1. The Basic Principle — India Taxes Gains on Indian Assets

A common misconception among NRIs is that because they live and pay taxes abroad, income from India is somehow outside the scope of Indian tax. This is not correct for capital gains: under the Income Tax Act, 1961, any capital gain arising from the transfer of a capital asset situated in India is taxable in India, regardless of the seller's residential status.

This applies whether the asset is listed shares, unlisted shares (including startup equity or CCPS), mutual fund units, or immovable property. The NRI's country of residence may provide relief through a Double Taxation Avoidance Agreement (DTAA), but the starting point is always that India has the first right to tax.

2. Classification — Short-Term vs Long-Term, and the 2024 Rate Changes

The Finance (No. 2) Act, 2024 significantly restructured capital gains taxation, with changes effective from 23 July 2024. The key classifications and rates now are:

Listed equity shares and equity-oriented mutual funds:

  • Short-Term (held ≤12 months): taxed at 20% (increased from 15%)
  • Long-Term (held >12 months): taxed at 12.5% on gains exceeding Rs. 1.25 lakh in a financial year (increased from 10% with a Rs. 1 lakh exemption)

Unlisted shares (including startup equity, CCPS) and immovable property:

  • Short-Term (held ≤24 months for shares; ≤24 months for property): taxed at the applicable slab rate for individuals
  • Long-Term (held >24 months): taxed at 12.5% without indexation under the new regime — indexation benefit was removed for most assets acquired after the cut-off, though certain transitional provisions for property acquired before 23 July 2024 allow a comparison between the old (20% with indexation) and new (12.5% without indexation) regimes, with the taxpayer permitted to use whichever results in lower tax

For NRIs holding startup equity (typically unlisted shares or CCPS) for more than 24 months, the 12.5% rate without indexation is the relevant benchmark for planning an exit.

3. TDS under Section 195 — The Practical Starting Point

For resident sellers, TDS on sale of shares or property is often minimal or nil. For NRI sellers, the position is materially different: Section 195 requires the buyer to withhold tax at source on payments to non-residents — and critically, this withholding is typically calculated on the entire sale consideration, not just the gain, unless the NRI proactively obtains a certificate specifying a lower rate.

This creates a common practical problem: an NRI selling a property for Rs. 1 crore (with an actual taxable gain of, say, Rs. 20 lakh) may find the buyer withholding TDS on the full Rs. 1 crore at the applicable rate — resulting in a TDS deduction far higher than the actual tax liability, with the excess refundable only after filing a tax return and waiting for processing.

This is the single most common pain point for NRIs in property and unlisted share transactions, and it is entirely avoidable with advance planning (see Section 4).

4. Lower Deduction Certificate (Section 197) — Avoiding the Cash Flow Problem

To address the TDS-on-full-consideration issue, NRIs can apply to the Income Tax Department for a Lower Deduction Certificate (LDC) or Nil Deduction Certificate under Section 197, before the transaction is completed.

The process involves:

  • Filing an application (Form 13) with the jurisdictional Assessing Officer (International Taxation), providing details of the transaction, the expected sale consideration, the cost of acquisition, and the computed capital gain
  • The Assessing Officer reviews the application and, if satisfied, issues a certificate specifying the rate at which TDS should be deducted — often significantly lower than the default rate, reflecting the actual estimated tax liability on the gain rather than the gross consideration
  • The certificate is provided to the buyer, who then deducts TDS at the certified rate instead of the default rate on full consideration

This process typically takes several weeks, so it should be initiated well before the transaction is expected to close — particularly for property sales or large unlisted share transactions where the cash flow impact of over-withholding can be substantial.

5. DTAA Relief and the Tax Residency Certificate

Where the NRI is a tax resident of a country that has a Double Taxation Avoidance Agreement (DTAA) with India, the DTAA may provide relief — either through a lower tax rate on certain types of income, or through a tax credit mechanism in the country of residence for taxes paid in India.

For capital gains specifically, many DTAAs (including with the UAE, Singapore, and others) provide that capital gains on shares are taxable in the country of residence of the seller, subject to specific conditions and exceptions (often excluding gains on shares of companies whose value is substantially derived from immovable property in India). However, India's domestic law position (taxing gains on Indian-situs assets) generally prevails for property and many share transactions unless the specific treaty article overrides it.

To claim DTAA benefits, the NRI must obtain a Tax Residency Certificate (TRC) from the tax authority of their country of residence, along with a self-declaration in Form 10F, and submit these to the Indian payer/buyer or the tax authorities as part of the lower-TDS application or the tax return filing.

Given the complexity and country-specific nature of DTAA provisions, NRIs should evaluate the applicable treaty article on capital gains for their specific country of residence before assuming a particular tax outcome.

6. Repatriation of Sale Proceeds — Form 15CA/15CB

Once the sale is complete and taxes have been accounted for (whether via TDS, an LDC, or post-filing refund), repatriating the net proceeds abroad requires compliance with the remittance certification process:

Form 15CB: A certificate issued by a Chartered Accountant confirming the nature of the remittance, the applicable tax rate, and that taxes have been deducted/paid as required. This is mandatory for most remittances of this nature.

Form 15CA: A self-declaration filed by the remitter (or on their behalf) on the income tax e-filing portal, based on the CA's certification in Form 15CB, which is then submitted to the Authorised Dealer (AD) bank to process the outward remittance.

For NRO account repatriation, the additional USD 1 million per financial year limit (under the RBI's facility for remittance of assets) applies — this is a cumulative limit across all NRO repatriations in the year, not specific to a single transaction, so NRIs with multiple India-sourced income streams should plan the timing of larger remittances accordingly.

7. Practical Checklist for NRIs Planning an Exit

For NRIs planning to sell shares (including startup equity) or property in India, the following sequence helps avoid the most common pitfalls:

Before the transaction: Determine the holding period and likely classification (short-term vs long-term), estimate the capital gain, and — if the gain is significantly lower than the full consideration — apply for a Lower Deduction Certificate under Section 197 well in advance.

At the transaction: Ensure the buyer correctly applies TDS under Section 195 at the certified rate (if an LDC was obtained) or the default rate (if not), and retain documentation of the TDS deducted (Form 16A).

After the transaction: File the Indian income tax return reporting the capital gain and the TDS credit — this is necessary even if TDS fully covers the tax liability, and essential to claim a refund if TDS exceeded the actual liability.

For repatriation: Obtain Form 15CB from a Chartered Accountant and file Form 15CA before approaching the AD bank for remittance, keeping the NRO USD 1 million annual limit in mind if repatriating from an NRO account.

This article is for informational purposes only and does not constitute legal, tax, or financial advice. Please consult with a qualified professional for advice specific to your situation. Maroon Advisors would be delighted to assist — get in touch.