NRI Investment Income and Capital Gains Tax: Special Provisions under the Income Tax Act 2025
The Income Tax Act 2025 has a special set of rules for a non-resident Indian (NRI) who earns income from assets bought with foreign money. Under section 214, "investment income" is taxed at a flat 20% and long-term capital gains on a "specified asset" at 12.5%. The rest of the income is taxed at the rates in force. Sections 213 to 217 also cover deductions, a reinvestment exemption, a return-filing exemption and an opt-out.
These rules apply from tax year 2026-27, as amended by the Finance Act 2026. Every figure below comes from the Act text, with the section number next to it. Last reviewed on 10 November 2026.
When does a person count as non-resident in the first place?
The special rules above apply only to someone who is not resident in the tax year. Section 6(2) makes an individual resident if they are in India for 182 days or more, or for 60 days or more in the year plus 365 days or more in the four preceding years. Two points matter for NRIs:
- For a citizen or person of Indian origin who comes on a visit from outside India, the 60-day limb does not apply (section 6(4)). If their Indian income, excluding foreign-source income, exceeds Rs 15 lakh, the 60 days become 120 days (section 6(5)).
- A citizen who is not liable to tax in any other country and has Indian income above Rs 15 lakh (excluding foreign-source income) is deemed resident (section 6(7)), and is then not ordinarily resident under section 6(13)(c).
Our guide on residential status covers the full test. If tax is also paid abroad, see double taxation relief.
Who is a non-resident Indian under the Income Tax Act 2025?
Section 212(d) says a non-resident Indian is an individual who is not a resident and is either (i) a citizen of India, or (ii) a person of Indian origin. A company, firm or HUF can never be an NRI for these sections. The special rules in sections 213 to 217 are written only for NRIs.
What is "investment income" and a "foreign exchange asset"?
Section 212 defines the building blocks used in sections 213 to 218:
- Foreign exchange asset (212(a)): a "specified asset" that you acquired, bought or subscribed to in convertible foreign exchange.
- Investment income (212(b)): any income derived from a foreign exchange asset.
- Long-term capital gains (212(c)): income under the head "Capital gains" from a foreign exchange asset that is not a short-term capital asset.
- Specified asset (212(e)): shares in an Indian company; debentures of an Indian company that is not a private company; deposits with an Indian company that is not a private company; Central Government securities; and any other asset the Central Government notifies.
The key test is how you paid. Shares bought with rupees from an Indian account are not a foreign exchange asset under this definition, so the special rates do not apply to income from them.
What tax rates apply to an NRI under section 214?
| Sl. No. | Income | Rate |
|---|---|---|
| 1 | Income from investment | 20% |
| 2 | Long-term capital gains on a specified asset | 12.5% |
| 3 | Total income after removing Sl. No. 1 and 2 | Rates in force |
The tax is the sum of the three amounts. Section 214 does not mention surcharge or cess, so the examples below show tax before those.
Can an NRI claim deductions against this income?
Only in a limited way. Section 213 has two rules:
- No deduction for any expenditure or allowance is allowed when computing investment income (section 213(1)). Brokerage or interest paid on a loan to buy the asset cannot be set off against it.
- If the gross total income consists only of investment income and/or long-term capital gains, no Chapter VIII deduction is allowed (213(2)(a)). If there is other income as well, the investment income and long-term gains are first taken out of the gross total income, and Chapter VIII deductions are allowed as if the reduced amount were the gross total income (213(2)(b)).
Worked example 1: dividend plus other Indian income (tax year 2026-27)
Assumptions: Ravi is an NRI (Indian citizen, non-resident). He holds shares of an Indian company bought with convertible foreign exchange. In 2026-27 he receives Rs 2,00,000 as dividend from them. He also has Rs 3,00,000 of other Indian income, and he is eligible for a Chapter VIII deduction of Rs 50,000. Tax is shown before surcharge and cess.
