NRI taxation: How to claim special tax concessions
:
Non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) often maintain a financial footprint in India through shares, deposits, or other financial instruments. However, many are unaware of the benefits of the Income Tax Act's sections 115C and 115I, which provide concessional tax treatment on certain incomes.
Mint explains who can claim these benefits on which assets and when.
The types of income that qualify for concessions
The concessions apply to two specific types of income.
'The special tax provisions apply to income from foreign exchange assets such as interest, dividends, etc., or anything derived from specified foreign exchange assets. Long-term capital gains (LTCG) from the sale of foreign exchange assets are also covered," said Hardik Mehta, managing committee member, Bombay Chartered Accountants Society.
Also Read: Golden tax window for NRIs: What RNOR means and how to use it
However, Laxmi Ahirwar, director at chartered accountant firm P.R. Bhuta & Co, clarified that NRIs can not claim any deduction under Chapter VI-A (sections 80C to 80U), adding that even the indexation benefit on LTCG is not available.
Foreign exchange assets
The definition of a foreign exchange asset is strictly linked to the source of funds. 'Specific assets acquired or purchased with, or subscribed, using convertible foreign exchange are classified as foreign exchange assets. These are: shares in a private or public limited Indian company, debentures issued by a public limited Indian company, deposits with a public limited Indian company, any security issued by the central government, or any other security that the central government may specify by issuing a notification," explained Ahirwar.
Mehta added: 'When you transfer US dollars from your foreign bank account to your non-resident external (NRE) account, these funds are initially converted into INR before being deposited into the NRE account. Consequently, if equity shares are bought utilising funds from the NRE account, they are considered as foreign exchange assets. However, if the same shares are acquired using domestic funds from the non-resident ordinary (NRO) account, they will not qualify for the preferential tax rate under the special tax provisions."
Funds transferred from NRO to NRE
According to Ahirwar, funds routed through NRE accounts are generally eligible for concessional tax treatment under sections 115C to 115I of the Income Tax Act, provided the investment is made using foreign exchange remitted into India. In contrast, investments made using funds from NRO accounts are not eligible, as these typically consist of income earned or accumulated within India.
A frequent point of confusion arises when funds are transferred from an NRO to an NRE account using Forms 15CA and 15CB, a process permitted under the Foreign Exchange Management Act (FEMA). However, Ahirwar clarified that simply moving funds in this manner does not automatically qualify them for tax concessions. The key factor remains the original source of the money—it must have been inwardly remitted in convertible foreign exchange, not generated or retained domestically.
'This area is often subject to litigation," Ahirwar noted, 'as tax authorities may ask for proof that the investment was made from genuine foreign exchange inflows and not converted from Indian income."
Even if the funds sit in an NRE account, the origin trail must be clearly established.
Also Read: Do NRIs have to pay tax on mutual fund gains in India?
Ahirwar added that case laws have consistently emphasized that the source of funds takes precedence over the type of bank account used. Therefore, taxpayers must maintain proper documentation, such as bank remittance advice or foreign inward remittance certificates, to demonstrate compliance and claim concessional tax treatment with confidence.
Under Section 115E, the tax rates are fixed and applied on a gross basis. Mehta shared that 'as per Section 115E, the special tax rate on investment income is 20% and on LTCG 12.5%. The above taxation is on a gross basis, and no deductions or indexation benefits are available to the assessee.
For those reinvesting their LTCG, Mehta added, 'LTCG is exempted from tax if net consideration is invested within six months from the date of sale in another foreign exchange asset or a savings certificate."
If the price of a new foreign exchange asset is less than the net sale consideration, the exemption would be computed proportionately. A three-year lock-in would be applicable to the new foreign exchange asset purchased.
'If the new asset is transferred or sold within three years of purchase, then the exemption claimed earlier will be taxable in the year in which the new asset was transferred or sold," he explained further.
For example, Mr A sells shares that qualify as foreign exchange assets for ₹10 lakh and earns LTCG of ₹2 lakh on the sale. Per Section 115E, this LTCG would typically be taxed at 12.5% on a gross basis. However, if the NRI reinvests the entire net sale proceeds within six months in any specified asset or any other assets as the central government may specify, the LTCG can be exempted from tax.
But Mr A reinvests only ₹8 lakh out of the ₹10 lakh net sale consideration into a specified asset. Because the reinvestment is less than the net sale consideration, the exemption on the LTCG will be computed proportionately. This means the exempted LTCG will be calculated as (LTCG/net sale consideration) multiplied by the amount reinvested.
In this case, ( ₹2 lakh/ ₹10 lakh × ₹8 lakh) ₹1.6 lakh would be exempt from tax. The remaining ₹40,000 would be taxable.
