NRI capital gains and TDS on redemption: why your payout is smaller than the tax
How capital gains work for NRIs — the same rates as residents but collected as TDS at source, the ignored ₹1.25 lakh equity exemption, debt-fund slab withholding, DTAA, and getting the refund.
A resident and an NRI can sell the exact same mutual fund, on the same day, for the same gain — and walk away with different amounts in hand. Not because the tax rate differs (it doesn’t, since July 2024), but because of when and how the tax is collected. For NRIs, capital gains tax is deducted at source, the moment you redeem, before the money reaches you. Understanding that one difference — and the quirks it creates — is the whole game. Run your numbers through the NRI capital gains calculator as you read.
Same rates, different collection
Post 23 July 2024, capital gains rates are identical for residents and NRIs:
- Listed equity / equity mutual funds: long-term (held over 12 months) 12.5% above ₹1.25 lakh a year; short-term 20%.
- Debt mutual funds (bought on/after 1 April 2023): slab rate on the whole gain, no indexation.
- Gold, unlisted shares, other assets: long-term (over 24 months) 12.5% without indexation; short-term at slab.
The difference is collection. A resident pays through advance tax and self-assessment when filing. An NRI has it withheld at source — the broker, AMC or buyer deducts TDS before paying out. That immediacy, plus a few quirks, is why NRIs so often end up over-deducted and chasing refunds.
Quirk 1: the ₹1.25 lakh equity exemption is ignored at source
For residents, the first ₹1.25 lakh of long-term equity gains each year is automatically tax-free. For an NRI redeeming equity funds, the AMC deducts 12.5% (plus surcharge and cess) on the entire long-term gain — the exemption is not applied at the deduction stage.
Redeem an equity fund with a ₹3 lakh long-term gain and the AMC withholds 12.5% of the full ₹3 lakh, about ₹37,500 plus surcharge and cess. Your actual liability, applying the exemption, is 12.5% of ₹1.75 lakh — about ₹21,875. The difference, roughly ₹15,600, is your money, withheld now and returned only when you file. Multiply across a year of redemptions and it adds up.
Quirk 2: debt funds get the maximum slab withheld
Debt mutual funds bought after 1 April 2023 are taxed at your slab rate under Section 50AA. But at the deduction stage, the AMC doesn’t know your slab — so for NRIs it typically withholds at the maximum 30% plus surcharge and cess. If your actual slab is lower (say you have little other Indian income), a big chunk is over-withheld and refundable. This is the harshest NRI cash-flow case: no long-term benefit, no indexation, and top-rate withholding by default.
Quirk 3: surcharge stacks on top
The headline rate isn’t the whole rate. Surcharge is tiered by the gain — nil up to ₹50 lakh, 10% to ₹1 crore, 15% above (capped at 15% for long-term gains) — and 4% cess sits on top of that. So a large long-term gain is taxed nearer 14.95% than 12.5%. The calculator applies the right tier to both the withheld and the actual figures.
DTAA: the relief most NRIs under-claim
Your country’s Double Taxation Avoidance Agreement with India can change how a gain is taxed, or give you credit for tax paid in one country against the other, so the same gain isn’t taxed twice. Historically the India-Singapore and India-Mauritius treaties gave favourable treatment on equity gains, though 2017 grandfathering rules limit this for newer investments. Whether a treaty helps depends on your residence country, the asset and the purchase date. To claim any benefit you need a Tax Residency Certificate and Form 10F — and most NRIs simply don’t, leaving relief on the table.
Getting your money back
Everything over-withheld — the ignored equity exemption, a lower real slab, capital losses to set off, DTAA relief — comes back, but only if you act:
- File an Indian return. This is how the refund is claimed. Given how routinely NRI capital gains are over-deducted, filing is often the only way to recover your own money.
- For large, predictable gains, apply for a Form 13 lower-deduction certificate before the transaction — the same Section 197 route used for NRI property sales. The payer then withholds on your actual liability instead of the full gain, so the cash never leaves your hands.
Also mind which account receives the proceeds: money in an NRE account is freely repatriable, while NRO proceeds face the USD 1 million per year limit and need Form 15CA/15CB to move abroad.
The short version
- NRI capital-gains rates match residents; the difference is TDS withheld at source on redemption.
- The ₹1.25 lakh equity exemption is ignored at source — reclaim it by filing.
- Debt funds often get the maximum 30% withheld regardless of your real slab.
- DTAA can cut the tax — but only if you file the TRC + Form 10F.
- Recover excess by filing a return, or prevent it upfront with Form 13.
Work out the withheld TDS, your actual liability and the refund for your own sale with the NRI capital gains calculator, and check your residential status first with the residency & RNOR calculator.
General information, not tax advice. Treaty positions and TDS specifics vary by country and case — confirm with a chartered accountant.