Special Provisions for NRI Taxation

Sections 115C to 115I of the Income tax Act create an optional special regime for NRIs on a narrow category of income, investment income and long-term capital gains from assets bought in convertible foreign exchange. It’s optional: if the normal provisions work out cheaper for you, you can simply not elect into this regime.

What qualifies as a Specified Foreign Exchange Asset

Only assets purchased in convertible foreign exchange qualify: shares in an Indian company, debentures of an Indian public limited company, deposits with an Indian public limited company, and Central Government securities. This regime applies to two kinds of income from these assets: interest and dividend income, and long-term capital gains on sale.

Special regime rates vs normal provisions

Income type	Special regime	Normal provisions
Interest income	20% flat	Slab rates
Dividend income	20% flat	20% flat (same)
LTCG on listed shares (STT paid)	12.5%, with foreign exchange fluctuation benefit, no indexation	12.5%, first ₹1.25 lakh exempt, no indexation, no forex benefit
LTCG on unlisted shares	12.5%, with forex benefit	12.5%, no forex benefit

The real advantage of the special regime is the foreign exchange fluctuation benefit, when you invested foreign currency to buy the asset, both the cost and the sale value get converted at the exchange rate on their respective dates, so you’re not artificially taxed on rupee appreciation that has nothing to do with your actual investment return. This uses the average of the buying and selling telegraphic transfer rates on each date.

Two trade-offs to weigh before opting in: Chapter VI-A deductions (80C, 80D, and so on) are not allowed against this income under the special regime, and the ₹1.25 lakh LTCG exemption available under normal provisions for listed equity doesn’t apply here either. For most retail NRI investors holding listed Indian equity, normal provisions with the ₹1.25 lakh exemption often work out better, the special regime tends to help more with unlisted shares or debentures where the forex benefit matters more than the exemption.

Reinvestment exemption on LTCG

LTCG from a specified asset is exempt if you reinvest the net sale consideration into another specified asset within 6 months of the transfer. If the new asset costs less than the net consideration, only a proportionate exemption applies (capital gain × cost of new asset ÷ net consideration). If you sell or convert the new asset within 3 years of buying it, the exemption you claimed gets taxed as LTCG in the year you sell.

Relief from filing

If your total income consists only of investment income and LTCG from specified assets, and full tax has been deducted at source on both, you’re not required to file a return at all. Most NRIs still choose to file anyway, since filing is how you’d claim back any excess TDS if the deduction rate exceeded your actual liability.