Furthermore, the new foreign exchange asset bought with the reinvested amount will have a mandatory lock-in period of three years. If the NRI sells or transfers this new asset before the completion of three years, the earlier exemption claimed on the LTCG will be reversed and taxed in the year of such transfer or sale. This rule ensures that the reinvestment is maintained for a minimum period to qualify for the exemption.
Continuous tax exemption
Even after the initial three-year lock-in period, NRIs can continue to enjoy exemptions on LTCG, provided the proceeds from the sale are reinvested into eligible foreign exchange assets within the stipulated time. 'The tax exemption on LTCG doesn't have to be a one-time benefit," said Gautam Nayak, a chartered accountant. 'If the sale proceeds are reinvested into qualifying assets within six months, and those assets are held for the required period, the exemption can be carried forward indefinitely with each reinvestment cycle."
This reinvestment must occur within six months of the sale of specified assets.
Nayak explained that maintaining a proper documentary trail is critical in such cases. 'NRIs must be able to demonstrate that the original investment was made using convertible foreign exchange and that each subsequent reinvestment complied with the conditions specified under the Income Tax Act."
Without clear proof of the source of funds and asset eligibility, claims for exemption may not hold up during assessment or scrutiny.
For example, an NRI invests ₹20 lakh in shares using funds from their NRE account. After one year, the investment grows to ₹40 lakh. To claim the capital gains exemption, the entire ₹40 lakh must be reinvested within six months into another qualifying foreign exchange asset.
After holding the new asset for the required three years, if its value increases to ₹60 lakh and is sold again, the exemption can still be preserved, provided the ₹60 lakh is reinvested once more into an eligible asset within six months.
This cycle of reinvestment and exemption can continue as long as the NRI complies with the reinvestment timeline, asset eligibility, and documentation requirements.
Even after an NRI returns to India and becomes a resident, they may continue to enjoy these concessions under certain conditions. 'NRIs returning to India can continue being governed under these special provisions for their investment income (except interest, dividend income on shares in an Indian company) by furnishing a declaration to the assessing officer, along with their income tax return (ITR)," Mehta explained.
Also Read: EPF nightmare for NRIs: Service gaps, missing UANs, and frozen funds
'If an NRI becomes a resident in India in any subsequent year, he may submit a return of income along with a written declaration to the assessing officer stating that the special tax provisions should continue to apply to their investment income from foreign exchange assets," Ahirwar added.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Indian Express
19 minutes ago
- Indian Express
India-UK FTA: Import of Britain-made luxury cars to get cheaper
Luxury cars made in the United Kingdom will become cheaper in India, with the India-UK Comprehensive Economic and Trade Agreement (CETA) introducing tariff-rate quotas (TRQ) for passenger cars and trucks, which will allow automakers to export vehicles at reduced tariffs, limited by quotas. Under the agreement, tariffs on imports of internal combustion engine (ICE) cars will be slashed to 30-50 per cent in the first year of implementation, with the benefit limited to a quota of 20,000 cars. The tariffs will be reduced gradually, and after 15 years, they will become 10 per cent, with the quota set at 15,000 units. For out-of-quota imports of ICE cars, the duties are reduced to 60-95 per cent in the first year, and further to 45-50 per cent from the tenth year onwards. Currently, India's import tariffs on passenger vehicles range from 70-110 per cent while those on trucks stand at 40 per cent. Industry executives said that import quotas have been implemented to avoid sudden surges in imports and safeguard the Indian auto industry. This reduction, ranging from 16 per cent to 56 per cent over a period up to 5 years on ICE vehicles up to 2500 cc (diesel)/3000 cc (petrol) and 80 per cent to 100 per cent over a period of 5 years on ICE vehicles more than 2500 cc (diesel)/3000 cc (petrol), is expected to make high-end vehicles more accessible. For electric vehicles (EVs), hybrids, and hydrogen fuel-based cars, tariffs have been eliminated entirely for units priced under £40,000 CIF (cost, insurance and freight value). For zero-emission cars priced between £40,000 to £80,000, tariffs are reduced to 50 per cent and a quota of 400, which from the fifteenth year will become 10 per cent and 2,000 respectively. For more expensive zero-emission cars (above £80,000), duties will start at 40 per cent with a quote of 4,000 units, which from the fifteenth year will become 10 per cent and 20,000 respectively. The new tariff rates are likely to benefit automakers such as Jaguar Land Rover. It is worth noting that the agreement does not provide for reduced out-of-quota duties on zero-emission vehicles, a decision that will provide some relief to domestic EV and hybrid players. In 2024-25, India's car imports from the UK fell by 46 per cent to $72 million from $134 million in 2023-24. For ICE trucks, the tariffs are slashed to 37 per cent for the first year, with a quota of 2,500. From the tenth year onwards, tariffs drop further to 8.8 per cent, with the quota set at 3,500. The agreement does not reduce duties for electric or hydrogen-based trucks. 