The Chapter XII-A Option: Flat 20% and 10% Tax on NRI Investment Income and Reinvestment Relief

Most NRI tax conversations start and end with slab rates. Chapter XII-A of the Income-tax Act 1961 — sections 115C to 115I — sidesteps them. It offers a non-resident Indian a flat rate on income from a "foreign exchange asset", an asset bought with convertible foreign currency, and a full exemption on the capital gain if the proceeds are recycled into specified assets within six months.

The catch is that the numbers usually quoted for this regime are the 1961 Act's, and the 1961 Act is no longer the operative statute. The Income-tax Act 2025 came into force on 1 April 2026; its sections 212 to 218 carry Chapter XII-A forward almost unchanged in structure, and change one rate that matters. Every figure below is labelled with the Act it comes from.

FEMA / DTAA Position

Chapter XII-A rests on a foreign-exchange test. Section 115C(b) of the Income-tax Act 1961 defines a "foreign exchange asset" as "any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange", and section 115C(a) defines convertible foreign exchange by reference to what the Reserve Bank of India treats as convertible (Section 115C, Income Tax Act 1961). The money trail, not the asset class, is what admits you to the regime.

Section 115C(f) lists five categories of "specified asset": (i) shares in an Indian company; (ii) debentures of an Indian company that is not a private company; (iii) deposits with such a company; (iv) Central Government securities under the Public Debt Act 1944; and (v) any other asset the Central Government notifies. Property is absent from those heads, which is why a flat bought with remitted dollars does not enter Chapter XII-A at all.

Section 115C(e) defines a non-resident Indian as an individual who is a citizen of India or a person of Indian origin and who is not a "resident", with an Explanation deeming a person to be of Indian origin if he, or either parent or grandparent, was born in undivided India. The day-count deciding the "resident" half of that test sits outside this Chapter; our explainer on Section 6 day-count rules and the 120-day trap covers it, and the residential status entry gives the short version.

FEMA does not grant the tax concession, but it decides whether the funding counts as convertible foreign exchange. The RBI's FAQ "Accounts in India by Non-residents", as on 16 January 2025, records that permissible credits to an NRE account are inward remittance from outside India, interest on the account, interest on investment, transfers from other NRE or FCNR(B) accounts and maturity proceeds of investments made from that account, and that NRE balances are "Repatriable" while NRO balances are "Not repatriable except for all current income" (RBI FAQ, 16 January 2025). An asset subscribed from an NRE account therefore has clean convertible-foreign-exchange provenance; the same asset bought from an NRO account funded by Indian rent does not.

Treaty relief runs parallel to Chapter XII-A rather than inside it. Under section 195 of the Income-tax Act 1961, withholding is at "DTAA rates or rates in the IT Act, whichever is lower", so a treaty rate below the Chapter's 20% displaces it for the payer's deduction. Nothing in a DTAA makes an Indian-source capital gain exempt: India retains taxing rights, and the long-term capital gains rate across the United States, United Kingdom, UAE and Singapore treaty positions is 12.5%.

Tax Treatment in India

Section 115E of the Income-tax Act 1961, as substituted with effect from 1 April 1998, taxed investment income of a non-resident Indian at 20% and long-term capital gains on a foreign exchange asset at 10%, with any remaining total income taxed as if reduced by those two amounts (Section 115E, Income Tax Act 1961). That 10% is the figure that circulates in NRI forums, and for the tax year that began on 1 April 2026 it is the wrong one.

Section 214 of the Income-tax Act 2025 rebuilds the provision as a three-row table: investment income at 20%, long-term capital gains on a specified asset at 12.5%, and total income as reduced by those two items at the rates in force (Section 214, Income Tax Act 2025). The 20% is unchanged. The long-term rate is 12.5%, not 10%, matching the 12.5% the treaty tables already apply to Indian-source long-term gains.

