NRI Capital Gains Tax India: TDS & ITR Guide

When a non-resident Indian sells a flat in Hyderabad, the buyer is obligated to deduct TDS at 20% plus a 10-15% surcharge plus 4% cess before making any payment. On a Rs 1 crore property, that is approximately Rs 23-24 lakhs withheld at source before the NRI seller sees any money. The actual tax on a long-term gain might be Rs 10-12 lakhs. The Rs 11-12 lakh excess becomes a refund only after the NRI files an ITR in India.

This gap between TDS deducted and tax actually payable is the central practical problem of NRI capital gains compliance. Understanding Section 195, Section 197, and the ITR-2 filing requirement is not optional if you want your excess TDS back promptly.

How Residential Status Determines Tax Obligation

Before dealing with rates and forms, it is worth clarifying what "NRI" means for income tax purposes versus FEMA purposes, because they use different definitions.

For income tax (Section 6): An individual is Non-Resident if they are in India for fewer than 182 days during the FY, OR fewer than 60 days during the FY and fewer than 365 days in the preceding four FYs. The tax year is April 1 to March 31.

For FEMA: NRI classification follows Reserve Bank of India (RBI) norms under FEMA 1999, based on whether the person resides outside India for "an uncertain period" or for an employment/business purpose. FEMA classification affects which accounts you can hold (NRE/NRO/FCNR) and repatriation limits.

For this guide, "NRI" means a non-resident individual for income tax purposes. Capital gains from Indian assets (property, shares, mutual funds) are taxable in India regardless of residential status under Section 5(2): income accruing or arising in India is taxable for non-residents.

Capital Gains on Property: Tax Rates and TDS Under Section 195

Applicable Tax Rates

The capital gains tax rates for NRIs on immovable property in India are the same as for residents:

TDS Under Section 195: Why It Is So Much Higher Than 194-IA

Section 195 covers any person making payment to a non-resident that is "chargeable to tax" in India. The default TDS rate under Section 195 for capital gains is not 1% (which is Section 194-IA for resident sellers). Instead:

• LTCG on property: 20% base rate plus applicable surcharge plus 4% cess
• STCG on property: 30% base rate (highest slab, conservatively applied) plus applicable surcharge plus 4% cess

Surcharge for individuals:

• 10% surcharge if NRI's total income exceeds Rs 50 lakh
• 15% surcharge if total income exceeds Rs 1 crore
• 25% surcharge if total income exceeds Rs 2 crore (capped at 15% for capital gains under the new tax regime)

Effective TDS on LTCG (total income assumed > Rs 1 crore): 20% base + 15% surcharge on tax + 4% cess = approximately 23.92%

On a Rs 1 crore property sale with Rs 60 lakh LTCG, TDS would be approximately Rs 14.35 lakh, while actual tax at 12.5% on Rs 60 lakh gain is Rs 7.50 lakh. The difference of Rs 6.85 lakh is refundable but only after ITR filing.

The Buyer's Obligation

The buyer of the property — whether a resident or NRI — must:

1. Obtain a TAN (Tax Deduction Account Number) before deducting Section 195 TDS.
2. Deduct TDS at the applicable rate before making any payment to the NRI seller.
3. Deposit the TDS within 7 days of the end of the month in which deduction was made (or by April 30 for March).
4. File Form 27Q (quarterly TDS return for payments to non-residents).
5. Issue Form 16A (TDS certificate) to the NRI seller.

Unlike Section 194-IA (for resident sellers) which does not require TAN, Section 195 TDS absolutely requires TAN. Buyers who skip this face Section 201 interest at 1%/1.5% per month and Section 271C penalty equal to 100% of TDS.

Applying for Lower TDS: Section 197 Certificate

Given the gap between TDS deducted and actual tax payable, the right tool is a Section 197 certificate for lower or nil TDS deduction. This is applied for proactively, before the sale transaction.

Who Applies and How

The NRI seller (not the buyer) makes the application to the Assessing Officer (AO) having jurisdiction over the NRI's PAN.

