July 15, 2025

How NRIs Can Avoid Paying Tax on Capital Gains in India – Full Exemption Under Section 115F Explained

Looking for ways to avoid paying capital gains tax as an NRI in India? You’re not alone. Many Non-Resident Indians (NRIs) are unaware that the Indian Income Tax Act offers a completely legal provision Section 115F that allows you to pay zero tax on long-term capital gains (LTCG) if certain conditions are met.

This guide breaks down everything you need to know about how NRIs can save tax on capital gains by reinvesting under Section 115F. Let’s dive in.

What Is Section 115F of the Indian Income Tax Act?

Section 115F offers long-term capital gains exemption to NRIs when they:

Sell a foreign exchange asset, and
Reinvest the net sale consideration in eligible assets within 6 months of the transfer.

This section is specifically applicable to Non-Resident Indians, making it a highly effective tax planning tool for cross-border investors.

What Qualifies as a "Foreign Exchange Asset" for NRIs?

As per Indian tax law, a foreign exchange asset is any long-term capital asset acquired using convertible foreign exchange (like funds from your NRE, FCNR, or foreign remittance channels).

Common foreign exchange assets include:

Listed equity shares of Indian companies
Public sector bonds and debentures
Company fixed deposits (with Indian public companies)
Government securities

These assets must be held for more than 24/36 months to qualify as long-term under tax rules.

Eligible Reinvestment Options Under Section 115F

To claim tax exemption under Section 115F, NRIs must reinvest the full net sale proceeds (not just the profit) into the following:

Equity shares of an Indian company
Debentures of Indian public companies
Public deposits with Indian companies
Central Government securities

Not allowed: Reinvestment in mutual funds, real estate, ULIPs, private companies, or gold does not qualify for exemption under this section.

Lock-in Period for Reinvestment: 3 Years

To maintain the exemption, the new asset purchased using the capital gains must be held for a minimum of 3 years. If you sell or transfer this reinvested asset before 3 years, the earlier tax-exempt capital gain becomes fully taxable in the year of sale.

How to Calculate Exemption Under Section 115F?

The exemption is allowed proportionately, based on the reinvestment amount.

Formula for Exempt Capital Gain:

Exempt LTCG = (Amount Reinvested ÷ Net Sale Value) × Total Long-Term Capital Gain

Section 115F Example – NRI Capital Gains Tax Planning

Let’s assume:

Sale value of listed equity shares: ₹6 crore

Original cost of investment: ₹3 crore

Total long-term capital gain: ₹3 crore

Reinvestment in eligible asset: ₹4.5 crore

Exempt Capital Gain = (₹4.5 crore / ₹6 crore) × ₹3 crore = ₹2.25 crore
Taxable LTCG = ₹3 crore – ₹2.25 crore = ₹75 lakh

Tax Saved:
Assuming a 20% LTCG tax rate (post indexation), NRI saves:
₹2.25 crore × 20% = ₹45 lakh in tax saved.

NRI Tax Exemption Under Section 115F – 4 Key Conditions

1. Reinvestment Deadline – Within 6 Months

The reinvestment must be made within 6 months of the transfer of the asset. Delay in reinvestment disqualifies you from claiming exemption.

2. Invest in Only Specified Assets

You must reinvest only in assets permitted under Section 115F. Any investment in property, unlisted shares, mutual funds, or international assets will not help you save tax under this section.

3. Lock-in Period of 3 Years

The reinvested asset must be held for at least 36 months. Premature sale leads to revocation of the exemption, and tax will be levied on the exempted amount.

4. Maintain NRI Status and Use Foreign Currency Funds

Reinvestment should be made using foreign exchange (through NRE/FCNR account or foreign remittance).

You must maintain NRI status during this period.

Retain bank records, FIRC certificates, and investment documents to prove compliance during assessment.

Why NRIs Should Use Section 115F – Key Benefits

Zero tax on long-term capital gains
Fully legal and permitted under Income Tax Act
No need to file for refunds later
Efficient reinvestment into Indian economy
Ideal for NRIs looking to rotate capital from Indian shares, deposits, or government bonds

Conclusion

Tax laws for NRIs in India are complex, but when used strategically, provisions like Section 115F can result in massive tax savings.

This is not tax evasion. It is lawful tax optimization.

If you're planning to sell Indian assets and want to maximize your post-tax returns, speak to an expert NRI tax consultant before executing the transaction.