| Step | Working | Amount (Rs) |
|---|---|---|
| 1. Gross total income | 2,00,000 + 3,00,000 | 5,00,000 |
| 2. Remove investment income (213(2)(b)(i)) | 5,00,000 - 2,00,000 | 3,00,000 |
| 3. Chapter VIII deduction on the reduced amount (213(2)(b)(ii)) | Rs 50,000 allowed against 3,00,000 | (50,000) |
| 4. Other income after deduction | 3,00,000 - 50,000 | 2,50,000 |
| 5. Tax on investment income at 20% (214, Sl. No. 1) | 2,00,000 x 20% | 40,000 |
| 6. Tax on the Rs 2,50,000 | At rates in force (214, Sl. No. 3) | Per slab |
The Rs 50,000 deduction can reduce only the Rs 3,00,000 of other income. It cannot reduce the Rs 2,00,000 dividend. The slab tax in step 6 depends on the regime and the rates in force for the year, so it is not computed here.
Can an NRI avoid tax on capital gains by reinvesting?
Yes, in part or in full, under section 215. The conditions are:
- You are an NRI and have long-term capital gains from transferring a foreign exchange asset (the "original asset").
- Within six months of the transfer, you invest all or part of the net consideration in a specified asset (the "new asset").
Net consideration (215(2)(b)) is the full value of the consideration received less expenditure incurred wholly and exclusively for the transfer. If the new asset is a deposit under section 212(e)(iii) or (v), its "cost" is the amount of the deposit (215(2)(a)).
- If the cost of the new asset is not less than the net consideration, the whole gain is not charged under section 67.
- If it is less, the exempt part is A = B x C / D, where B is the whole capital gain, C is the cost of the new asset and D is the net consideration.
Worked example 2: partial reinvestment (tax year 2026-27)
Assumptions: Meena is an NRI. She sells Indian company shares, bought with convertible foreign exchange and held long term. Net consideration is Rs 20,00,000 and the long-term capital gain is Rs 8,00,000. Three months later she buys Central Government securities for Rs 15,00,000. Tax is before surcharge and cess.
| Step | Working | Amount (Rs) |
|---|---|---|
| 1. Is cost of new asset below net consideration? | 15,00,000 < 20,00,000 | Yes, use the formula |
| 2. Gain not charged: A = B x C / D | 8,00,000 x 15,00,000 / 20,00,000 | 6,00,000 |
| 3. Gain still charged | 8,00,000 - 6,00,000 | 2,00,000 |
| 4. Tax at 12.5% (214, Sl. No. 2) | 2,00,000 x 12.5% | 25,000 |
Had she invested Rs 20,00,000 or more, the entire Rs 8,00,000 gain would have been outside section 67.
What happens if the new asset is sold within three years?
Section 215(3): if the new asset is transferred, or converted into money otherwise than by transfer, within three years from the date of acquiring it, the gain that was not charged earlier is deemed to be long-term capital gains (a capital asset other than a short-term one) of the tax year in which that happens. In Meena's case, if she sells the securities after two years, the Rs 6,00,000 becomes taxable in that later year.
Does an NRI have to file a return?
Not always. Section 216 says an NRI need not file a return under section 263(1) if both conditions hold:
- Total income for the tax year consisted only of investment income, long-term capital gains, or both; and
- Tax deductible at source under Chapter XIX-B has been deducted from that income.
If the NRI has any other income, or tax was not deducted on some of it, the exemption is not available.
What if the NRI becomes a resident later?
Section 217(1) lets the benefit continue. If an NRI becomes assessable as a resident in a later year and gives a written declaration to the Assessing Officer along with the return under section 263 for that year, sections 212 to 216 keep applying to investment income from foreign exchange assets, other than shares in an Indian company. This continues for that year and every later year until the asset is transferred or converted into money.
Can an NRI opt out of these provisions?
Yes. Under section 217(2), an NRI can declare in the return under section 263 for a tax year that sections 212 to 216 will not apply. Then, for that year, total income is computed and taxed under the other provisions of the Act. Whether opting out helps depends on the person's whole income, so compare both computations before declaring.
Real-life examples
Anil, no return needed. Anil lives in Dubai and is an Indian citizen. His only Indian income in 2026-27 is interest on a deposit with a listed Indian company, made out of foreign exchange. Tax was deducted at source on it. Both conditions of section 216 are met, so he is not required to file a return under section 263(1).
