Complete Guide to NRI Taxation on Indian Stocks and Mutual Funds

The dual definition of NRI: FEMA vs Income Tax Act

Before any taxation rule applies, residency status must be determined. India uses two parallel definitions:

FEMA definition (used for banking and investment): A person leaving India for employment, business, or any indefinite-stay purpose becomes a non-resident under FEMA from the date of departure, regardless of day-count. FEMA decides what kind of bank account (NRE/NRO/FCNR) and what kind of demat account the person can hold.

Income Tax Act definition (used for tax computation):Residency is determined by physical presence in India during the financial year. A person is treated as Resident if they spent 182 days or more in India in the year, or 60 days or more in the year combined with 365 days or more across the preceding four years. The 60-day threshold extends to 182 days for Indian citizens leaving India for employment abroad. A "deemed resident" rule introduced in 2020 added Indian citizens with Indian income above Rs 15 lakh who were not tax-resident anywhere else.

The two definitions can disagree, particularly in the year of relocation. An individual may be Non-Resident under FEMA from June (when they left India) but Resident under the Income Tax Act for that financial year because they were present in India for more than 182 days before leaving. Each year's status must be assessed separately under each law.

Listed equity shares and equity mutual funds

The post-Budget 2024 framework simplified equity taxation but increased rates relative to earlier years:

Short-term capital gains (STCG)

Holdings of less than 12 months in listed equity shares or equity-oriented mutual funds (where the fund holds at least 65% equity) attract STCG at 20% under Section 111A, plus surcharge and cess. STT must have been paid on the sale. The 20% rate replaced the earlier 15% rate from the date of Budget 2024 announcement (July 23, 2024 in the Finance Act 2024).

Long-term capital gains (LTCG)

Holdings of 12 months or more attract LTCG at 12.5% under Section 112A on gains exceeding Rs 1.25 lakh per financial year. The Rs 1.25 lakh annual exemption is available to both residents and NRIs. Indexation is not available on equity LTCG. The 12.5% rate replaced the earlier 10% rate effective July 23, 2024.

TDS for NRIs on equity sales

Unlike residents, NRIs are subject to TDS at source on capital gains. The buyer (for off-market transfers) or the broker (in PIS-mode transactions) is required under Section 195 to deduct tax at the applicable rate before remitting net proceeds to the NRI. For listed equity, TDS at 20% on STCG and 12.5% on LTCG (above the exemption) applies. For unlisted shares, separate rules apply with higher rates.

Equity mutual funds

Equity-oriented mutual funds (those that maintain at least 65% equity allocation as defined by SEBI) follow the same 20% STCG / 12.5% LTCG framework. The fund deducts TDS for NRI investors at the time of redemption. NRIs from the US and Canada face FATCA-driven onboarding restrictions with several AMCs but can still invest with many fund houses subject to additional documentation.

Debt mutual funds

Debt mutual fund taxation was substantially reframed by the Finance Act 2023 and refined by Budget 2024. For units acquired on or after April 1, 2023 in specified mutual funds (those investing less than 35% in Indian listed equity), capital gains are taxed at slab rates regardless of holding period — indexation is no longer available. For units acquired before April 1, 2023, the older indexation regime applied to LTCG up to grandfathering provisions.

For NRIs, TDS under Section 195 is applied at the maximum marginal rate or treaty rate (whichever applies) on debt MF redemptions, with refund or adjustment claimed via ITR-2. This made debt mutual funds significantly less attractive for NRIs relative to direct fixed deposits in NRE (which pay tax-free interest) for any NRI whose primary objective was a fixed-income return on Indian rupee assets.

Bank interest: NRO vs NRE vs FCNR

NRO interest

Interest on NRO savings accounts and NRO fixed deposits is fully taxable in India as "Income from Other Sources" at the NRI's slab rate. TDS at 30% (plus surcharge and cess, effective ~31.2%) is deducted at source by the bank. This is the highest TDS rate in the Indian banking framework. DTAA can reduce TDS to 10-15% in many treaty countries (US/UK/UAE/Singapore/Canada) provided the NRI submits a Tax Residency Certificate, Form 10F, and PAN.

NRE interest

Tax-exempt in India under Section 10(4)(ii) for as long as NRI status is maintained under FEMA. No TDS in India. However, in the country of residence, NRE interest may still be taxable as worldwide income — for example, a US-resident NRI declares NRE interest on Form 1040 because the US taxes worldwide income of US residents.

FCNR interest

Tax-exempt in India under Section 10(15)(iv)(fa). FCNR deposits are held in foreign currency (USD, GBP, EUR, JPY, AUD, CAD), and the interest is also paid in the same currency. Like NRE interest, the exemption is only in India — the residence country may still tax it.

Dividends from Indian companies

The abolition of Dividend Distribution Tax (DDT) in April 2020 shifted dividend taxation to the recipient. For NRIs, Section 195 mandates 20% TDS at source on dividends paid by Indian listed companies (plus surcharge and cess for higher-income NRIs, although surcharge slabs are calibrated). The standard rate for individual NRIs is typically 20%.

