Tax on NRI Investments in India: A Practical Overview

You have been a non-resident for a few years and you want to put money to work back home — in a fixed deposit, some equity, perhaps a mutual fund. The investment part is straightforward. The tax part is where most NRIs trip up. This guide covers the most common NRI investment options in India, the tax treatment on each, and the TDS rates that will apply before you see any return.

Quick answer

The tax an NRI pays on Indian investments depends on the type of income — capital gain, interest, or dividend — and the nature of the asset. TDS is deducted at source on most NRI investment income; the rates are typically higher than for residents. If India has a Double Taxation Avoidance Agreement (DTAA) with your country of residence, you can claim the lower treaty rate — but only if you furnish a Tax Residency Certificate and Form 10F before the deduction is made.

Before you invest:

1. Check whether you need to invest through an NRE or NRO account for that instrument.
2. Understand the TDS rate on the return — it directly affects your cash flow.
3. Identify whether your country of residence has a DTAA with India and whether it covers your type of income.
4. Plan to file an ITR if TDS is deducted in excess of your actual tax liability.

NRI investment options: what is allowed

FEMA (the Foreign Exchange Management Act) governs which investment routes are available to NRIs. The broad framework is:

NRE account (Non-Resident External): Funded from foreign remittances. Principal and interest are freely repatriable. Interest income on NRE deposits is exempt from Indian tax under Section 10(4)(ii) of the Income Tax Act 1961 for as long as you remain an NRI.

NRO account (Non-Resident Ordinary): Funded from India-source income — rent, dividends, pension — or from remittances. Repatriation is permitted up to USD 1 million per financial year subject to CA certificate. Interest is fully taxable in India.

FCNR(B) accounts: Foreign currency deposits held with Indian banks. Interest is tax-exempt during NRI status, similar to NRE.

Equity: NRIs can invest in listed Indian equities through the Portfolio Investment Scheme (PINS) administered under FEMA regulations. A PINS account is routed through a designated bank branch; only one PINS account is permitted at a time.

Mutual funds: NRIs can invest in Indian mutual funds directly through NRE or NRO accounts, subject to fund-house KYC. US- and Canada-based NRIs face restrictions from certain funds due to FATCA compliance requirements — check with the specific AMC before investing.

Government securities and bonds: RBI-issued securities and certain non-convertible debentures are accessible to NRIs through authorised channels.

Real estate: NRIs can purchase residential and commercial property in India (agricultural land and plantation property are generally not permitted). The tax treatment on property is covered separately — see the NRI capital gains and Section 54F guides.

Tax on equity and equity mutual funds

Equity investments generate two types of return: capital gains and dividends.

Capital gains on listed equity and equity-oriented mutual funds:

For assets held more than 12 months, the gain is Long-Term Capital Gain (LTCG). For NRIs, LTCG on listed equity and equity-oriented mutual funds is taxed under Section 115AD of the Income Tax Act 1961 — not Section 112A, which applies to residents. The rate and threshold are the same: 12.5% (without indexation) on gains above ₹1.25 lakh per financial year, effective 23 July 2024. Gains up to ₹1.25 lakh in a year are exempt. The section differs for an NRI; the tax does not.

For assets held 12 months or less, the gain is Short-Term Capital Gain (STCG), taxed at 20% under Section 111A (the rate was 15% before 23 July 2024).

TDS is deducted by the broker or mutual fund at the time of redemption or transfer. Because these rates can exceed what many residents effectively pay, and because the ₹1.25 lakh LTCG exemption is not applied at source, NRIs often find excess TDS deducted. A further point specific to NRIs: unlike some residents, an NRI cannot set the basic exemption limit against these special-rate gains, so the gain (above the ₹1.25 lakh equity exemption) is taxable from the first rupee. The remedy for any over-deduction is to file an ITR and claim a refund.

Dividends from Indian companies:

Dividends are taxable in the hands of the NRI shareholder. For an NRI, dividend TDS is deducted under Section 195 of the Income Tax Act 1961 at 20% (plus surcharge and cess), unless a DTAA provides a lower rate. To secure the treaty rate, furnish your TRC and Form 10F to the company’s registrar before the dividend record date; otherwise the 20% domestic rate applies and you recover any excess only by filing a return.