The rate is flat because the base is gross. Section 213(1) of the Income-tax Act 2025 states that "no deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non-resident Indian", and section 213(2)(a) adds that where gross total income consists only of investment income or long-term capital gains or both, "no deduction shall be allowed under Chapter VIII" (Section 213, Income Tax Act 2025). Where other income is present, section 213(2)(b) allows Chapter VIII deductions only against that reduced figure, and the basic exemption limit is not set off against income charged at the Chapter's special rates.

Two loadings sit above the flat rate and are often forgotten when an NRI compares 20% against a home-country marginal rate. Health and education cess runs at 4% of tax plus surcharge, and surcharge applies at 10% between Rs 50 lakh and Rs 1 crore of total income, 15% between Rs 1 crore and Rs 2 crore, and 25% between Rs 2 crore and Rs 5 crore, with the new regime capped at 25% above Rs 5 crore. A 20% headline on a large debenture coupon is therefore 20%, plus surcharge on that tax, plus 4% cess on the total; the NRI income tax calculator works the stack through.

The reinvestment relief

Section 115F of the 1961 Act, and section 215 of the 2025 Act, hold the capital gain out of charge where the net consideration is put back to work. The condition is that "within six months after the date of such transfer, he has invested the whole or any part of the net consideration in any specified asset". Where the cost of the new asset is not less than the net consideration, "the whole of such capital gain shall not be charged"; where it is less, the relief is proportionate on the formula A = B x C / D, with B the gain, C the cost of the new asset and D the net consideration (Section 115F, Income Tax Act 1961; Section 215, Income Tax Act 2025).

The relief is a deferral wearing an exemption's clothing. Both sections impose a three-year lock-in and a claw-back: where the new asset is transferred or converted into money within three years of acquisition, the gain not charged earlier "shall be deemed to be income by way of capital gains" in the year of that transfer. A six-month reinvestment followed by a sale in month thirty brings the whole original gain back into charge.

Filing relief, continuity and the opt-out

Section 115G of the 1961 Act says it is not necessary for a non-resident Indian to furnish a return where his total income "consisted only of investment income or income by way of long-term capital gains or both" and the tax deductible at source under Chapter XVII-B "has been deducted from such income" (Section 115G, Income Tax Act 1961). Section 216 of the 2025 Act retains it. Both limbs must hold: one rupee of Indian rental income, or TDS short-deducted, and the return obligation revives.

Section 115H of the 1961 Act, reproduced as section 217 of the 2025 Act, lets the benefit survive a move home. A non-resident Indian who becomes assessable as a resident may file a written declaration with his return, after which the Chapter continues to apply to investment income from foreign exchange assets falling within sub-clauses (ii), (iii), (iv) and (v) of section 115C(f), for that assessment year and every subsequent year, until those assets are transferred or converted into money (Section 115H, Income Tax Act 1961). Shares under sub-clause (i) are outside the continuity, so a returning NRI's Indian equity leaves the regime on the day residence changes.

Tax Treatment Abroad

Chapter XII-A fixes what India takes; crediting it is a question for the residence country, and the treaty rate often undercuts the Chapter first. Because section 195 withholds at the lower of the treaty rate and the Act rate, an NRI in a treaty country frequently faces less than 20% on interest at source.

The India-United States treaty caps interest at 15% against the Chapter's 20%, and its Article 24 gives the foreign tax credit in the country of residence. Its dividend article is the trap: 15% applies only where the recipient holds at least 10% of the voting stock, and the portfolio rate is 25%. The India-UAE treaty, in force from 22 September 1993, prices interest at 12.5% and dividends at 10%, but a Tax Residency Certificate needs proof of a UAE establishment.

Singapore's 2017 Protocol restores India's taxing right over gains on shares acquired after 1 April 2017, and the treaty carries a limitation-of-benefits clause requiring substantial economic presence. Under all four treaties long-term capital gains sit at 12.5%, and none makes an Indian-source gain exempt. The DTAA benefit calculator and the foreign tax credit calculator size both halves of that arithmetic.