Process:

1. File an application on the Income Tax portal under "My Account" > "Lower Deduction Certificate" (Traces portal, Form 13).
2. Submit details: nature of payment, expected total income for the FY, capital gains computation with cost of acquisition and indexation, and supporting documents (sale agreement, purchase deed, valuation report).
3. The AO reviews and issues a certificate specifying the reduced TDS rate or nil TDS.
4. The NRI provides this certificate to the buyer, who deducts at the certified rate instead of the Section 195 default.

Timeline: Applications typically take 2-4 weeks to process. For property transactions, apply at least 4-6 weeks before the expected closing date. Section 197 applications filed after the payment is made have no effect on TDS already deducted.

Alternative — Section 195(2): The buyer can also apply to the AO to determine the "appropriate proportion of the sum chargeable to tax." This is less commonly used and more time-consuming, but it is an option when the seller is unresponsive to applying for a Section 197 certificate.

DTAA: What It Actually Covers for Property Sales

Many NRIs assume that because their country of residence has a Double Tax Avoidance Agreement (DTAA) with India, they are protected from Indian capital gains tax on property. This is almost always incorrect for immovable property.

The "Immovable Property" article in virtually every India DTAA explicitly preserves India's right to tax gains from immovable property situated in India. The relevant articles:

The DTAA does provide a mechanism to credit Indian taxes paid against the NRI's tax liability in their country of residence (the "relief from double taxation" article). So the NRI avoids paying tax twice, but the Indian tax itself is not eliminated by the DTAA.

What DTAA can help with in limited cases:

• Gains from shares of Indian companies (not immovable property) — some older DTAAs (pre-revision) had favorable treatment for share gains, but most have been revised.
• India-Netherlands DTAA and a few others have provisions on shares that benefit certain structures. These require careful analysis specific to the investor's situation.

The short summary for most NRIs: plan your property sale tax as if DTAA provides no relief. If there is a specific DTAA provision that applies, a CA's formal opinion letter is required before relying on it in a filing.

Capital Gains on Shares and Mutual Funds

For NRIs holding listed Indian shares and equity mutual funds:

Tax Rate Chart

NRI Capital Gains on Indian Shares and Equity MFs — AY 2026-27

Rates apply to transfers on or after 23 July 2024

Listed equity LTCG (Section 112A) — held 12+ months

Same as residents. On gains above Rs 1.25 lakh per FY. STT must have been paid on sale.

12.5%

Listed equity STCG (Section 111A)

Same as residents. STT paid on sale. Applies to gains from transfers on or after 23 July 2024.

20%

Unlisted shares LTCG (Section 112)

Held 24+ months. No indexation. Note: Section 48 second proviso foreign currency rule applies to NRIs.

12.5%

Debt mutual funds — all gains (post 1 April 2023 acquisition)

Section 50AA: treated as short-term regardless of holding period. Added to total income.

Slab rate

Source: Finance Act 2024; Section 112A; Section 111A; Section 115E for NRIs (pre-2024 elections)

The Section 48 Second Proviso for NRI Share Gains

Section 48 of the Income Tax Act has a special proviso for non-residents holding shares and debentures of Indian companies that were acquired in foreign currency.

What it does: The gain is computed in the foreign currency of acquisition (say USD), not in INR. The foreign currency gain is then converted to INR at the exchange rate on the date of sale.

Why this matters: If you bought shares in 2018 when Rs 65 per USD and sold in 2026 when Rs 84 per USD, a significant portion of your "gain" in INR is purely from rupee depreciation — not actual investment gain. The Section 48 proviso neutralizes this by computing gain in USD terms only.

The formula follows CBDT Rule 115A and 115B. Indexed cost computations (for properties) use different rules.

TDS on NRI Share and Mutual Fund Gains

Brokers and mutual fund houses are required to deduct TDS on payments to NRIs:

• Listed equity LTCG: 12.5% TDS at source (plus surcharge + cess)
• Listed equity STCG: 20% TDS at source
• Debt mutual fund redemptions: per applicable slab

NRO demat account gains are subject to TDS. NRE account holders may argue DTAA relief but must submit Form 10F and tax residency certificate to the broker or AMC before redemption to avoid TDS at the full rate.