DTAA can reduce this rate substantially. UAE-India DTAA caps dividend tax at typically 10%. UK-India and Singapore-India DTAAs cap at 10-15%. US-India DTAA caps at 15-25% depending on shareholding (Section 90(2) allows the lower of treaty or domestic rate to apply). Claiming the DTAA rate requires submission of Form 10F, TRC, and PAN to the company's registrar (e.g., Computershare, KFin Technologies) before the dividend record date. See our companion guide on DTAA explained for the procedural mechanics.

Real estate

NRIs holding immovable property in India face a separate framework:

• Rental income:Taxable as "Income from House Property" at slab rate, after standard deduction of 30% for repairs and municipal tax actually paid. The tenant is required to deduct TDS at 31.2% on rent paid to an NRI under Section 195 (or at the lower DTAA rate where applicable, with TRC submitted).
• Capital gains on property sale: LTCG on property held more than 24 months is taxable at 12.5% under the post-Budget 2024 rate, with indexation removed for properties acquired on or after July 23, 2024 (older property had a transitional choice between 20% with indexation and 12.5% without indexation). STCG (held less than 24 months) is taxable at slab rate.
• TDS on property purchase from NRI seller: The buyer is required under Section 195 to deduct TDS at 12.5% on long-term gains or slab rate on short-term gains — on the sale value, not just the gain, unless the NRI seller obtains a Lower Deduction Certificate (LDC) from the income tax department under Section 197. The LDC route is the standard practice for NRI property sellers because deduction on full sale value would tie up disproportionate cash flow.
• Repatriation of sale proceeds: Subject to the USD 1 million per FY ceiling on NRO repatriation, with Form 15CA and Form 15CB required for the bank remittance.

Other income categories

• Royalties and FTS: 10% TDS under Section 115A (post-Budget 2023 changes). DTAA can adjust this for some treaty residents.
• Salary earned in India: If NRI rendered services in India during a visit, that portion of salary may be taxable in India at slab rates with regular TDS by the employer.
• Pension from former Indian employer: Taxable in India at slab rate, potentially also taxable in country of residence with DTAA credit.
• Government securities and bonds: Interest taxable at slab rate; certain tax-free bonds remain exempt for NRIs as well.

PAN, Form 60, and Section 206AA

A valid Indian Permanent Account Number (PAN) is essentially mandatory for NRIs investing in Indian financial assets. The consequences of operating without PAN are severe:

• Section 206AA requires TDS at the higher of the prescribed rate or 20% if PAN is not furnished. For NRO interest, this could push the rate from 30% to 30%; for dividends, from 20% to 20%; for capital gains, from 12.5% to 20%.
• DTAA benefits cannot reliably be invoked without PAN, even with TRC and Form 10F. Some judicial rulings and recent amendments have softened this in cross-border contexts, but the practical default at most banks and AMCs is to insist on PAN.
• Form 60 is a non-PAN declaration but is generally not sufficient for NRI capital market transactions.

NRIs without PAN can apply through Form 49AA (the variant for foreign citizens/non-residents) or through online routes. PAN is permanent — once obtained, it does not need renewal.

Section 195 TDS mechanics

Section 195 of the Income Tax Act is the master provision for TDS on payments to non-residents. Unlike resident TDS rules (Sections 192-194) which apply only above specified thresholds, Section 195 applies on the entire amount of any payment that is chargeable to Indian tax in the hands of the non-resident. Practical consequences:

• The Indian payer (bank, company, AMC, tenant, property buyer) is treated as an "assessee in default" if tax is not deducted, exposing them to penalty.
• The payer can apply DTAA rate at source if the NRI submits Form 10F, TRC, PAN, and beneficial ownership declaration before the payment. Otherwise, the higher domestic rate applies and the NRI must claim refund through ITR.
• For capital gains on shares, brokers and depository participants apply Section 195 TDS on the gain (computed using the FIFO method on the demat ledger), not on the entire sale value.
• For property sales, TDS is on the full sale value unless an LDC is obtained.
• Form 27Q is the quarterly TDS return that the Indian payer must file, and Form 16A is the TDS certificate issued to the NRI.

ITR filing for NRIs

NRIs whose total taxable Indian income (excluding NRE/FCNR tax-exempt interest) exceeds the basic exemption limit must file an Indian ITR. Key procedural points:

• Basic exemption limit: Rs 2.5 lakh under the old regime, Rs 3 lakh under the new regime.
• Form: ITR-2 for income from capital gains, interest, dividends, rental, and other sources. ITR-3 for those with business or professional income from India. ITR-1 (Sahaj) is not available for NRIs.
• Filing route: Mandatory e-filing through the Income Tax e-filing portal. Digital signature or Aadhaar OTP (if the NRI has Aadhaar) required for verification.
• Due date: July 31 for non-audit cases, with extensions occasionally granted by CBDT.
• Bank account for refund: The bank account for ITR refund must be an NRO or NRE Indian bank account. Foreign bank accounts cannot directly receive Indian tax refunds.
• Schedule FA: Required only for residents, not NRIs. NRIs do not have to disclose foreign assets in their Indian ITR for years they were non-resident.

