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Non-Resident Indians (NRIs) can pay zero tax on capital gains; here's how

kanan-bahl.webp

5 min read | Updated on July 04, 2025, 11:43 IST

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SUMMARY

NRI taxation may seem complex, but smart planning unlocks powerful opportunities. With sections like 115F, NRIs can legally save lakhs (or crores) in tax, reinvest efficiently in India, and maintain wealth creation across borders.

NRI nil tax rule

It's possible for NRIs to pay zero tax on capital gains. | Repesentational image

Non-Resident Indians (NRIs) are subject to Indian income tax laws but with specific provisions and exemptions tailored to their unique status. While most NRI incomes, like rent, dividends, and interest, are taxable in India, certain capital gains can be completely exempt from tax if strategic reinvestments are made.

Section 115F read with Section 115C of the Income Tax Act offers NRIs a golden opportunity to pay zero tax on long-term capital gains from foreign exchange assets.

Let us see how NRI taxation works, dive into types of income taxable in India, and demystify the powerful tax-saving strategy using Sections 115F and 115C.

But first, let’s see why it is important.

India has a vast global diaspora with over 1.58 crore NRIs as per the Ministry of External Affairs. According to RBI and World Bank data:
  • NRIs held 160 billion USD in NRO/NRE/FCNR deposits (as of February 2025).
  • Non-Resident remittances exceeded $129 billion in 2024.

With rising cross-border asset holdings, understanding how India taxes NRIs has become essential, not just for compliance but also for intelligent wealth planning.

Who is an NRI for tax purposes?

Under Section 6 of the Income Tax Act, an NRI is a person who:

  • were in India for less than 182 days during the relevant financial year, or

  • were in India for less than 60 days during the year and less than 365 days in the last 4 years.

The 60-day rule extends to 120 days if the individual is an Indian citizen or PIO visiting India with total income (excluding foreign income) up to ₹15 lakh.

The 60-day rule extends to 182 days if the individual is an Indian citizen and leaving indian for employment.

How are the different incomes of NRIs taxed in India?

Here's a detailed look at how various types of income earned by NRIs are taxed under income tax:

Income TypeTaxability in India
Rent from Indian propertyTaxable in India under "Income from House Property". Deduction: 30% std. + interest.
Interest on NRO accountFully taxable in India.
Interest on NRE/FCNR depositsExempt as long as NRI status is maintained and account is funded via foreign income
Dividends from Indian companiesTaxable as "Income from Other Sources". No threshold exemption.
Short-term capital gains (STCG)On listed shares: taxed at 20% under section 111A. Others are taxed at slab rate.
Long-term capital gains (LTCG)12.5% above ₹1.25 lakh, subject to section 115F
Business income from IndiaTaxable only if the business is controlled/set up in India.
Gift received in IndiaExempt, if received from relatives. Taxable if the value of the gift exceeds ₹50,000 and is received from a non-relative.

How NRIs can pay zero tax on capital gains

Section 115F of the Income Tax Act provides full or proportional exemption from LTCG tax for NRIs who:

  • Sell a foreign exchange asset, and
  • Reinvest the net sale proceeds in specified assets within six months.
What qualifies as a foreign exchange asset?

a “foreign exchange asset” is any asset purchased using convertible foreign exchange.

Eligible reinvestment options under Section 115F

Reinvestment must be made in:

  • Equity shares of Indian companies
  • Debentures of Indian public companies
  • Public deposits with Indian companies
  • Government securities
Lock-in period: Assets must be held for at least 3 years. If sold earlier, the exempted gain becomes taxable.
How is the exemption calculated?

Exempt Capital Gain = (Cost of New Asset / Net Consideration) * Total Capital Gain

Example:

  • Net sale value of India-listed equity shares: ₹4 crore
  • Cost of old asset sold: ₹2 crore
  • Capital Gain: ₹2 crore
  • Reinvestment: ₹3 crore

Exempt Gain = (₹3 crore / ₹4 crore) × ₹2 crore = ₹1.5 crore

Taxable Gain = ₹50 lakh

Tax Saved = ₹18.75 lakh @ 12.5% LTCG rate (₹1.5 crores * 12.5%)

Section 115F compliance: 4 key things NRIs must remember

6-month reinvestment deadline: Reinvest the entire net sale proceeds (not just capital gain) into eligible assets within 6 months of transfer to claim exemption.
Invest only in specified assets: Valid reinvestments include shares, debentures, deposits, and government securities—not mutual funds, real estate, or gold.
Hold new assets for 3 years: Selling or converting the reinvested asset within 3 years makes the earlier exempt capital gain fully taxable in the year of sale.
Maintain NRI status and fund traceability: Ensure reinvestment is made using foreign exchange funds, and you retain NRI status—also keep clear bank and FIRC records to prove the source of funds.

Lastly, NRI taxation may seem complex, but smart planning unlocks powerful opportunities. With sections like 115F, NRIs can:

  • Legally save lakhs (or crores) in tax
  • Reinvest efficiently in India
  • Maintain wealth creation across borders

This is not tax evasion. It’s strategic, lawful tax planning endorsed by the Income Tax Act.

Disclaimer: The views and opinions expressed above are those of respective experts/commentators and do not reflect the views of Upstox. This content is only for informational purposes and should not be considered investment advice from Upstox.
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About The Author

kanan-bahl.webp
Kanan Bahl is a CA and founder of Fingrowth Media. He writes in-depth explainers on personal finance and investing.