Tax on fixed-income investments and deposits

NRO fixed deposit interest:

Interest on NRO deposits is taxable in full at the rate applicable to non-residents. Banks deduct TDS at 30% (plus applicable surcharge and health and education cess) under Section 195 of the Income Tax Act 1961. If India has a DTAA with your country covering bank interest, the treaty rate is typically lower — for example, the India-UAE DTAA caps interest tax at 12.5% and the India-UK DTAA at 15%. To claim the DTAA rate, submit a TRC and Form 10F to your bank before the interest credit date.

NRE and FCNR(B) deposit interest:

Tax-exempt under Section 10(4)(ii) and Section 10(4)(i) of the ITA 1961 respectively, during the period you qualify as an NRI. No TDS is deducted. Once your residential status changes to Resident or Resident but Not Ordinarily Resident (RNOR), the exemption ceases.

Debt mutual funds:

Debt fund taxation depends on when you bought the units. For units of specified mutual funds acquired on or after 1 April 2023, gains are treated as short-term regardless of holding period and taxed at your applicable slab rate — no indexation, no long-term benefit. Units bought before 1 April 2023 retain the earlier treatment for those units. The definition of a “specified mutual fund” was further refined by the Finance (No. 2) Act 2024 with effect from FY 2025-26, so confirm a specific fund’s classification before computing the gain. For NRIs, TDS on debt fund redemptions is deducted at 20% under Section 196A; if your effective DTAA rate is lower, claim the excess as a refund through your ITR.

Government securities and bonds:

Interest income is taxable at applicable rates. Capital gains on G-secs and bonds follow the holding-period rules applicable to the specific security; most listed securities qualify as LTCG after 12 months.

TDS rates on NRI investment income: the quick reference

Investment type	Income type	Default TDS rate (plus surcharge and cess)
NRO fixed deposit	Interest	30% (Section 195)
NRE / FCNR(B) deposit	Interest	Nil (exempt)
Equity (PINS)	STCG (≤12 months)	20%
Equity (PINS)	LTCG (>12 months)	12.5% (above ₹1.25L)
Equity mutual fund	STCG / LTCG	Same as equity above
Debt mutual fund	Any gain	20% (Section 196A)
Dividends	Dividend income	20% (Section 195)

Surcharge and cess can add 10–15% to the base rate for higher incomes. DTAA rates, where applicable, take precedence over domestic rates — but only if properly documented with TRC and Form 10F before the deduction.

How DTAA can reduce your TDS

If India has a DTAA with your country of residence and that DTAA covers your type of income, you can ask the Indian payer (bank, fund, company) to deduct TDS at the lower treaty rate rather than the domestic rate. The process:

1. Obtain a valid Tax Residency Certificate (TRC) from your resident country’s tax authority covering the relevant financial year.
2. Check whether your TRC contains all seven items required under Rule 21AB — name, status, nationality, country of tax residence, TIN, period of residence, and address.
3. If any item is missing, file Form 10F online through India’s e-filing portal (eportal.incometax.gov.in).
4. Give the TRC and the filed Form 10F to the Indian payer before the next payment or interest credit date.
5. The payer can then legally deduct TDS at the DTAA rate.

The flowchart in the next section captures the core tax-type decision NRIs face before claiming DTAA relief or filing an ITR.

Flowchart: what tax applies to your Indian investment?

Both paths — equity gains and other income — ultimately lead to the same action: file an ITR at year end, reconcile the TDS credit against actual tax liability, and claim a refund if excess TDS was deducted.

When capital gains reinvestment exemptions apply (ITA 1961 and ITA 2025 note)

NRIs who earn capital gains on property (or, in some cases, on the sale of equity or debt instruments) and wish to reinvest to reduce the tax outgo may claim exemptions under Sections 54, 54F, and 54EC of the Income Tax Act 1961:

• Section 54 / 54F: Available to NRIs on LTCG from property sale; investment must be in one residential house in India (54) or one residential house in India for gains from any long-term capital asset other than property (54F), within prescribed timelines.
• Section 54EC: Available on LTCG from land or building; investment of up to ₹50 lakh in specified bonds (NHAI, REC) within six months of the sale date.

