This provision, though lesser known, is gaining attention for its potential to reduce compliance burdens on NRIs. The special regime applies to income earned from specific investments such as shares of Indian companies, debentures or deposits with public companies in India, and securities issued by the Indian government, provided these assets were acquired in foreign exchange. The regime aims to attract overseas investments by offering predictable tax treatment and simplified compliance.
One of the most significant advantages under Chapter XII-A is the reduced tax rate on long-term capital gains (LTCG) from these specified assets. Effective from June 23, 2024, the tax rate on LTCG under this regime is 12.5%, up from the earlier 10%. Meanwhile, interest income and dividends from the same class of assets are taxed at a flat 20%. Other types of income not covered by this special provision are taxed according to the general rules applicable to NRIs.
However, the benefits come with restrictions. Those opting for Chapter XII-A cannot claim standard deductions under Chapter VI-A, which includes common sections like 80C (investments in PPF, ELSS, etc.) and 80D (health insurance premiums). Also, NRIs under this regime are not allowed to use indexation to adjust capital gains for inflation. Moreover, they cannot deduct any related expenses or claim currency fluctuation benefits on LTCG calculations from specified assets.
A noteworthy feature of this regime is the exemption from return filing. If an NRI’s only income in India is derived from these qualifying investments and the full applicable tax has been deducted at source (TDS), they are not obligated to file an income tax return in India. This rule significantly eases the compliance burden for many investors abroad, especially those with simple and straightforward income structures in India.
The regime also offers flexibility. NRIs can choose whether or not to use this special tax regime in any given year. If they decide to opt out, they must make this clear in their return of income and notify the Assessing Officer accordingly. Interestingly, the tax benefits under Chapter XII-A are not lost even when an NRI returns to India and becomes a resident. The special tax treatment continues for income from already acquired specified FOREX assets until the time these assets are either sold or converted to cash. This feature ensures continued tax predictability for returning residents.
To qualify as an NRI under Indian tax laws in any financial year, the individual must either stay outside India for at least 182 days in that year or have been outside the country for at least 60 days in that year and 365 days over the preceding four years. While NRIs are allowed to invest in a wide variety of financial instruments and real estate properties in India, they are restricted from purchasing agricultural land, plantations, or farmhouses. Nevertheless, income earned from permissible investments is subject to Indian tax rules and must be declared accordingly—unless exempted under the special regime.
Choosing the correct ITR form is crucial for NRIs. Those earning income from salary, house property, capital gains, or other sources (excluding business or professional income) must use ITR-2. If the NRI earns income from business or professional activity in India, ITR-3 is the appropriate form. It’s important to note that ITR-1 (Sahaj), typically used by resident individuals, is not permitted for NRIs, even if their income would otherwise qualify.
The last date to file the ITR for the financial year 2024–25 is July 31, 2025, for individuals not subjected to tax audit, which includes most NRIs. It’s important to remember that all filings and deadlines are governed by Indian Standard Time (IST), irrespective of where the taxpayer resides globally.
Chapter XII-A of the Income Tax Act presents NRIs with a streamlined tax option that allows them to benefit from lower tax rates on specific investments and potentially avoid the annual return filing process if all conditions are met. With careful planning and understanding of the provisions, NRIs can optimize their tax liabilities while ensuring compliance with Indian laws.