'The substantial reduction of import duties to 10 per cent in 5 years for UK cars represents one of the most significant outcomes of the FTA and is poised to transform the car market in India, particularly for Completely Built Units (CBUs) due to the drastic duty cut. However, it is crucial that the cars meet the originating criteria of 35 per cent of Qualifying Value Content ('QVC') i.e. the material of UK origin is 35 per cent of total material used,' said Saurabh Agarwal, partner and automotive tax leader at EY India. He added that since the reduced duty benefits apply to all automobiles manufactured in factories located in the UK, non-UK carmakers may consider establishing factories in the UK to take advantage of the reduced rates and maintain their market share in India. Aggam Walia is a Correspondent at The Indian Express, reporting on power, renewables, and mining. His work unpacks intricate ties between corporations, government, and policy, often relying on documents sourced via the RTI Act. Off the beat, he enjoys running through Delhi's parks and forests, walking to places, and cooking pasta. ... Read More Soumyarendra Barik is Special Correspondent with The Indian Express and reports on the intersection of technology, policy and society. With over five years of newsroom experience, he has reported on issues of gig workers' rights, privacy, India's prevalent digital divide and a range of other policy interventions that impact big tech companies. He once also tailed a food delivery worker for over 12 hours to quantify the amount of money they make, and the pain they go through while doing so. In his free time, he likes to nerd about watches, Formula 1 and football. ... Read More
&w=3840&q=100)
Business Standard
19 minutes ago
- Business Standard
'UK is back on world stage': Keir Starmer after trade deal with India
The trade deal comes at a time when US President Donald Trump's tariff policies continue to disrupt global trade Bloomberg The UK has restored its international standing after years of 'performative' politics under successive Conservative governments, Labour Prime Minister Keir Starmer said in an interview after sealing a long-sought trade deal with India on Thursday. The trade deal — the biggest struck by Britain since Brexit — will cut the vast majority of India's tariff lines for the UK, helping exports from Scotch whisky to cars. But speaking at his Chequers country retreat after meeting with Indian Premier Narendra Modi, Starmer said the agreement didn't mark the limit of the UK's ambition, and would provide a baseline of cooperation to build on for the two countries. 'We have re-established the place and position of the UK on the world stage,' Starmer told Bloomberg in his only interview with a major publication to mark crystallisation of the pact, referring also to increased cooperation with the European Union and a trade pact with the US. Now, 'we're seen as a country which other countries want to be working with and delivering with.' The deal signed earlier Thursday by the Indian and British trade ministers eliminated or reduced a swath of tariffs and lifted other barriers to commerce. The pact came after three years of intense negotiations touching on thorny topics such as visas, and tax breaks. The two nations concluded talks in May, completing Britain's biggest trade deal since Brexit and India's most significant such agreement to date. 'This isn't merely paving the way for economic partnership but is also a blueprint for our shared prosperity,' Modi said earlier Thursday, speaking alongside Starmer at Chequers. In an interview with Bloomberg on Thursday evening, Modi's trade minister, Piyush Goyal, said the deal will 'open the doors for more robust and resilient supply chains,' as well as encouraging 'greater investments because of the stable and predictable business environment.' 'It's a win win for both UK and India,' he said. A separate bilateral investment treaty is still being negotiated between the UK and India, which could include more controversial elements such as a provision which allows investors to sue either government if they believe a policy change has unfairly affected their profits. 'I do hope we will get that also across the hump soon,' Goyal said of the treaty, declining to discuss the sticking points. The trade deal comes at a time when US President Donald Trump's tariff policies continue to disrupt global trade, and Starmer told Bloomberg that it marked 'a real statement of intent as to how close we want our two countries to be as we go forward in an uncertain world.' He added that he and Modi had already begun to discuss which areas they could build on. Starmer, whose Labour Party was elected to power a year ago, also made a jibe at his Tory predecessors Boris Johnson and Rishi Sunak — both of whom set and missed their own deadlines for agreeing a deal with India, with the former famously promising one by Diwali 2022. 'Serious, pragmatic, respectful diplomacy trumps performative politics any day of the week,' Starmer said. He added that the 'quiet, serious, pragmatic, respectful way' in which he had asked officials to proceed 'achieved results compared with the noisy performance of my predecessors.' Starmer and Modi earlier attended a showcase of businesses who hoped to benefit from the trade deal. Representatives from firms including the supermarket chain Sainsbury's and family-run Spice Kitchen staffed stands under a marquee in the Chequers rose garden, and said they were excited about the opportunities for further cooperation between the UK and India. 