Repatriation Mechanics

The Chapter's entry condition and the exit route are separate regimes, and an asset can qualify for 20% while its proceeds sit stuck in rupees. The RBI FAQ as on 16 January 2025 records that balances in an NRO account of NRIs and PIOs "are remittable up to USD 1 (one) million per financial year (April-March) along with their other eligible assets", subject to the Foreign Exchange Management (Remittance of Assets) Regulations 2016, and that funds may move to an NRE account within that same facility.

NRE and FCNR(B) sit on the other side of that line. The same FAQ marks both as repatriable and records that income earned in those accounts "is exempt from income tax", while NRO income is "Taxable". FCNR(B) deposits are held in any freely convertible currency for terms of not less than one year and not more than five years; NRE term deposits run from one to three years. The FCNR deposit entry sets out the currency-risk trade-off.

For a Chapter XII-A investor the sequence is narrow: subscribe from NRE or FCNR(B) funds so the asset is a foreign exchange asset under section 115C(b), hold the proceeds in a repatriable account, and where the section 215 relief is claimed, complete the reinvestment inside the six-month window before moving anything offshore. Our piece on the USD 1 million NRO route for inherited property and asset sale proceeds covers the documentation, and the repatriation calculator tests a plan against the USD 1 million ceiling.

One boundary bears restating, because it is the most common planning error: the Liberalised Remittance Scheme limit of USD 250,000 belongs to resident individuals and is not available to an NRI, as our LRS eligibility explainer sets out. An NRI's outward route is the USD 1 million remittance of assets facility.

FAQ

Does Chapter XII-A cover property bought with remitted dollars?

No. Section 115C(f) of the Income-tax Act 1961 lists exactly five specified assets, and immovable property is not among them, so rental income and property gains are taxed under ordinary provisions; see the NRI rental income tax calculator.

Is the flat rate on long-term capital gains 10% or 12.5%?

For the tax year that began on 1 April 2026 it is 12.5%. Section 214 of the Income-tax Act 2025 sets long-term capital gains on a specified asset at 12.5%. The 10% figure comes from section 115E of the Income-tax Act 1961 as substituted with effect from 1 April 1998, and is not the operative rate now.

Can I claim deductions against the 20% investment income?

No. Section 213(1) of the Income-tax Act 2025 disallows any expenditure or allowance in computing investment income, and section 213(2)(a) disallows Chapter VIII deductions where gross total income is only investment income or long-term capital gains. The 20% applies to a gross figure, with no indexation.

What happens if I sell the reinvested asset in year two?

The relief is reversed. Section 215 of the Income-tax Act 2025, like section 115F of the 1961 Act, deems the gain not charged earlier to be income by way of capital gains in the year the new asset is transferred or converted into money, where that occurs within three years of acquisition.

Do I still have to file an Indian return?

Not always. Section 216 of the Income-tax Act 2025, reproducing section 115G of the 1961 Act, removes the filing obligation where total income consists only of investment income or long-term capital gains or both and tax has been deducted at source on it. Any other Indian income, or any shortfall in withholding, brings the return back.

I am moving back to India. Do I lose the 20% rate immediately?

Not on all of it. Section 217 of the Income-tax Act 2025, reproducing section 115H of the 1961 Act, lets you file a written declaration with your return and keep the Chapter's treatment for investment income from foreign exchange assets under sub-clauses (ii) to (v) of section 115C(f) until those assets are sold or converted into money. Shares under sub-clause (i) fall outside that continuity.

Is the Chapter compulsory?

No. Section 218 of the Income-tax Act 2025, carrying forward section 115I of the 1961 Act, is headed "Chapter not to apply if the assessee so chooses" and allows a non-resident Indian to be assessed under the ordinary provisions instead. Compare the two outcomes before electing, because 20% flat on a gross base can exceed the ordinary result at lower income levels.