Non-resident Indians (NRIs) encompass Indian citizens or individuals of Indian origin who maintain residence outside of India for a duration exceeding 182 days in a financial year. It is imperative for NRIs to grasp the tax ramifications accompanying their status, as they may find themselves subject to taxes on specific incomes earned within India. Of notable significance is the aspect of capital gain, denoting the profit realized from the sale of capital assets, including but not limited to property, shares, or other investments. NRIs must develop familiarity with the precise tax rates and regulations applicable to their circumstances to ensure seamless compliance with tax statutes and regulations, thereby averting any potential penalties.
Types of Capital Gains and Holding Periods
Understanding the discrepancies between long-term and short-term capital gains is essential for NRIs, as the tax implications differ significantly.
Short-Term Capital Gains (STCG): These gains arise from the sale of capital assets held for less than the specified holding period. The holding period varies depending on the type of asset:
Equity Mutual Funds and Equity Shares: Less than 12 months.
Debt Instruments (Bonds, Debentures): Less than 36 months (as of April 1, 2023).
Immovable Property (Land, Building): Less than 36 months.
Long-Term Capital Gains (LTCG): These gains are earned from the sale of capital assets held beyond the specified holding period:
Equity Shares and Equity Mutual Funds: Held for 12 months or more.
Debt Instruments (Bonds, Debentures): Held for 36 months or more (as of April 1, 2023).
Immovable Property (Land, Building): Held for 36 months or more.
Tax Rates on Capital Gains Property
Long-Term Capital Gains (LTCG) on property are subject to a flat rate of 20%, allowing investors to benefit from indexation to offset inflation. Meanwhile, LTCG on equity shares and units of equity-oriented mutual funds incur a 10% tax on gains exceeding ₹1 lakh, with other assets taxed at 20%.
Short-Term Capital Gains (STCG) vary based on the applicability of Securities Transaction Tax (STT). When STT isn't applicable, STCG is taxed at normal slab rates. However, when STT is applicable, a 15% tax rate is imposed.
Tax Deducted at Source (TDS) Implications
Tax Deducted at Source (TDS) is a significant aspect of capital gains taxation. For LTCG (Long-Term Capital Gain) and STCG (Short-Term Capital Gain) on property, if the sale value exceeds ₹50 lakhs, the buyer must deduct TDS at 1%. However, no TDS is deducted on LTCG from equity shares and mutual funds or on STCG from other assets.
Exemptions and Investment Options for Long-Term Capital Gains
The exemptions and investment options available for long-term capital gains (LTCG), along with how Non-Resident Indians (NRIs) can utilize them for tax benefits:
Section 54:
Eligibility: Applies to LTCG from the sale of residential property.
Exemption: If you reinvest the LTCG amount in another residential property within 2 years (or construct a new property within 3 years), you can claim an exemption.
NRIs: NRIs can also avail of this exemption by reinvesting in Indian residential property.
Section 54EC:
Eligibility: Applies to LTCG from the sale of any long-term capital asset (not just property).
Exemption: Invest the LTCG amount in specified bonds (such as REC or NHAI bonds) within 6 months of the sale. The lock-in period for these bonds is 5 years.
NRIs: NRIs can utilize this exemption by investing in these specified bonds.
Section 54F:
Eligibility: Applies to LTCG from the sale of any asset other than residential property.
Exemption: Reinvest the LTCG amount in a residential property within 1 year before or 2 years after the sale. Alternatively, construct a new residential property within 3 years.
NRIs: NRIs can also benefit from this exemption by reinvesting in Indian residential property.
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