax Implications on Long-Term Capital Gains

 Non-Resident Indians (NRIs) often invest in various assets in India, such as property, stocks, and mutual funds. When they sell these assets, they may incur Long-Term Capital Gains (LTCG), which are subject to tax. Understanding the LTCG rate for NRIs is crucial for tax planning and optimizing returns on investments. This blog explores the LTCG taxation for NRIs, the applicable rates, and key considerations.

1. What is Long-Term Capital Gain (LTCG)?

Long-Term Capital Gains (LTCG) are the profits made from the sale of assets that have been held for a specific duration. The duration for an asset to be considered long-term varies depending on the type of asset:

• Property: Held for more than 24 months.
• Stocks and Mutual Funds: Held for more than 12 months.
• Debt Instruments: Held for more than 36 months.

If the asset is held for the required period and sold for a profit, the profit is classified as LTCG.

2. LTCG Tax Rates for NRIs

The tax rate on LTCG rate for NRI depends on the type of asset sold. Here are the key tax rates applicable:

a. LTCG on Property (Real Estate)

For NRIs, the LTCG on the sale of property is subject to a tax rate of 20% with the benefit of indexation. Indexation allows NRIs to adjust the purchase price of the property to account for inflation, thus reducing the taxable gain.

• Indexation: This process adjusts the cost of acquisition and improvement of the property for inflation using the Cost Inflation Index (CII) notified by the Indian government.
• Tax Rate: The effective LTCG tax rate on property is 20%, but with indexation, the taxable gain can be significantly reduced.

b. LTCG on Stocks and Mutual Funds

If an NRI sells stocks or equity mutual funds after holding them for more than 12 months, the gain is considered long-term and is subject to a tax rate of 10% on the amount exceeding INR 1 lakh in a financial year. This tax is applicable without the benefit of indexation.

• Exemption Limit: NRIs can earn up to INR 1 lakh in LTCG from stocks and mutual funds without paying any tax.
• Tax Rate: Once the LTCG exceeds INR 1 lakh, the tax rate is 10% on the excess amount.

c. LTCG on Debt Instruments (Bonds, Debentures)

For debt instruments like bonds and debentures, the LTCG tax rate for NRIs is 20% with indexation benefits, similar to property. However, the tax on interest income from debt instruments is taxed at the applicable rate of TDS (Tax Deducted at Source).

3. Rebates and Exemptions for NRIs on LTCG

NRIs can also avail of certain exemptions and reliefs under the Indian tax laws to minimize their LTCG tax liability:

a. Section 54: Exemption on Residential Property Sale

Under Section 54 of the Income Tax Act, NRIs can claim an exemption from LTCG tax if they invest the proceeds from the sale of a residential property in another residential property. The amount of exemption is proportional to the amount reinvested.

• Eligibility: The property must be a residential property, and the reinvestment must be made within a specified time frame after the sale.

b. Section 54EC: Investment in Bonds

Under Section 54EC, NRIs can claim a tax exemption on LTCG arising from the sale of property by investing the proceeds in specified bonds, such as bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). The maximum amount that can be invested in these bonds is INR 50 lakh.

• Eligibility: The investment in these bonds must be made within six months of the property sale.
• Tax Relief: This exemption is available only if the investment is held for a minimum of three years.

4. Double Taxation Avoidance Agreement (DTAA) and LTCG

India has signed Double Taxation Avoidance Agreements (DTAAs) with several countries to prevent NRIs from being taxed twice on the same income. If an NRI is subject to capital gains tax in their country of residence, the DTAA may provide relief by reducing the tax rate in India.

• DTAA Benefits: NRIs can use the DTAA to offset taxes paid in their country of residence against their Indian tax liability on LTCG.
• Tax Credit: NRIs can claim a tax credit for taxes paid abroad, reducing their overall tax liability.

5. How is LTCG Taxed on Repatriation?

If NRIs repatriate the proceeds from the sale of property or investments in India, they must consider the following:

• Repatriation Process: NRIs can repatriate funds from their NRE accounts without restrictions, but repatriation from NRO accounts is subject to tax and certain limits.
• LTCG Tax Payment: Before repatriating the funds, NRIs must ensure that the applicable LTCG tax is paid on the gains made from the sale.

6. Conclusion

LTCG tax rates for NRIs depend on the type of asset sold and the holding period. While the tax rate for property and debt instruments is 20% with indexation, the tax on stocks and mutual funds is 10% for gains exceeding INR 1 lakh. NRIs can also take advantage of exemptions and deductions under various sections of the Income Tax Act to reduce their tax liability.

As the rules and regulations around LTCG taxation can be complex, it is advisable for NRIs to consult tax professionals for proper guidance and tax planning.

For expert advice on LTCG tax for NRIs and to ensure that you are compliant with Indian tax laws, Dinesh Aarjav & Associates is here to assist you with all your taxation needs.