Common NRI tax planning approaches

NRIs have several established educational approaches to manage Indian tax — none of which are recommendations, simply observations of how the framework can be used:

• NRE for fixed-income: Holding fixed-income assets in NRE FDs gave tax-free interest in India. Any NRI whose objective was fixed-income return on Indian rupees historically observed lower effective tax in NRE FDs vs NRO FDs or debt MF.
• DTAA invocation: Submitting TRC, Form 10F, and PAN annually to all Indian payers reduced TDS on NRO interest from 31.2% to 10-15% in many treaty countries.
• Holding for LTCG: Selling listed equity after 12 months attracted 12.5% LTCG instead of 20% STCG, and used the Rs 1.25 lakh annual exemption. The 7.5 percentage-point gap was substantial for active investors.
• Tax harvesting Rs 1.25 lakh LTCG: Each financial year, selling enough long-term equity to realise up to Rs 1.25 lakh of LTCG (within the exemption) and repurchasing the same shares reset the cost basis higher without paying tax. See our guide on tax harvesting on stocks for details.
• Lower Deduction Certificate (LDC): For NRI property sellers, an LDC under Section 197 prevented TDS on full sale value being deducted, releasing cash flow and avoiding a year-long refund cycle.
• Coordinating ITR with foreign tax credit: Filing the Indian ITR early enough to obtain the Form 16A and TDS certificate before the residence-country tax return deadline allowed the NRI to claim foreign tax credit cleanly in the residence country in the same cycle.

Common mistakes

• Not redesignating bank accounts on becoming an NRI: Continuing to operate a resident savings account is a FEMA violation and credits routed through it create complications during audit.
• Investing in PPF and SSY as an NRI: NRIs are generally not eligible to open new PPF or SSY accounts. Existing accounts opened as residents are allowed to continue but cannot be extended after maturity.
• Missing DTAA paperwork: Submitting TRC and Form 10F after the financial year locked in the higher domestic TDS rate for that year, recoverable only through ITR refund.
• Not obtaining LDC for property sale: Without an LDC, the buyer must deduct TDS on full sale value, often tying up Rs 50 lakh+ that the NRI then waited months to recover via ITR refund.
• Confusing residency definitions: Tax residency under the Income Tax Act may differ from FEMA residency. In transition years, the same person could be FEMA-NRI (so eligible for NRE) but tax-resident (so all global income taxable in India).
• Ignoring debt MF post-April 2023 changes: Many NRIs continued to hold debt mutual funds expecting indexation benefit; the post-2023 framework taxed gains at slab rate regardless of holding period for new units.

Related guides

For NRI banking infrastructure within which all this taxation plays out, see NRE vs NRO vs FCNR accounts. For DTAA mechanics that reduce TDS rates, see DTAA explained. For the underlying domestic equity tax framework, see long-term capital gains on stocks and dividend tax in India.

Frequently asked questions

What are the current capital gains rates for NRIs on listed equity?

STCG (less than 12 months) at 20%, LTCG (over 12 months) at 12.5% above the Rs 1.25 lakh annual exemption, both post-Budget 2024. STT must have been paid on the sale.

Is NRE interest tax-free in India?

Yes, under Section 10(4)(ii), as long as NRI status under FEMA is maintained. No TDS in India. The same interest may still be taxable in the country of residence under worldwide-income rules.

Do NRIs need to file an Indian ITR?

Yes, if total taxable Indian income (excluding NRE/FCNR tax-exempt interest) exceeds Rs 2.5 lakh (old regime) or Rs 3 lakh (new regime). ITR-2 is the form for most NRIs. Filing is also useful to claim refund of excess TDS even when income is below the limit.

How are dividends taxed for NRIs?

20% TDS at source under Section 195 (plus surcharge and cess). DTAA can reduce this to 10-15% with treaty paperwork (TRC, Form 10F, PAN).

Can NRIs use the Rs 1.25 lakh LTCG exemption every year?

Yes. The Rs 1.25 lakh annual exemption on listed equity LTCG (post-Budget 2024) applies to NRIs on the same terms as residents. It is per-financial-year, not lifetime.

This article is educational only and does not constitute tax, legal, financial, or investment advice. NRI taxation rules, TDS rates, Section 195 mechanics, DTAA treaty rates, ITR forms, and procedural requirements change with Finance Acts, CBDT notifications, RBI circulars, and judicial rulings. Every figure and rule cited is historical and illustrative as of the date of writing. Cross-border taxation involves complex interactions between Indian law, foreign tax law, and bilateral treaty interpretation. Please consult a qualified chartered accountant familiar with NRI taxation, an international tax adviser, and the tax authorities of your country of residence before relying on any specific position. EquitiesIndia.com is not liable for any reliance placed on this article.