Why an NRI Pays Tax on Indian Equity Gains a Resident with the Same Income Walks Away From

A retired NRI in Dubai sells a slice of his Indian equity portfolio in March 2026 and books a Rs 6,00,000 long-term gain. His total other Indian income for the year is Rs 2,00,000 of NRO interest. He assumes that because his income is so far below the Rs 4,00,000 basic exemption limit, most of the gain will fall inside that exemption and escape tax, the way it would for his brother who never left India. He is wrong, and the gap is not small. His brother, a resident on identical numbers, will pay Rs 34,375. He, the NRI, will pay Rs 59,375. The Rs 25,000 difference is not a penalty for anything he did. It is the price of residential status, written quietly into the provisos of two sections of the Income Tax Act that almost nobody reads.

This is one of the few places in the Indian code where two people with the exact same income, the exact same portfolio, and the exact same gain pay different tax purely because one of them lives abroad. It is also one of the least understood, because the rule lives in a proviso, not in a headline rate, so the published 12.5% and Rs 1.25 lakh figures look the same for everyone. They are not the same in effect.

The 30-second answer: A resident individual whose other income sits below the basic exemption limit (Rs 4,00,000 under the new regime for 2026, Rs 2,50,000 old regime) may set the unused part of that exemption against equity gains taxed at special rates under Sections 111A and 112A. An NRI cannot. The provisos to 111A, 112A and 115AD deny non-residents that adjustment, so an NRI's long-term equity gain is taxed at 12.5% from the first rupee above the Rs 1,25,000 annual exemption, regardless of how low their other Indian income is. The Rs 1,25,000 exemption under 112A still applies to NRIs; what they lose is the extra cushion of an unused basic exemption. A low-Indian-income NRI therefore pays tax an otherwise identical resident never sees.

This guide explains where the rule comes from, who it hits, and exactly how much it costs, with a worked example you can adapt to your own numbers. It then covers the edge cases that trip people up, the Rs 1.25 lakh exemption you do keep, the slab-rate income that behaves differently, the Section 87A rebate that is closed to you, and the Chapter VI-A deductions that cannot be set against these gains. The aim is not to make you angry at the asymmetry, which is fixed and not going anywhere, but to make you plan around it deliberately.

What the basic exemption limit actually does, and for whom

Start with the mechanism, because the whole asymmetry turns on one quiet feature of how the basic exemption interacts with special-rate income.

The basic exemption limit is the slab of income at the bottom of the table that is taxed at nil. Under the new regime for the financial year 2025-26, it is Rs 4,00,000; under the old regime it is Rs 2,50,000 for an individual below 60. Ordinary income, salary, business profit, rent, interest, fills that slab first and is taxed at nil up to the limit, then at the slab rates above it.

Capital gains taxed at special rates do not work like ordinary slab income. A short-term gain on listed equity under Section 111A is taxed at a flat 20% (the rate stepped up from 15% for transfers on or after July 23, 2024), and a long-term gain on listed equity under Section 112A is taxed at a flat 12.5% above an annual exemption of Rs 1,25,000, with long-term meaning held more than 12 months and Securities Transaction Tax paid. These flat rates sit outside the slab table. They are not added to your other income and run through the slabs; they are computed separately at their own fixed rate.

Here is the feature that matters. For a resident individual or HUF, the law contains a concession: if your other income does not fully use up the basic exemption limit, the unused part can be set against the special-rate gains, so that part of the gain is also taxed at nil before the flat rate bites. A resident pensioner with Rs 1,00,000 of interest income and a Rs 5,00,000 equity gain gets to soak Rs 3,00,000 of that gain (the leftover after Rs 1,00,000 of the Rs 4,00,000 limit is used by the interest) into the nil slab, and pays the special rate only on what remains above the Rs 1.25 lakh 112A exemption. The basic exemption, in other words, is portable from ordinary income onto special-rate gains, but only when there is room left over and only for a resident.

That portability is the benefit. And it is exactly the benefit an NRI does not get.

The provisos that deny it to non-residents

The denial is not an interpretation or a circular. It is written into the sections themselves.

Section 111A, which charges the 20% short-term rate, contains a proviso to the effect that where the total income reduced by the short-term capital gain is below the maximum amount not chargeable to tax, the shortfall may be reduced from the gain, but only in the case of a resident individual or resident HUF. The plain words exclude a non-resident. A non-resident cannot reduce a 111A short-term gain by any unused basic exemption.

