NRI Tax on Mutual Funds and Shares in India: Long-Term and Short-Term Capital Gains, TDS on Redemption, and How to Get the Excess Back

For an NRI, selling Indian shares or redeeming mutual fund units raises two separate questions. The first is how much tax the gain attracts, and the answer is the same rate a resident pays, decided by what the asset is and how long you held it. The second is how much is taken off before the money reaches your account, and here the NRI is treated differently: the fund house or broker deducts tax at source on every redemption, often at a higher rate than the final tax. This guide works through both, with the sections of the Income-tax Act, 2025 behind each rule and examples you can check line by line.

Written on 25 October 2026 for the tax year 2026-27, from the text of the Income-tax Act, 2025 on the Income Tax Department's site (sections 2, 76, 90, 108, 111, 121, 196 to 198, 207, 212, 216 and 393), Part II of the First Schedule to the Finance Bill, 2026 (passed as the Finance Act, 2026) for the TDS rates, and the 2026-27 tax reckoners of two fund houses for how TDS is applied in practice. Examples use round, assumed figures. This explains the law and the arithmetic; it is not advice to buy or sell any investment.

NRI capital gains tax on mutual funds and shares: the rates at a glance

The tax rates in the middle columns are the same for residents and NRIs. The TDS column is the NRI's alone: residents have no TDS on capital gains from funds or shares. The TDS rates come from Part II of the First Schedule to the Finance Act, the schedule that sets "rates in force" for deductions under section 393(2): for a non-resident Indian, 12.5% on long-term gains (on equity, on the part above ₹1,25,000), 20% on short-term equity gains, 20% on dividends, and 30% on "the whole of the other income", which is where short-term gains on debt and other funds fall. Both the HSBC and Nippon India tax reckoners for 2026-27 list the same rates for NRI redemptions.

Surcharge is added to the tax deducted only when the income paid in the year is large: 10% above ₹50 lakh and 15% above ₹1 crore. On capital gains and dividends it stops at 15%, so the deduction on a large equity gain never goes above 14.95% for long-term or 23.92% for short-term. On debt-fund gains, which fall under slab rates, the surcharge can go higher for very large amounts.

Long-term or short-term: how the holding period is counted

Section 2(101) of the Act defines a short-term capital asset as one held for not more than 24 months, and cuts that to 12 months for a security listed on an Indian stock exchange, a unit of an equity-oriented fund and a few others. Anything held longer is long-term. In practice:

• Equity funds and listed shares: long-term from the 13th month. An equity-oriented fund is one that keeps at least 65% in shares of Indian listed companies (section 198(8)), measured on the fund's average holdings.
• Debt funds bought on or after 1 April 2023: section 76 overrides the holding period altogether. A unit of a "Specified Mutual Fund" bought on or after that date gives a short-term gain however long you keep it. A Specified Mutual Fund is one that invests more than 65% of its money in debt and money market instruments, or a fund of funds that puts 65% or more into such funds.
• Gold, silver and international funds: since 2025-26 the definition above turns on the share in debt, so these funds are no longer caught by section 76. They become long-term after 24 months, or 12 months for listed ETFs.
• SIP investments: every instalment is a separate purchase with its own date. Fund houses redeem the oldest units first (first in, first out), so a redemption from a three-year SIP can produce a long-term gain on the early units and a short-term gain on the last twelve months.

Indexation is gone for both residents and NRIs on these assets. The gain is the sale value less the purchase cost, in rupees, so a fall in the rupee against your home currency does not reduce the Indian tax on a fund redemption.

What an NRI pays that a resident does not

The headline rates are the same, but three differences explain most of the surprise NRIs meet at filing time.

No use of the unused basic exemption against 20% and 12.5% gains. Sections 196(2), 197(2) and 198(3) all start "in the case of an individual or a Hindu undivided family, being a resident". They let a resident whose other income is below the tax-free limit (₹4 lakh under the new regime) reduce the special-rate gain by the shortfall. An NRI cannot. A resident with no other income and a ₹3 lakh short-term gain on shares pays nothing; an NRI in the same position pays ₹60,000 plus cess.

No rebate. The rebate in section 156 is given only to "an individual resident in India". An NRI pays slab tax on every rupee of slab income above the nil band.

TDS on every redemption. A resident redeems a fund and gets the full amount; tax is settled in the return. An NRI gets the redemption value less TDS, and settles the difference, up or down, in the return.

The slab part of the tax works the same way for both. Short-term gains on debt funds and other slab-rate income, such as NRO deposit interest, still get the ₹4 lakh nil band under the new regime. That is why NRIs with debt funds often get most of their TDS back.

