Aug 29, 2023

Understanding Long Term Capital Gains Tax for NRI in India: A Comprehensive Guide

by Godrej Properties Limited

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Navigating the taxation landscape for Non-Resident Indians (NRIs) can be quite a maze due to its complexity. Especially when it concerns capital gains on investments made in India, the waters can get even murkier. This comprehensive article delves into the intricate web of capital gains tax for NRIs in India and Persons of Indian Origin (PIOs), shedding light on the often perplexing subject of long-term capital gains tax in India.
 

Taxation Laws for NRIs/PIOs

Indian tax regulations require individuals, regardless of citizenship status, to file income tax returns if their income exceeds a specified slab. For NRIs and PIOs, this includes earnings from residential and commercial properties in India and other income sources such as property rentals, investments in shares, mutual funds, and term deposits.
 

Long-Term Capital Gains Tax for NRI

When an NRI sells a property in India after owning it for over three years, they are liable for long-term capital gains tax for NRI. At 20%, this tax gets levied on the difference between the sale value and the indexed purchase cost. 
 

Short-Term Capital Gains Tax for NRI

If an NRI sells a property before the 3-year holding period, they are subject to short-term capital gains for NRI. This tax at the rate of 30% is applicable to the difference between the sale value and the actual cost of purchase without indexing for inflation.
 

Reinvestment of Capital Gains

NRIs who plan to reinvest their capital gains into another property or tax-exempt bonds can exempt themselves from paying tax on those gains in India. Also, this provides them with a valuable opportunity to optimise their investments while enjoying tax benefits.
 

Understanding Cost Inflation Index (CII)

The Cost Inflation Index is an annual index of inflation notified by the Central Board of Direct Taxes (CBDT). It gets used to compute the indexed cost of acquisition when calculating long-term capital gains. By considering the rise in the consumer price index, the CII helps sellers adjust the cost of purchase, reducing the tax burden on capital gains.
 

Conclusion: Capital Gain for NRI Decoded

As NRIs explore investment opportunities in India, understanding capital gain tax for NRIs in India becomes essential. The knowledge of long-term and short-term capital gains and how they differ, and the significance of the Cost Inflation Index empowers NRIs to make informed financial decisions. By leveraging these insights, NRIs can effectively manage their tax liabilities while maximising their returns on property investments in India.


FAQs

Q. Are NRIs required to pay taxes on income earned outside India?

A. According to the Indian Income Tax Act, NRIs are only required to pay taxes on income earned within the territory of India. Any income earned outside India does not fall under the jurisdiction of the IT Act.
 

Q. What is the tax rate for long-term capital gains for NRIs?

A. NRIs are subject to a Tax Deducted at Source (TDS) of 20% on long-term capital gains from property sales in India.

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