Capital gains tax for NRIs: what India deducts and what you can claim back
When an NRI redeems a mutual fund in India, the AMC deducts TDS — Tax Deducted at Source — before crediting the proceeds to your NRE or NRO account. This is not optional. It happens automatically, and the rates are different from what resident investors pay.
For equity-oriented funds held for more than twelve months, the long-term capital gains tax rate is 12.5% on gains exceeding ₹1.25 lakh per financial year (as per the latest rules). For equity funds held for less than twelve months, short-term capital gains are taxed at 20%. For debt funds, gains are taxed at the applicable slab rate — which for most NRIs means 30% plus surcharge and cess, since the TDS is deducted at the maximum marginal rate.
The TDS is deducted at source regardless of your actual tax liability. This means that if your total Indian income is below the basic exemption limit, or if your DTAA entitles you to a lower rate or exemption, you may have excess TDS deducted. That excess is recoverable — but only if you file an Indian Income Tax Return (ITR).
This is the part most NRI families miss. They see the TDS deduction, feel upset about the "tax," and do not realise that filing an ITR could get them a substantial refund. At Dhansanchay, we advise every NRI client to file an ITR in India — even if they believe they owe no tax — because the refund is only available through the filing process.
The ITR form for NRIs is typically ITR-2. You declare the capital gains, claim applicable exemptions (including DTAA benefits if eligible), and the income tax department processes the refund. Refunds typically take three to six months after filing.
A qualified CA who understands NRI taxation is essential here. The interplay between Indian tax law, DTAA provisions, and your country-of-residence tax obligations is genuinely complex. We do not provide tax advice at Dhansanchay — that is your CA's domain — but we do ensure that every redemption is documented, every TDS certificate is available, and the family has what they need to file correctly.
We would rather you own less and understand more than the reverse. Use notes like this to ask better questions — not to shortcut diligence. Scheme documents, costs, and your own goals still come first.
NRI taxation, FEMA regulations, and DTAA provisions are complex and change frequently. This article reflects our understanding as of April 2026 and is for general education only. It is not tax, legal, or investment advice. Always consult a qualified chartered accountant or cross-border tax advisor for guidance specific to your residency status, country of residence, and financial situation.