"NRIs pay the same capital gains tax as residents on Indian stocks": What ITA 2025 actually says

"NRIs pay the same capital gains tax as residents on Indian stocks": What ITA 2025 actually says

Walk into any NRI investing forum and you will see the claim repeated with total confidence: "Capital gains on Indian shares are taxed exactly the same whether you are a resident or an NRI." It sounds reasonable, and on the headline rate it is even partly true. But it quietly skips three things that decide how much money actually lands in your bank account: the basic exemption limit you are not allowed to use, the TDS your broker or buyer is required to deduct before you ever see the proceeds, and the way the new Income Tax Act, 2025 has renumbered the very sections everyone keeps quoting. Get these wrong and you either overpay by lakhs or, worse, trigger a notice.

Here is what the law actually says for the Tax Year 2026-27 (the period beginning 1 April 2026), and what changes the moment the Income-tax Act, 2025 replaces the Income-tax Act, 1961.

What the law actually says

Gains on listed Indian shares fall into two buckets, and the bucket depends only on how long you held the shares before selling.

Short-term capital gains (STCG) apply when you sell listed equity shares or equity-oriented mutual fund units within 12 months of buying them, and Securities Transaction Tax (STT) was paid on the sale. Under the old law this was Section 111A of the Income-tax Act, 1961. Under the Income-tax Act, 2025 the identical provision is renumbered as Section 196. The rate, after the 23 July 2024 change that carries forward into ITA 2025, is 20%.

Long-term capital gains (LTCG) apply when you hold those same listed shares for more than 12 months before selling. This was Section 112A of the Income-tax Act, 1961, and is now Section 198 under ITA 2025. The rate is 12.5%, but only on the portion of long-term gains above ₹1.25 lakh in a Tax Year. The first ₹1.25 lakh of LTCG is exempt. There is no indexation benefit on these listed-equity gains.

For completeness, gains on assets that are not listed equity with STT — for example unlisted shares, or shares of a foreign-incorporated company — are governed by the general long-term provision, old Section 112, now Section 197 under ITA 2025, also at 12.5%. NRIs do not get indexation or the foreign-currency reinvestment relief on unlisted shares.

So far, residents and NRIs look the same: 20% STCG, 12.5% LTCG, same ₹1.25 lakh LTCG exemption. The viral claim survives this far. It falls apart on the next two points.

Point one — the basic exemption limit. A resident with little other income can offset short-term and long-term gains taxed at these special rates against any unused portion of the basic exemption limit (₹2.5 lakh under the old regime, ₹4 lakh under the new regime for Tax Year 2025-26 onward). An NRI cannot do this for these special-rate gains. Section 196/198 gains are taxed from the very first rupee for a non-resident, with one exception: the ₹1.25 lakh LTCG exemption itself, which is available to residents and non-residents alike.

Point two — TDS. A resident sells shares through a broker and pays tax later, when filing the return. For an NRI, Section 195 (the non-resident TDS provision) requires tax to be deducted at source on the gain before the money reaches you. On STCG the deduction is 20%, on LTCG it is 12.5%, plus the applicable surcharge and 4% health & education cess. This is the single biggest reason NRI proceeds look smaller than expected — the tax is taken upfront, not at filing.

One more layer: NRIs who invest through the portfolio investment route as foreign portfolio investors are assessed under Section 115AD rather than the ordinary sections, but for an individual NRI holding ordinary listed shares in a demat account, Sections 196 and 198 (ITA 2025) are the operative provisions. The surcharge on these capital gains is capped at 15%, which matters for high-value sales.

Practical implications for NRIs

Numbers make this concrete. Assume you are an NRI in Dubai who bought ₹20 lakh of listed Indian shares and sold them in the Tax Year 2026-27.

Scenario A — held 8 months, sold for ₹24 lakh. This is short-term. Gain = ₹4 lakh. STCG under Section 196 (old 111A) at 20% = ₹80,000, plus 4% cess = ₹83,200. You get no basic exemption cushion. A resident with no other income could have sheltered part of this gain under the ₹4 lakh basic exemption; you cannot.

Scenario B — held 3 years, sold for ₹24 lakh. This is long-term. Gain = ₹4 lakh. The first ₹1.25 lakh is exempt under Section 198 (old 112A). Taxable LTCG = ₹2.75 lakh at 12.5% = ₹34,375, plus 4% cess = ₹35,750. Note how dramatically holding past 12 months cuts the bill — ₹35,750 versus ₹83,200 on the same ₹4 lakh gain.

Scenario C — the TDS shock. In Scenario B, before you receive your ₹24 lakh, tax of roughly ₹35,750 (12.5% on the gain above exemption, plus cess) is deducted at source under Section 195. If the deductor computes TDS on the full gain without applying your ₹1.25 lakh exemption — which happens often — you may have excess TDS deducted that you can only recover by filing a return and claiming a refund. This is why NRIs who never filed because "tax was already deducted" routinely leave refunds on the table.