'We import a lot from India,' said Spice Kitchen's Sanjay Aggarwal, who runs the business with his mother Shashi. 'Hopefully some of our costs will come down.' Starmer had said he 'loves to cook and loves Indian food,' Aggarwal added. For Modi, the deal reinforces his push to position India as a viable alternative for global supply chains looking to diversify. The pact — India's first major one in a decade — signals that the South Asian nation is willing to lower its barriers to attract investments as it negotiates a bilateral trade deal with the US. It will also act as a springboard for India's ongoing talks with European Union. For Starmer, the deal will be a welcome step toward his goal of boosting economic growth in the UK. While it is expected to add £4.8 billion ($6.5 billion) to the UK's annual economic output — a tiny increase to the size of the economy — Starmer's Labour government hopes successive incremental wins will help encourage investment and turn around lackluster business sentiment. With Trump due to arrive in Scotland on Friday for a personal visit during which he'll meet with Starmer, the signing comes as Britain works to flesh out the trade pact it agreed with the US. Meanwhile the New Delhi administration is racing to clinch a deal with Washington before Aug. 1, when higher tariffs are due to kick in. (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
&w=3840&q=100)
Business Standard
19 minutes ago
- Business Standard
India, UK dismantle trade walls with landmark deal amid global tensions
India and the United Kingdom (UK) on Thursday signed a modern and comprehensive trade agreement, marking a major milestone in their bilateral relationship at a time of rising geopolitical polarisation and trade wars. Under the agreement, 99 per cent of Indian exports will enter the UK duty-free, while 90 per cent of UK goods will gain market access in India with zero tariffs. The deal, known as the Comprehensive Economic and Trade Agreement (CETA), was signed by Union Commerce and Industry Minister Piyush Goyal and his British counterpart Jonathan Reynolds, 42 months after negotiations began in January 2022. The signing took place in the presence of Prime Minister Narendra Modi and his British counterpart Keir Starmer at Chequers, the official countryside retreat of the British PM, in the Chiltern Hills of Buckinghamshire. 'This agreement is more than just an economic partnership; it is a blueprint for shared prosperity. On the one hand, it paves the way for enhanced market access in the UK for Indian textiles, footwear, gems and jewellery, seafood, and engineering goods…. On the other hand, UK-made products such as medical devices and aerospace components will become more accessible and affordable for Indian consumers and industries,' Modi said during the joint press statement in the UK. The agreement will come into effect once ratified by both countries. While the Union Cabinet in India has approved the deal, it still requires approval from the UK Parliament. CETA will reduce India's applied trade-weighted average tariff on goods imports from the UK from 15 per cent to 3 per cent, according to the UK government. However, the agreement does not address how to deal with the UK's Carbon Border Adjustment Mechanism when it comes into force in January 2027, despite India having raised concerns. India has granted tariff concessions on alcohol and automobiles -- key demands from the UK -- though in a staggered manner. Tariffs on whisky will be reduced from 150 per cent to 40 per cent over 10 years. For cars, where tariffs currently stand as high as 110 per cent, rates will fall to 10 per cent but within a quota. India will also eliminate or gradually phase out duties on consumer goods including soaps, perfumes, shaving creams and nail polish. However, the deal does not extend concessions to electric, hybrid and hydrogen-powered vehicles for the first five years. Tariff cuts have also excluded products such as apples, cheese, whey, gold bars, and smartphones, with India seeking to protect sensitive domestic sectors. Britain, in turn, has excluded meat, rice, sugar and eggs from tariff liberalisation. A standalone Double Contributions Convention (DCC) was also signed alongside the CETA. The treaty will prevent double payment of social security contributions -- roughly 20 per cent -- for a period of three years, benefiting an estimated 75,000 Indian professionals working in the UK. As part of the deal, India has committed to granting UK firms access to its vast government procurement market. British companies will be able to bid for around 40,000 tenders annually, with a total value of at least £38 billion. UK-origin goods with just 20 per cent domestic content will be treated as 'Class II' local suppliers under India's Public Procurement Order, a category previously reserved for Indian suppliers with 20–50 per cent local content. Experts said the move signals a shift away from using public procurement as a lever for domestic industrial development. 'The 20 per cent local content rule allows UK firms to use up to 80 per cent inputs from third countries -- such as China or the European Union -- while still receiving preferential treatment, effectively diluting the benefits that programs like 'Make in India' and Atmanirbhar Bharat were designed to protect,' according to a report released by Delhi-based think tank GTRI.