Section 112A, which charges the 12.5% long-term rate, carries the same restriction in its own proviso. The Rs 1,25,000 exemption built into 112A is available to everyone, resident or not, because that exemption is part of the charging provision and is not tied to residential status. But the further adjustment, setting the leftover basic exemption against the gain above that Rs 1,25,000, is again reserved for residents. A non-resident's 112A gain above Rs 1,25,000 is taxed at 12.5% from the first rupee.

Section 115AD, the special regime under which a non-resident often holds Indian securities, carries the same logic. It taxes a non-resident's securities income and gains at specified flat rates and does not open the basic exemption to be set against them. So whichever route an NRI's listed-equity gain travels, the answer converges: no basic-exemption adjustment.

The honest framing is this. The Indian code generally taxes a non-resident more bluntly than a resident on the same India-sourced income, partly because the non-resident is presumed to be taxed at home on worldwide income and partly because the basic exemption is conceived as relief for residents living on Indian income. Whether that policy is fair is a separate argument. As a matter of law for 2026, the basic exemption is a resident-only shelter for special-rate equity gains, and an NRI must plan as though it does not exist for these gains, because it does not.

The worked example, in full

Numbers settle this faster than prose. Take two people with deliberately identical inputs, one resident and one non-resident, both under the new regime for the financial year 2025-26.

Inputs, the same for both:

• Other Indian income for the year: Rs 2,00,000 (say NRO interest).
• Long-term capital gain on listed Indian equity under Section 112A: Rs 6,00,000.
• Basic exemption limit (new regime): Rs 4,00,000.
• Section 112A annual exemption: Rs 1,25,000.
• Section 112A rate above the exemption: 12.5%.

The resident's computation

Step 1. Other income of Rs 2,00,000 is taxed first against the basic exemption. It sits entirely within the Rs 4,00,000 limit, so tax on it is nil, and Rs 2,00,000 of the basic exemption is left unused.

Step 2. The Rs 6,00,000 long-term gain first claims its own Section 112A exemption of Rs 1,25,000, leaving Rs 4,75,000 of gain in charge.

Step 3. Because she is a resident, she sets the Rs 2,00,000 of unused basic exemption against that Rs 4,75,000, taxing it at nil. That leaves Rs 2,75,000 of gain.

Step 4. Tax at 12.5% on Rs 2,75,000 = Rs 34,375.

So the resident's tax on the special-rate gain is Rs 34,375 (before cess, which applies equally to both and does not change the comparison).

The NRI's computation

Step 1. Other income of Rs 2,00,000 is below the threshold, so it bears no tax. But the basic exemption left over cannot travel anywhere useful, because of the provisos above.

Step 2. The Rs 6,00,000 gain claims its Section 112A exemption of Rs 1,25,000, the one allowance an NRI does keep, leaving Rs 4,75,000 of gain in charge.

Step 3. There is no further adjustment. The unused Rs 2,00,000 of basic exemption is simply not available against the gain.

Step 4. Tax at 12.5% on the full Rs 4,75,000 = Rs 59,375.

So the NRI's tax on the same gain is Rs 59,375.

The gap

The difference is Rs 59,375 minus Rs 34,375, which is Rs 25,000. And that figure is not a coincidence. It is exactly the Rs 2,00,000 of unused basic exemption multiplied by the 12.5% rate, because that is precisely the slice the resident sheltered and the NRI could not. The asymmetry is mechanical: it equals (unused basic exemption) times (the special rate on the gain).

That gives you a quick way to size your own exposure without redoing the whole computation. Take the gap between your other Indian income and the basic exemption limit, cap it at the amount of gain you have above the Rs 1.25 lakh 112A exemption, and multiply by the special rate. For a long-term equity gain at 12.5%, the maximum possible cost of this rule is Rs 4,00,000 times 12.5%, which is Rs 50,000 (the case where you have no other Indian income at all and a large gain). For a short-term equity gain at the 20% rate under 111A, the same maximum is Rs 4,00,000 times 20%, which is Rs 80,000. Under the old regime, with its Rs 2,50,000 limit, the ceilings are lower because the exemption itself is smaller.

None of these are catastrophic numbers on their own. But they recur every year you realise gains while your other Indian income is low, and they compound with the other small denials an NRI faces, which is why they are worth planning around rather than shrugging at.

Who this actually bites, and who can ignore it

The rule only costs you money when two things are true at once: your other Indian income is below the basic exemption limit, and you are realising special-rate equity gains in the same year. That combination is more common among NRIs than you might think.

It bites hardest on:

• Retired or semi-retired NRIs whose only Indian income is some NRO interest or a small pension, and who fund their year by selling down an Indian equity portfolio. Their other income is naturally low, so they have a large unused basic exemption that, as residents, they could have used, and as non-residents they cannot.
• NRIs early in the journey who have parked a lump sum in Indian equity, have little or no other Indian income, and start booking gains. The whole basic exemption sits idle and unusable against the gain.
• NRIs in a gap year, between jobs or relocating, where Indian income happens to be low for a single year that coincides with a portfolio sale.