The practical headline: your rate is the same as a resident's, but your cash flow and your exemption access are not. Plan around the 12-month holding line, and plan around TDS.

Equity mutual funds, surcharge, and the over-deduction trap

Three details quietly swing the final number and are worth understanding before you sell.

Equity mutual funds follow the same rules as direct stocks. An equity-oriented fund (one holding at least 65% in domestic equity) is taxed exactly like a listed share: STCG at 20% under Section 196 (old 111A) if held 12 months or less, LTCG at 12.5% under Section 198 (old 112A) beyond the ₹1.25 lakh exemption if held longer. Debt funds and international funds are different animals — they do not get the special equity rates and are generally taxed at your slab — so do not assume "it's a mutual fund" tells you the rate. The asset class inside the fund decides it.

Surcharge changes the effective rate on large sales. On top of the base 20% or 12.5%, a surcharge applies once total income crosses ₹50 lakh, but for these capital gains the surcharge is capped at 15% (it does not climb to the 25% or 37% rates that apply to ordinary income). For a high-value sale this cap is a genuine relief. Add the 4% health & education cess on tax-plus-surcharge to reach the true effective rate. An NRI realising, say, ₹80 lakh of long-term gains pays 12.5% base + capped surcharge + cess — not the headline 12.5% alone.

You can stop excess TDS before it happens. Because Section 195 makes the deductor withhold on the gross gain — often without applying your ₹1.25 lakh exemption or treaty relief — NRIs frequently have far more deducted than they owe, then wait months for a refund. The remedy is a Lower or Nil Deduction Certificate: apply to the Assessing Officer (under the old Section 197 certificate route, carried into ITA 2025) before the sale, and the deductor withholds only the certified amount. For a planned, large disposal this single step can free up lakhs of working capital that would otherwise sit with the department until you file.

A related point on repatriation: tax treatment and money movement are separate questions. Even after capital gains tax is settled, moving sale proceeds out of India runs through your NRO account and the USD 1 million per financial year repatriation limit, and typically needs Form 15CA (now Form 145 under ITA 2025) and, where applicable, a Form 15CB (now Form 146) certificate from a chartered accountant. Paying the tax correctly does not by itself authorise the remittance — plan both.

Step-by-step: what to do

• Confirm STT was paid on the sale. The 20% STCG and 12.5% LTCG rates under Sections 196 and 198 (ITA 2025) apply only to listed equity sold on a recognised Indian exchange with STT paid. Off-market transfers do not qualify and are taxed differently.
• Tag each lot by holding period. Anything held 12 months or less is short-term (Section 196); more than 12 months is long-term (Section 198). Use your broker's holding statement, not memory.
• Apply the ₹1.25 lakh LTCG exemption deliberately. It is per Tax Year, not per transaction. If you have flexibility on timing, splitting a large long-term sale across two Tax Years can use the exemption twice.
• Track TDS deducted under Section 195. Reconcile it against Form 26AS — now Form 168 under ITA 2025 — so you can see exactly what was withheld and claim credit for it.
• File ITR-2 even if TDS was deducted. Filing is how you claim the ₹1.25 lakh exemption, the correct rate, and any refund of over-deducted TDS. "Tax already deducted" is not a reason to skip filing — it is usually a reason to file.
• Use a DTAA where it helps. Some treaties (for example the India-UAE and India-Singapore treaties) can reduce or reallocate taxing rights on certain capital gains. To claim treaty benefit you generally need a Tax Residency Certificate and Form 10F. This is fact-specific — do not assume your residence automatically exempts Indian share gains.

FAQ

Do NRIs get the ₹1.25 lakh LTCG exemption on Indian shares?
Yes. The ₹1.25 lakh annual exemption on long-term gains under Section 198 (old Section 112A) is available to both residents and non-residents. What NRIs do not get is the ability to set special-rate gains against the unused basic exemption limit.

Is the capital gains rate really the same for NRIs and residents?
The headline rates are the same — 20% STCG under Section 196 and 12.5% LTCG under Section 198. The differences are that NRIs cannot use the basic exemption limit against these gains, and tax is deducted at source under Section 195 before proceeds are paid, rather than settled at filing.

Why was so much tax deducted before I received my sale proceeds?
Because Section 195 requires the deductor to withhold tax at source on an NRI's capital gains — 20% on short-term, 12.5% on long-term, plus surcharge and 4% cess. If the exemption was not applied at deduction, you reclaim the excess by filing ITR-2 and checking the credit in Form 168 (the ITA 2025 successor to Form 26AS).

Does the new Income-tax Act, 2025 change my tax rate on shares?
No. ITA 2025 renumbers the provisions — Section 111A becomes 196, Section 112 becomes 197, Section 112A becomes 198 — and switches the vocabulary to "Tax Year," but the 20% STCG and 12.5% LTCG rates and the ₹1.25 lakh exemption carry over unchanged for the Tax Year 2026-27.

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