TDS on mutual fund redemption and share sales for NRIs

Gains on redemption are deducted under serial number 17 of the table in section 393(2), the entry for any sum chargeable to tax and paid to a non-resident, at the rates in force described above. The fund house deducts at redemption on the gain it calculates for each lot. For shares, the bank or broker that runs your portfolio investment account deducts at sale. The money you receive is the sale value less the TDS.

Three practical points decide whether the TDS matches your tax.

• The ₹1.25 lakh relief is applied by each deductor separately. A fund house sees only its own redemptions. If you redeem equity funds with three fund houses, each may give you the ₹1.25 lakh relief, which leaves too little deducted, or none may, which leaves too much. The return sets it right either way.
• Treaty rates on fund payouts are doubtful. Note 2 to the section 393(2) table lets the deductor use a lower treaty rate on income from fund units if you give a tax residency certificate. Fund houses point out that fund distributions may not count as "dividends" under most treaties, so expect 20% on IDCW and plan to claim any treaty benefit in the return.
• Your PAN must be with the fund house and broker. Without it, section 397(2) can lift the deduction to 20% where the normal rate is lower, such as the 12.5% on long-term gains, unless you give the alternative details the rules accept from non-residents (rule 217 of the Income-tax Rules, 2026). Each deduction is reported in a Form 144 statement and appears against your PAN in Form 168, the annual information statement.

Worked examples

The examples follow one NRI, Meera, who lives in London, has no Indian salary or business and files under the new regime for the tax year 2026-27. Each part can be checked on its own.

1. Equity mutual fund, held over 12 months

Meera put ₹8,00,000 into an equity fund in January 2024 and redeems the whole holding in November 2026 for ₹13,00,000. The gain is ₹5,00,000 and long-term. The first ₹1,25,000 is tax-free under section 198; 12.5% on the remaining ₹3,75,000 is ₹46,875, plus ₹1,875 cess, a total of ₹48,750. If the fund house applies the ₹1.25 lakh relief, that is also the TDS. If it does not, it deducts 13% of ₹5,00,000, which is ₹65,000, and ₹16,250 comes back through the return.

2. Listed shares, sold within 12 months

She bought shares for ₹6,00,000 in March 2026 and sells them for ₹9,00,000 in October 2026. The ₹3,00,000 gain is short-term and taxed at 20% under section 196: ₹60,000 plus ₹2,400 cess, ₹62,400, which is also what the broker deducts. Had she been a resident with no other income, section 196(2) would have absorbed the whole gain within the ₹4 lakh nil band and the tax would be nil.

3. Debt fund bought under the 2023 rule

She invested ₹10,00,000 in a debt fund in June 2024 and redeems it for ₹11,60,000 in October 2026. Even after more than two years the ₹1,60,000 gain is short-term under section 76, and taxed at slab rates. The fund house deducts 31.2%: ₹49,920. Her slab income for the year is only this ₹1,60,000, below the ₹4 lakh nil band, so the tax on it is nil and the whole ₹49,920 is refundable.

4. Debt fund bought before the 2023 rule

An older debt fund, bought for ₹5,00,000 in January 2022, is redeemed for ₹6,50,000. The units were held more than 24 months and bought before section 76 applied, so the ₹1,50,000 gain is long-term under section 197: 12.5% without indexation, ₹18,750 plus cess, ₹19,500, equal to the TDS. There is no ₹1.25 lakh relief on non-equity funds, and as an NRI she cannot use the nil band against it.

5. Meera's year, put together

Meera's refund is ₹49,920, all from the debt fund, and ₹66,170 if the equity fund house did not give the ₹1.25 lakh relief. Without the return, the ₹49,920 stays with the department: the refund exists only if she files.

Losses: what can be set off and for how long

Under section 108(2), a short-term capital loss can be set off against any capital gain in the same year, short or long; a long-term loss only against long-term gains. Capital losses cannot be set off against rent, interest or other income. What is left is carried forward for up to eight tax years under section 111, keeping the same rule: short-term losses against any gain, long-term only against long-term.

Section 121 adds the condition NRIs most often miss: a loss is carried forward only if it is determined in a return filed under section 263(1), that is, on time. An NRI who skips the return in a bad year because "there is no tax to pay" loses the right to use that loss against next year's gains.

Set-off also changes the TDS picture. The fund house deducts on each redemption's gain and does not know about a loss you booked with a broker or another fund house. A loss is the most common reason for a large refund on equity, and also the best reason to apply for a lower-deduction certificate before a big redemption.