It does not bite at all on NRIs whose other Indian income already exceeds the basic exemption limit, because there is no unused exemption to lose in the first place. If you have Rs 8,00,000 of Indian rent and a Rs 6,00,000 equity gain, the basic exemption is fully consumed by the rent for both a resident and an NRI, and the gain is taxed identically for both. The asymmetry is purely a low-other-income phenomenon. The further below the limit your other income sits, the more it costs you, up to the ceilings above.

What you can do about it

You cannot change the law, but you can change the timing and the shape of your realisations, and that is where the planning lives.

Use the Rs 1.25 lakh Section 112A exemption every single year, deliberately. This is the one shelter an NRI keeps in full, it is annual, and it does not roll over. Each financial year you can sell enough of a long-term winner to book a gain of up to Rs 1,25,000, pay nil on it, and immediately rebuy the same position, which steps your cost basis up by the harvested amount and permanently shrinks the gain you will eventually report. Left unused, the allowance vanishes on 1 April. For the mechanics of this harvesting move and the TDS friction that comes with it, see the tax-efficient investing guide. For an NRI, harvest only direct equity if you are a US or Canadian person, because harvesting an Indian mutual fund triggers a home-country disposition that swamps the Indian saving.

Spread realisations across financial years rather than dumping a large gain into one. Since the Rs 1.25 lakh exemption is annual, two Rs 1,25,000 harvests in two years shelter Rs 2,50,000 of gain, where one Rs 2,50,000 sale in a single year shelters only Rs 1,25,000. The flat 12.5% rate above the exemption does not itself reward spreading the way a slab system would, but the annual exemption does, and so does keeping any single year's gain small enough that advance-tax and return-filing obligations stay simple.

Time large realisations to a year when you have already used up your basic exemption with other Indian income, or are about to become resident. This sounds counter-intuitive, but the point is that the basic-exemption denial only costs you when the exemption is sitting idle. If you are returning to India and will be resident (or RNOR with the relevant treatment) in a coming year, the residential-status arithmetic changes, and the basic exemption may become available against the gain. Returning NRIs in particular should map their realisation calendar against their residency transition. The residency rules that govern this are in the RNOR rules guide.

Do not assume the TDS deducted is your final tax. Intermediaries frequently withhold on the full gain at the headline rate without applying even the Rs 1.25 lakh 112A exemption, let alone any treaty relief. For an NRI, the only way to recover the over-withheld amount is to file an Indian return. So the saving from using your Rs 1.25 lakh exemption is often a refund you have to claim, not a deduction you see at source. The redemption TDS mechanics are covered in the mutual fund TDS on redemption guide, and the return itself in the NRI ITR filing guide.

Edge cases

The general rule has several adjacent corners that trip people up. Take them one at a time.

The Rs 1.25 lakh 112A exemption still applies to you

This is worth repeating because the loss of the basic exemption leads some NRIs to assume they have lost the Rs 1.25 lakh exemption too. They have not. The Rs 1,25,000 annual exemption inside Section 112A is part of the charging provision and is available to residents and non-residents identically. An NRI's long-term equity gain is exempt up to Rs 1,25,000 a year and taxed at 12.5% only above it. What you lose is the second, larger cushion, the unused basic exemption that a resident gets to stack on top of the Rs 1.25 lakh. Keep the two straight: one allowance you keep, one allowance you do not.

Slab-rate income behaves differently

The denial is specific to the special flat-rate gains under 111A, 112A and 115AD. It does not mean an NRI gets no basic exemption at all. Income that is taxed at slab rates, NRO interest, Indian rent, business income, salary for services rendered in India, still enjoys the basic exemption in the normal way for an NRI. An NRI with Rs 2,00,000 of NRO interest and nothing else pays nil on it, exactly as a resident would, because slab-rate income fills the basic exemption regardless of residential status. The asymmetry only appears when you have leftover basic exemption after the slab income, and a special-rate gain you would like to set it against. The leftover travels for a resident; it does not for an NRI. So do not over-read the rule: it costs you only on the special-rate gains, not on your ordinary Indian income.