Sunita, the three-year trap. Sunita reinvests her full net consideration from a share sale into Government securities and pays no tax on the gain under section 215(1)(i). Eighteen months later she redeems them for cash. Under section 215(3), the gain that was left uncharged is treated as long-term capital gains of the year of redemption.
Ravi comes home. Ravi, from example 1, returns to India and becomes a resident. He holds a foreign exchange debenture of an Indian public company. If he gives the written declaration with his return for the first resident year, sections 212 to 216 continue for income from that debenture until he sells or redeems it. The same declaration does not carry over his shares in an Indian company, which section 217(1) excludes.
Common mistakes
- Assuming every NRI holding is covered. Only assets bought, acquired or subscribed in convertible foreign exchange qualify as foreign exchange assets.
- Claiming expenses against investment income. Section 213(1) allows none.
- Missing the six-month window. The reinvestment must be made within six months after the transfer (215(1)(b)).
- Using the gain instead of the net consideration in the formula. C and D in section 215 are costs and consideration, not gains.
- Selling the new asset too soon. A transfer within three years brings the exempt gain back into tax (215(3)).
- Forgetting the declaration. Both continuing the benefit after becoming resident (217(1)) and opting out (217(2)) need a declaration in the return.
Quick reference
| Item | Rule | Section |
|---|---|---|
| Rate on investment income | 20% | 214, Sl. No. 1 |
| Rate on LTCG on specified asset | 12.5% | 214, Sl. No. 2 |
| Reinvestment window | 6 months after transfer | 215(1)(b) |
| Lock-in on new asset | 3 years from acquisition | 215(3) |
| Return not needed if | Only such income, and TDS deducted | 216 |
| Continue after becoming resident | Written declaration with the return | 217(1) |
| Opt out for a year | Declare in the return | 217(2) |
Where this is in the Act
- Section 212: definitions (NRI, foreign exchange asset, investment income, specified asset)
- Section 213: no expenditure deduction; Chapter VIII deductions
- Section 214: tax rates, Table Sl. No. 1 to 3
- Section 215: reinvestment exemption and three-year rule
- Section 216: return not required in certain cases (refers to section 263(1))
- Section 217: continuing the benefit after residence, and opting out
For the TDS side of payments to non-residents, see our guide on TDS on payments to non-residents. For general capital gains rates, see tax on long-term capital gains.
How can CA firms keep track of NRI client deadlines?
NRI files carry dates that are easy to miss: six-month reinvestment windows, three-year holding periods, and the year a client turns resident. Finexo's practice management software lets a CA firm set these as tasks and reminders against each client. It does not compute tax or file returns.
This article explains the Income Tax Act 2025 (as amended by the Finance Act 2026). It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.
Frequently Asked Questions
What is the tax rate on NRI investment income under the Income Tax Act 2025?
Under section 214, Table Sl. No. 1, income from investment is taxed at 20% for a non-resident Indian. Investment income means income from a foreign exchange asset, as defined in section 212.
What is the tax rate on NRI long-term capital gains?
12.5% on long-term capital gains on a specified asset (section 214, Sl. No. 2). The remaining total income is taxed at rates in force.
Can an NRI claim deductions against investment income?
No expenditure or allowance is deductible against investment income (section 213(1)). Chapter VIII deductions are allowed only against the other income, as if the gross total income were reduced by investment income and long-term capital gains (213(2)).
How does an NRI avoid capital gains tax by reinvesting?
Invest the net consideration in a specified asset within six months of the transfer (section 215). Full reinvestment exempts the whole gain; partial reinvestment exempts gain x cost of new asset / net consideration. Selling the new asset within three years brings the gain back into tax.
Does an NRI need to file an income tax return?
Not if total income was only investment income and long-term capital gains, and tax was deducted at source on it (section 216). Any other income or missing TDS removes the exemption.
Can an NRI opt out of sections 212 to 216?
Yes, by declaring it in the return under section 263 for that tax year (section 217(2)). Total income is then taxed under the other provisions of the Act for that year.
How many days make an NRI a resident under the Income Tax Act 2025?
182 days or more in the tax year, or 60 days plus 365 days in the four preceding years (section 6(2)). For a citizen or person of Indian origin visiting India, the 60 days becomes 120 if Indian income excluding foreign-source income exceeds Rs 15 lakh (section 6(4) and (5)).