Shares and equity funds bought before the 2018 cut-off

Long-term gains on listed equity were tax-free until 31 March 2018. To protect gains made up to then, section 90(7) sets the cost of shares and equity fund units bought before 1 February 2018 at the higher of the actual cost and the lower of (a) the highest price on 31 January 2018 and (b) the sale price. A share bought in 2016 for ₹100, quoted at ₹150 on 31 January 2018 and sold now for ₹260, is treated as costing ₹150, so the taxable gain is ₹110, not ₹160. Your broker's capital gains statement usually shows this "grandfathered" cost; check it before you file.

Getting excess TDS back

The excess is refunded only through a return. An NRI with capital gains files ITR-2 by the due date, 31 July for most individuals. Before filing:

• Download the capital gains statements from each fund house (through the registrars' consolidated statements) and from your broker, and match each TDS entry to Form 168.
• Report the gross gain for each item and claim all the TDS, including on IDCW and dividends.
• Claim the ₹1.25 lakh equity exemption once, across all equity funds and shares.
• Pre-validate an Indian bank account, such as your NRO account, for the refund on the e-filing portal.

Section 216 says an NRI need not file a return if the income for the year is only "investment income" or long-term gains under the NRI chapter and TDS has been deducted. That exemption is narrower than it looks. Section 212 limits those terms to "foreign exchange assets": shares, certain debentures and deposits of Indian companies, and government securities, bought with foreign currency. Mutual fund units are not on the list, and skipping the return means no refund and no carried-forward loss. Most NRIs who redeem funds or sell shares should file.

If you know before redeeming that the TDS will be far above the tax, as with a large debt-fund redemption and little other Indian income, you can apply in Form 128 under section 395 for a certificate of lower deduction and give it to the fund house before the redemption. Our guide to the Form 128 certificate for NRIs walks through the application.

Tax treaties and the tax in your country of residence

Most of India's tax treaties let India tax gains on shares of Indian companies, so the Indian tax stands and your country of residence gives credit for it under the treaty and its own rules. As with rent, claim credit for the final Indian tax in your return, not for TDS that is later refunded.

Mutual fund units are the contested area. In March 2025 the Mumbai bench of the Income Tax Appellate Tribunal held, in Anushaka Sanjay Shah v. ITO, that a Singapore resident's gains on redeeming Indian mutual fund units fell under Article 13(5) of the India–Singapore treaty and were taxable only in Singapore, because units of a fund set up as a trust are not shares of a company. It is one tribunal's view on one treaty, not settled law: the department may appeal, other treaties are worded differently, and fund houses still deduct TDS. An NRI who wants to rely on it needs a tax residency certificate, Form 41 (the old Form 10F), and a return that claims and discloses the position, ideally with a CA's advice.

If you are a US taxpayer, the US side matters as much as the Indian side: the US rules on foreign investment funds can make Indian mutual funds expensive to hold, so take US advice before investing or redeeming.

Moving the money out

Where the money lands depends on how you invested. Investments made from an NRE account on a repatriable basis can be credited back to the NRE account and sent abroad freely. Investments made from an NRO account come back to the NRO account, and moving them abroad counts against the USD 1 million a year limit on NRO remittances, with Form 145 and, above ₹5 lakh, a CA's Form 146. Our note on Forms 145 and 146 covers the paperwork.

A checklist before you redeem or sell

Frequently Asked Questions

How are mutual funds taxed for NRIs in India? At the same rates as residents. Equity funds: 12.5% on long-term gains above ₹1.25 lakh a year after 12 months, 20% on short-term gains. Debt funds bought on or after 1 April 2023: slab rates, whatever the holding period. Other funds: 12.5% after 24 months, slab rates before. The difference is that the fund house deducts TDS from an NRI on every redemption.

What is the TDS rate on mutual fund redemption for NRIs? With cess, 13% on long-term gains (on equity, above ₹1.25 lakh), 20.8% on short-term equity gains, and 31.2% on short-term gains from debt and other funds. Surcharge is added only on large amounts.

Is TDS deducted on the whole redemption amount or only on the gain? On the gain. The fund house works out the cost of the units redeemed, first in first out, and deducts on the difference.

What is the LTCG tax rate for NRIs on shares? 12.5% on long-term gains above ₹1.25 lakh a year on listed shares held more than 12 months with securities transaction tax paid, under section 198. Unlisted shares held more than 24 months are taxed at 12.5% under section 197.