The Section 87A rebate is not available on these gains either

The Section 87A rebate, which makes income up to Rs 12,00,000 effectively tax-free for a resident under the new regime, is doubly closed to an NRI on this front. First, the 87A rebate is for residents only, so an NRI cannot claim it on any income. Second, even for residents, the rebate has been restricted so that it does not apply against special-rate income taxed under 112A. So an NRI must not build any plan on the idea that a modest equity gain will be rebated to nil. It will not. The 12.5% above Rs 1.25 lakh is a real liability. This is one more reason the low-income-resident comparison flatters the resident: the resident may get both the basic-exemption adjustment and, on slab income, the 87A rebate, while the NRI gets neither.

Chapter VI-A deductions cannot be set against special-rate gains

Sections 80C, 80D, 80TTA, 80TTB and the rest of the Chapter VI-A deductions reduce gross total income to arrive at total income, but the law specifically provides that these deductions are not allowed against income taxed at special rates under 111A and 112A. This is true for residents and non-residents alike, so it is not an NRI-specific denial, but it matters here because it removes another route an NRI might hope to use to soften the gain. You cannot, for instance, claim an 80C investment to shrink a 112A gain. The deductions work against your slab-rate income only. For an NRI, several of these deductions are themselves narrowed (80TTB, the senior-citizen interest deduction, is not available to non-residents), which compounds the point. The clean way to think about it: a special-rate equity gain is an island. Neither the basic exemption (for an NRI), nor the 87A rebate, nor Chapter VI-A deductions can be ferried onto it. Only the Rs 1.25 lakh built into 112A reduces it.

Short-term gains are worse, not just different

Everything above used the 12.5% long-term rate to keep the example clean. If your equity gain is short-term under Section 111A, the rate is 20%, and the same basic-exemption denial applies, so the cost of the rule per rupee of unused exemption is higher. There is also no Rs 1.25 lakh built-in exemption on short-term gains; that allowance is a 112A feature only. So an NRI sitting on short-term equity gains with low other Indian income faces the steepest version of this asymmetry: 20% from the first rupee, with no Rs 1.25 lakh cushion and no basic-exemption adjustment. Where you have a choice, letting a position cross the 12-month long-term threshold before selling changes both the rate and the availability of the Rs 1.25 lakh exemption.

Capital losses still set off normally

One piece of relief that an NRI does keep is loss set-off. A capital loss can be set against a capital gain under the ordinary set-off rules regardless of residential status, and long-term losses can be carried forward for eight assessment years if you file your return on time. So if the basic-exemption denial leaves you with a taxable gain you would rather not pay on this year, a realised capital loss elsewhere in the portfolio is a legitimate tool to bring it down, in a way the basic exemption is not. The set-off and carry-forward mechanics, including the ordering rules, are in the capital loss set-off and carry-forward guide.

The closing read

For most NRIs the basic-exemption denial is a small, recurring leak rather than a single large bill, and the temptation is to ignore it. That is the wrong call for two kinds of reader. If you are a retired or low-Indian-income NRI funding your year by selling down an Indian equity portfolio, this rule costs you real money every year, up to Rs 50,000 on a long-term gain and Rs 80,000 on a short-term one, and it is the single clearest case in the code where you pay tax a resident on identical numbers does not. If you are anyone else with a low-other-income year coinciding with a portfolio sale, it costs you for that one year and you should plan the sale around it.

The honest read is that you cannot beat the asymmetry head-on, because it is written into the provisos of 111A, 112A and 115AD and reserved deliberately for residents. What you can do is refuse to leave the one shelter you keep, the Rs 1,25,000 annual 112A exemption, sitting unused. Harvest it every financial year, spread realisations so each year's gain uses that allowance, time large sales to years when your basic exemption is already consumed or your residency is about to change, and treat the TDS as a refund to claim rather than a final tax. Do those four things and the leak shrinks to the irreducible minimum. The basic exemption was never going to be yours on these gains. The Rs 1.25 lakh always is, so spend it on purpose.

Related guides

• Capital gains tax for NRIs on shares and mutual funds
• Tax-efficient investing for NRIs
• Capital loss set-off and carry-forward for NRIs
• NRI residency and the RNOR rules
• NRI self-assessment tax and the challan
• ITR filing for NRIs, AY 2026-27
• Foreign Tax Credit and Form 67
• NRI portfolio asset allocation
• NRI mutual fund eligibility
• NRI Systematic Withdrawal Plan (SWP)
• NRI mutual fund TDS on redemption

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This guide is general information for NRIs, not personal tax advice. Capital-gains tax positions turn on your exact residential status under the Income Tax Act, the financial year of realisation, the instrument held, and your country of residence and its treaty with India. The rates, exemption figures and section provisos described here reflect the position for the financial year 2025-26 (assessment year 2026-27) and can change with a future Finance Act. Confirm your own position with a qualified chartered accountant or tax adviser before acting, particularly before timing a large realisation or relying on a refund of over-withheld TDS.