Understanding LTCG and TDS Rates for NRIs

 As a Non-Resident Indian (NRI), managing investments in India involves understanding the intricacies of taxes, especially Long-Term Capital Gains (LTCG) tax and Tax Deducted at Source (TDS) rates. These taxes are crucial when it comes to property sales, investments in stocks, and other capital assets. This blog provides a comprehensive understanding of LTCG and TDS rates for NRIs, offering insights into how these taxes are calculated and how to ensure compliance.


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

Long-Term Capital Gains (LTCG) refer to the profit made from the sale of assets such as property, stocks, or mutual funds, which have been held for a long period. The Indian tax laws classify capital gains into two categories based on the holding period:

  • Short-Term Capital Gains (STCG): Profits from assets held for a shorter duration (less than 36 months for property and less than 12 months for stocks and mutual funds).
  • Long-Term Capital Gains (LTCG): Profits from assets held for a longer duration (more than 36 months for property and more than 12 months for stocks and mutual funds).

LTCG is typically taxed at a more favorable rate than STCG, making it an attractive tax structure for investors.

2. LTCG Tax for NRIs

For NRIs, the LTCG and TDS rates for NRI tax applies when they sell assets in India that have been held for the specified duration. The tax rates and conditions depend on the type of asset:

a. Real Estate (Property)

When an NRI sells a property after holding it for more than 36 months, the capital gains are considered long-term. The LTCG on the sale of property is taxed at 20% with the benefit of indexation. Indexation helps reduce the capital gain by adjusting the purchase price for inflation, which in turn lowers the taxable amount.

  • Example: If an NRI sells a property for INR 50 lakh, which was bought for INR 30 lakh, the capital gain would be calculated after factoring in the indexation benefit, thus reducing the taxable amount.

b. Stocks and Mutual Funds

For stocks and equity mutual funds, if the holding period exceeds 12 months, the gains are classified as LTCG. Since the introduction of the LTCG tax on stocks and equity mutual funds in the 2018 Union Budget, profits exceeding INR 1 lakh in a financial year are taxed at 10% without the benefit of indexation.

  • Example: If an NRI sells stocks worth INR 5 lakh with a gain of INR 1.5 lakh, only INR 50,000 (the amount exceeding INR 1 lakh) will be subject to 10% tax.

c. Debt Mutual Funds and Bonds

For debt mutual funds and bonds, LTCG is applicable if the investment is held for more than 36 months. The tax rate for LTCG on debt funds is 20% with indexation, which helps reduce the taxable gain.

3. TDS Rates for NRIs

Tax Deducted at Source (TDS) is a system where tax is deducted at the source of income before it reaches the individual. NRIs are subject to TDS on various types of income earned in India, including rental income, interest, and capital gains. The TDS rates for NRIs depend on the type of income.

a. TDS on Capital Gains (Property Sale)

When an NRI sells property in India, TDS is deducted at the time of the transaction. The TDS rates for capital gains from property sales are as follows:

  • Long-Term Capital Gains (LTCG): TDS is deducted at 20% on the sale of property, which is the same as the tax rate on LTCG.
  • Short-Term Capital Gains (STCG): TDS is deducted at 30% on the sale of property held for less than 36 months.

It is important to note that the TDS deducted can be claimed as a credit against the final tax liability when filing the income tax return.

b. TDS on Interest Income

Interest earned by NRIs on deposits in India is subject to TDS at the rate of 30%. However, if the NRI holds an NRE (Non-Resident External) account, the interest earned on it is exempt from tax in India. For NRO (Non-Resident Ordinary) accounts, TDS is applicable, and NRIs can claim a refund for the excess TDS deducted.

c. TDS on Dividends

NRIs are also subject to TDS on dividend income earned from Indian companies. The TDS rate for dividend income is 20%.

d. TDS on Sale of Stocks and Mutual Funds

For NRIs selling stocks or mutual funds in India, the TDS is deducted at the rate of 15% on the capital gains from the sale of listed securities. However, TDS on LTCG for stocks and mutual funds above INR 1 lakh is subject to 10% taxation, as explained earlier.

4. Repatriation of Funds

NRIs can repatriate the proceeds from their investments in India, including the sale of property, stocks, and mutual funds. However, repatriation is subject to certain conditions:

  • Property Sale Proceeds: NRIs can repatriate the sale proceeds of property after paying capital gains tax, subject to a limit (up to USD 1 million per year).
  • Investments in Stocks and Mutual Funds: The proceeds can be repatriated after TDS is deducted, subject to compliance with FEMA (Foreign Exchange Management Act) regulations.

5. Double Taxation Avoidance Agreement (DTAA)

India has signed Double Taxation Avoidance Agreements (DTAAs) with several countries to avoid taxing the same income in both India and the NRI’s country of residence. Under the DTAA, NRIs can claim tax credits for taxes paid in India against taxes owed in their home country. This helps reduce the overall tax burden.

6. Tax Filing and Refunds

NRIs must file an income tax return in India if they have taxable income, even if TDS has already been deducted at source. The TDS amount can be adjusted against the final tax liability, and if excess TDS has been deducted, NRIs can claim a refund by filing the tax return.

Conclusion

Understanding LTCG and TDS rates is essential for NRIs to manage their investments effectively and stay compliant with Indian tax laws. By knowing the applicable tax rates, NRIs can optimize their returns and ensure that they are not overpaying taxes. Consulting a tax expert can provide further clarity on tax deductions, exemptions, and strategies to minimize tax liability.

For assistance with LTCG, TDS, or any other NRI taxation concerns, Dinesh Aarjav & Associates is here to provide expert guidance and support to navigate the complexities of NRI taxation.

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