What is the STCG tax rate for NRIs on equity? 20% under section 196, plus cess, on listed shares and equity funds sold within 12 months. An NRI cannot reduce this gain by the unused basic exemption, which a resident can.

Do NRIs get the ₹1.25 lakh exemption on long-term capital gains? Yes. Section 198 applies to all taxpayers, so the first ₹1.25 lakh of long-term gains on equity funds and listed shares in a year is tax-free for NRIs too. It is one limit across all equity, not one per fund house.

How are debt mutual funds taxed for NRIs? Units bought on or after 1 April 2023 give short-term gains taxed at slab rates however long they are held, under section 76. The fund house deducts 31.2%, which is often well above the final tax, so the excess comes back through the return. Units bought before that date are long-term after 24 months and taxed at 12.5% without indexation.

How can an NRI claim a refund of excess TDS on mutual funds? By filing ITR-2 by the due date, reporting each gain and claiming the TDS shown in Form 168. To avoid the excess in the first place, apply for a lower-deduction certificate in Form 128 before redeeming.

Can NRIs set off capital losses? Yes, as residents can: short-term losses against any capital gain, long-term losses only against long-term gains, and carried forward for eight years, but only if the return for the year of the loss was filed on time.

Is TDS deducted on mutual fund dividends paid to NRIs? Yes, at 20% plus cess on IDCW payouts, whatever the amount. The final tax is 20% if the units were bought in foreign currency and slab rates otherwise, so the return may give some back. A treaty rate can apply only with a tax residency certificate, and fund houses doubt that fund payouts count as dividends under most treaties.

Do NRIs have to pay tax in India if their country of residence also taxes the gain? India taxes gains on Indian shares under most treaties, and the other country gives credit for the Indian tax. For mutual fund units, a 2025 tribunal ruling under the India–Singapore treaty held the gains taxable only in Singapore, but that view is contested and limited to the treaty it interpreted.

Sources

The rules and figures in this article can be checked against these official sources.

• Income-tax Act, 2025, section 2: definitions, including the holding period of a capital asset Income Tax Department
• Income-tax Act, 2025, section 76: debt mutual funds bought on or after 1 April 2023 and market-linked debentures: always short-term Income Tax Department
• Income-tax Act, 2025, section 196: tax on short-term capital gains in certain cases Income Tax Department
• Income-tax Act, 2025, section 197: tax on long-term capital gains Income Tax Department
• Income-tax Act, 2025, section 198: tax on long-term capital gains on shares and equity funds Income Tax Department
• Income-tax Act, 2025, section 90: cost of acquisition and improvement Income Tax Department
• Income-tax Act, 2025, section 108: set-off of losses within the same head, including capital losses Income Tax Department
• Income-tax Act, 2025, section 111: carry forward of capital losses for eight tax years Income Tax Department
• Income-tax Act, 2025, section 121: losses carried forward only on a return filed in time Income Tax Department
• Income-tax Act, 2025, section 207: tax on dividends and fund income of non-residents Income Tax Department
• Income-tax Act, 2025, section 212: definitions for non-resident Indians, including foreign exchange assets Income Tax Department
• Income-tax Act, 2025, section 216: when a non-resident Indian need not file a return Income Tax Department
• Income-tax Act, 2025, section 393: tax to be deducted at source Income Tax Department
• Finance Bill, 2026 (Bill No. 3 of 2026, passed as the Finance Act, 2026 on 30 March 2026): First Schedule, Part II, rates for deduction of tax at source, including 30% on the other income of a non-resident Indian, and the surcharge on tax deducted Gazette of India
• Income-tax Act, 2025, section 395: certificates, including for lower or nil deduction Income Tax Department
• Income-tax Act, 2025, section 156: rebate of income-tax Income Tax Department
• Income-tax Act, 2025, section 159: double taxation agreements Income Tax Department
• Tax Reckoner 2026-27: income-tax rates for mutual funds, including TDS on redemptions by NRIs HSBC Mutual Fund
• Tax Reckoner FY 2026-27: TDS rates for non-resident investors on short-term and long-term capital gains Nippon India Mutual Fund
• Anushaka Sanjay Shah v. ITO (International Taxation), Mumbai Tribunal, March 2025: gains on Indian mutual fund units under Article 13(5) of the India–Singapore treaty Income Tax Appellate Tribunal, Mumbai (digest by ITATonline)
• Old and new section, rule and form numbers: the department’s mapping utility Income Tax Department
• e-Filing portal: returns, refund status, AIS and Form 168 Income Tax Department