Under the Income Tax Act 2025: The capital gains framework and the reinvestment exemption provisions (equivalent to the current Sections 54, 54F, and 54EC) are carried forward into the 2025 Act, though section numbers are renumbered. The rates and holding-period thresholds applicable from 23 July 2024 — LTCG at 12.5% on equity and 12.5% on property without indexation — are reflected in both the current ITA 1961 (as amended) and the ITA 2025. Verify the exact provision references in the 2025 Act against its current text before applying them to any transaction.

Common mistakes NRIs make at tax time

Using the wrong account to invest. Equity purchased through an NRO account does not enjoy the same repatriation freedom as equity held through an NRE account linked to a PINS. Using the wrong account can create FEMA compliance issues on repatriation.

Not providing TRC and Form 10F before the deduction. If TDS is deducted at 30% on NRO interest and you submit documents only afterward, the bank cannot revise the deduction. You would need to wait for an ITR refund instead of getting the DTAA rate at source.

Assuming NRE interest income is always tax-free. NRE interest is exempt under Section 10(4)(ii) only during the period you qualify as a non-resident. Once your residential status changes, NRE interest becomes taxable from the date of change. Many returning NRIs miss this.

Not filing an ITR because “TDS is already paid.” TDS deducted at 30% on NRO income may exceed your actual liability, especially if your India-source income is modest — and the only way to recover the excess is to file an ITR. Note the NRI-specific trap on the other side too: because you cannot offset the basic exemption limit against special-rate capital gains, a year that “looks” below the threshold can still carry tax on equity or property gains. When in doubt, file — it is also how you claim DTAA relief not applied at source and carry forward capital losses.

Misunderstanding the LTCG ₹1.25 lakh exemption. The exemption on LTCG from equity applies annually across your total equity and equity-MF gains in a year. It is an annual threshold, not a per-transaction one. Mutual funds and brokers deduct TDS on gross gains without applying this exemption at source; claim it in your ITR.

Pre-investment checklist

Before investing in India as an NRI:

• Confirm your FEMA-permitted investment route — NRE, NRO, or PINS — for the asset class you are targeting
• Verify the TDS rate applicable to your investment income
• Check whether India has a DTAA with your country of residence covering this income type
• If DTAA applies: obtain a TRC from your resident country’s tax authority for the financial year
• File Form 10F on India’s e-filing portal (if your TRC does not cover all Rule 21AB items)
• Submit TRC and Form 10F to the Indian payer before the first payment / interest credit
• Maintain a record of purchase price, acquisition date, and cost of improvement for all assets (needed to compute capital gains on exit)
• Set aside time to file an ITR if TDS is deducted at source and you believe your actual liability is lower

Final takeaway

NRI investment tax in India is manageable once you understand three things: the type of income you will earn (capital gain, interest, or dividend), the TDS rate that applies by default, and whether a DTAA lets you claim a lower rate. Acting before money moves — getting TRC and Form 10F in place before interest is credited or a payment is made — is far easier than trying to recover excess TDS through an ITR refund months later.

If you hold NRO deposits, plan to exit an equity position, or are considering mutual fund investment from abroad, a short planning call before the financial year begins can prevent the most common filing complications.

NRI investment tax confusion, or need help planning your portfolio for tax efficiency? eTaxMate can review your investment mix, advise on DTAA applicability, coordinate Form 10F filing, and ensure your ITR correctly reflects your TDS credits and DTAA relief.

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This blog post is for general information only and does not constitute professional advice. Tax laws are subject to change; their application depends on individual facts and circumstances. The rate changes effective 23 July 2024 and the ITA 2025 references should be verified against current statutory text before any transaction. Readers should consult a qualified professional before acting on any information in this post. eTaxMate accepts no liability for any action taken based on this content.

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