TDS to capital gains tax: What impact new tax Bill will have on NRIs

NRIs who earn Rs 15 lakh or more annually in India will be classified as residents for tax purposes

The Income Tax Bill, 2025, tabled in Parliament on Thursday, introduces changes for non-resident Indians (NRIs), particularly regarding capital gains, tax deducted at source (TDS), and tax recovery measures.

 

“The Bill introduces more stringent measures for tax recovery from non-residents: Enhanced powers for tax authorities to access electronic records, including emails, social media accounts, and online banking information during searches. This aims to improve tax compliance and prevent evasion by leveraging digital footprints,” said Pallav Pradyumn Narang, partner, CNK (a legal firm).

 

Under new provisions NRIs earning Rs 15 lakh or more annually in India will be classified as residents for tax purposes. NRIs are now only taxed on income sourced from India. The change aims to ensure they pay taxes on their Indian earnings and closes loopholes that allow benefits under NRI status.

 

“NRIs shall still continue to face a 20 per cent tax on dividend and interest income from Indian companies, with a reduced 10 per cent rate for dividends from units in an International Financial Services Centre. Additionally, capital gains tax provisions remain unchanged,” said Kunal Savani, partner, Cyril Amarchand Mangaldas (a legal firm).

 

Income from mutual funds purchased in foreign currency is subject to 20 per cent tax. Interest income earned from the Indian government or Indian companies will attract a 20 per cent tax rate, except for infrastructure debt fund investments, which will be taxed at 5 per cent.

 

Any taxable income received by a non-resident in India will be subject to TDS. NRIs may not be required to file returns if their total income is solely derived from investment income or long-term capital gains, provided the applicable tax has already been deducted at source.

 

Foreign Institutional Investors (FIIs) earning income from Indian securities will continue adhering to capital gains tax provisions, ensuring compliance with the latest tax regulations on their investments in India.

 

NRIs who reinvest their long-term capital gains from foreign exchange assets into specified assets within six months may qualify for an exemption from capital gains tax. However, if the cost of the new asset is lower than the net consideration of the original asset, only a proportional portion of the gain will be exempt.

 

The Bill tightens the place of effective management rules, bringing more foreign companies under Indian taxation if their effective management is in the country. The purpose is to prevent companies from avoiding taxes by claiming residency in low-tax jurisdictions.