Filing ITR-2: Schedule CG for NRI Capital Gains

NRIs must file ITR-2 (not ITR-1). Schedule CG has separate sub-sections for each type of capital gain:

Long-Term Capital Gains:

• Section A1: LTCG under Section 112A (listed equity, equity MFs above Rs 1.25 lakh)
• Section A2: LTCG on property (land and building) under Section 112
• Section A3: Other LTCG (gold, unlisted shares, bonds)

Short-Term Capital Gains:

• Section B1: STCG under Section 111A (listed equity with STT)
• Section B2: Other STCG (taxed at slab rate)

For each asset transferred, you enter:

• Date of acquisition and date of transfer
• Full value of consideration (sale price)
• Cost of acquisition (purchase price; for pre-July 2001 assets, the Fair Market Value as on 01 April 2001 is used as the deemed cost)
• Indexed cost (if applicable — under the old regime for property acquired before 23 July 2024, the NRI may use indexation via CBDT Cost Inflation Index)
• Transfer expenses (brokerage, stamp duty paid by seller, registration fees)
• Net capital gain

TDS credit from Section 195: The TDS deducted appears in Form 26AS (Part F for non-residents) and AIS. In Schedule TDS2 of ITR-2, enter the TDS certificate details. The ITR-2 utility pre-fills these from your Form 26AS data.

Section 197 certificate adjustment: If you obtained a lower TDS certificate and TDS was deducted at a reduced rate, enter the certificate number in Schedule TDS2. The system verifies the certificate against the income tax database.

FEMA Repatriation of Sale Proceeds

After paying Indian capital gains tax, NRIs typically want to remit the net sale proceeds to their overseas bank account. FEMA 1999 and RBI Master Circular govern this.

NRO Account Route: Most NRI property sale proceeds are credited to an NRO account (the proceeds cannot be directly credited to NRE or FCNR accounts since NRO accounts handle India-sourced income).

Repatriation limits: Up to USD 1 million per FY (or equivalent) can be repatriated from NRO account proceeds, subject to:

1. Taxes being paid on the income/gains.
2. Form 15CA: An electronic declaration filed on the income tax portal by the remitter (or their authorized representative) before remittance. Specified fields include nature of payment, amount, FEMA purpose code.
3. Form 15CB: A CA certificate certifying the nature of the remittance, applicable DTAA/Income Tax provisions, taxes paid, and that the remittance is in compliance with FEMA. Required for individual remittance amounts exceeding Rs 5 lakh (approximately USD 6,000) per transaction where the payment is chargeable to tax.

Banks will not process the outward remittance without receiving the 15CB CA certificate and the 15CA acknowledgment number.

Timeline: Allow 2-3 weeks for CA to complete Form 15CB after tax payment is confirmed. The 15CA must be filed before the actual remittance date.

Common NRI Capital Gains Mistakes

1. Waiting for excess TDS to be refunded without filing ITR. TDS refunds are processed only after ITR filing. An NRI who assumes the excess TDS will automatically come back will wait indefinitely.

2. Applying Section 197 after the deed is registered. Once payment is made and TDS deducted, the Section 197 certificate has no effect for that transaction. Apply before the transaction closes.

3. Not updating the residential status flag in ITR-2. ITR-2 has a section asking for residential status. Selecting "Resident" instead of "Non-Resident" or "Resident but Not Ordinarily Resident" changes which schedules apply and may invalidate DTAA claims.

4. Assuming the buyer handled everything. The buyer's obligation is only to deduct and deposit TDS. The NRI's separate obligation to file ITR, claim the TDS credit, and pay any balance tax due remains regardless.

5. Not maintaining the foreign currency purchase documentation. For Section 48 second proviso relief on shares, the NRI must show that the original acquisition was made in foreign currency. Bank records showing the source of funds for original purchase are essential.

Let Tax Garden Handle Your NRI Capital Gains Filing

Tax Garden manages NRI capital gains filings end to end: property gain computation with indexation choice, Section 197 application, Schedule CG in ITR-2, TDS credit reconciliation, Form 15CA/15CB for repatriation, and any DTAA claim backed by a formal CA opinion. See our tax compliance plans or talk to our team.