India raises capital gains tax, tightens NRI residency rules
Sweeping changes to India's tax code have raised capital gains rates, eliminated indexation benefits, and introduced stricter residency thresholds for non-resident investors.
India has overhauled its taxation of non-resident investors through a series of legislative changes culminating in the new Income-tax Act 2025, which took effect on 1 April 2026. The most significant financial impact came from Budget 2024, which raised long-term capital gains tax on listed equities and equity funds from 10% to 12.5%, while short-term rates jumped from 15% to 20%. Real estate and other asset classes were flattened to a uniform 12.5% long-term rate, but crucially, indexation benefits were removed entirely for transfers after 23 July 2024.
Unlike domestic taxpayers, non-resident Indians received no grandfathering relief on the removal of indexation. This disproportionately affects NRI portfolios holding property acquired years ago, sharply increasing the taxable capital gain upon sale. Compounding the issue, tax deducted at source is frequently withheld on the entire property sale price rather than the actual gain, locking up capital in lengthy refund processes.
The new legislation also tightens the net on residency status, a critical factor for determining global tax liability. While standard NRI visitors retain a 182-day threshold before triggering residency, those earning more than ₹15 lakh in Indian income see that threshold drop to just 120 days. Furthermore, Indian citizens residing in zero-tax jurisdictions like the UAE are now deemed residents if their Indian income exceeds ₹15 lakh, automatically classifying them as Resident but Not Ordinarily Resident.
These structural shifts make account setup increasingly important. Interest on NRE and FCNR(B) deposits remains fully tax-exempt and repatriable, whereas NRO accounts face a 30% withholding tax on interest. The appeal of debt mutual funds for NRIs has also dimmed since April 2023, when funds with less than 35% equity exposure lost their long-term concession and became taxable at standard slab rates.
To avoid cash flow traps, tax practitioners advise NRIs to apply proactively for a Lower or Nil TDS Certificate under Section 395 rather than waiting to claim refunds. Missing paperwork remains a costly error; without a valid Tax Residency Certificate and Form 41 submitted to Indian payers, full domestic withholding applies. Foreign tax credit claims must now be filed via Forms 44 and 45 strictly by the income tax return due date.
Some investors are looking to GIFT City IFSC specified funds, which carve out certain income from Indian tax under the 2025 act. However, this is a case-by-case planning tool rather than a blanket exemption. Meanwhile, recent rules have closed other avenues; from Budget 2026, the tax-free maturity benefit on Sovereign Gold Bonds now applies only to original subscribers, eliminating a key perk for secondary market buyers.
