Why NRI Investment on a Non-Repatriation Basis Counts as Domestic, Not Foreign, Investment

When a non-resident Indian or overseas citizen of India puts money into an Indian company, a mutual fund unit or a partnership firm and agrees upfront that the proceeds will never leave India, the Foreign Exchange Management framework stops treating that money as "foreign". Under Schedule IV of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, a non-repatriation investment is deemed to be domestic investment, at par with money put in by an Indian resident. For an NRI based in the United States, that single classification changes which sectoral caps apply, which account the exit proceeds land in, and how the Reserve Bank of India counts the holding when it measures foreign ownership of the investee company.

This piece sets out the statutory basis for that "deemed domestic" status, the Income-tax Act consequences in India, how the India-US treaty and US foreign-tax-credit rules interact, and the repatriation mechanics that follow once the money is locked to a Non-Resident Ordinary rupee account. Every figure below is traceable to an RBI Master Direction, the Non-debt Instruments Rules notified under FEMA 1999, or the Income-tax Act 1961.

FEMA / DTAA Position

The Reserve Bank's Master Direction on Foreign Investment in India (the version updated in 2026) is explicit. Explanation 2 to Para 9.1.15 records that investment by NRIs and OCIs on a non-repatriation basis is treated as deemed domestic investment; where an Indian entity is owned and controlled by an NRI or OCI who has invested on a non-repatriation basis under Schedule IV of the Non-debt Instruments Rules, 2019, that holding is excluded from the indirect foreign investment calculation of any company further downstream. Para 6.4, read with Annex 4 of the same Master Direction, separately permits NRIs and OCIs to purchase equity instruments on a non-repatriation basis outside the standard foreign investment framework that governs repatriable investment.

The logic flows from FEMA itself. Section 6 of the Foreign Exchange Management Act, 1999 makes every capital account transaction impermissible unless the RBI specifically allows it, and the Non-debt Instruments Rules are the instrument that permits it. Schedule IV is the narrow lane the Rules carve out: the NRI or OCI accepts that neither the capital nor the gain will be repatriated, and in exchange the investment is let in without the sectoral conditions, pricing guidelines and entry routes that bind repatriable foreign investment under Schedule I.

The practical effect is that a non-repatriable holding does not count towards the sectoral cap. A repatriable purchase of listed shares runs through the Portfolio Investment Scheme under Schedule III and is capped at 5% of paid-up capital per NRI and 10% in aggregate; a Schedule IV purchase sits outside the Portfolio Investment Scheme entirely and is treated like resident money for ownership-measurement purposes. The table below contrasts the two routes.

The Double Taxation Avoidance Agreement does not change the FEMA classification, but it governs how the same income is taxed once it arises. The India-US treaty, in force since 12 September 1991, is the relevant instrument for a US-resident NRI. Crucially, it does not make Indian-source capital gains exempt: under the treaty India retains the right to tax capital gains on the alienation of Indian assets, and domestic law applies the 12.5% long-term rate. Treating DTAA capital gains as "exempt" is a common and costly error, and it is wrong for every US investor.

Tax Treatment in India

The FEMA label "deemed domestic" does not carry over to the Income-tax Act 1961. For income-tax purposes the investor is still a non-resident, decided purely by the day-count test for residential status in Section 6 of the Act. So the Schedule IV holding is taxed on the same base rates as a resident's, but the collection mechanism is the non-resident one: tax is withheld at source under Section 195 before the proceeds reach the investor.

Capital gains follow the Budget 2024 regime that took effect on 23 July 2024. Long-term gains on listed equity and equity mutual-fund units are taxed under Section 112A at 12.5%, with the first Rs 1,25,000 of such gains in a financial year exempt. Short-term gains on the same instruments are taxed under Section 111A at 20%. For unlisted shares, immovable property and gold held long term, the rate is 12.5% without indexation; assets acquired before 23 July 2024 keep a grandfathered option of 20% with indexation. The table sets out the headline rates.

On top of the base tax, a surcharge applies once total income crosses Rs 50 lakh: 10% between Rs 50 lakh and Rs 1 crore, 15% between Rs 1 crore and Rs 2 crore, and 25% above Rs 2 crore, with a health and education cess of 4% levied on tax plus surcharge. The surcharge on capital gains is itself capped at 15%, and the top surcharge in the new regime is 25%, not the 37% rate that was abolished for the new regime. A US-resident NRI can model the combined incidence with the NRI income-tax calculator before filing.

Rental income from an Indian property bought on a non-repatriation basis is taxed as income from house property, after the standard 30% deduction under Section 24(a) and a deduction for interest; tenants paying rent to a non-resident landlord must withhold tax under Section 195 rather than the 2% domestic rate under Section 194-IB. The rental-income tax calculator works the arithmetic for a single let property. Note that the Section 87A rebate, now Rs 60,000 for incomes up to Rs 12 lakh under the new regime, is a resident-only relief and is not available to a non-resident investor.

Tax Treatment Abroad

A US-resident NRI is taxed by the United States on worldwide income, so the Indian gain, dividend or interest is reportable on the US return regardless of where the money sits. Relief from paying twice comes through Article 24 of the India-US treaty, which obliges the United States as the country of residence to allow a foreign tax credit for the Indian tax paid on the same income. The foreign-tax-credit calculator estimates how much of the Indian tax can offset the US liability.

The treaty also caps the Indian withholding on certain passive income. The table below lists the India-US treaty rates that apply to a Schedule IV investor's income streams; note again that capital gains are not in this table because India taxes them under domestic law at 12.5% rather than a treaty-capped rate.

To claim the lower treaty rate on dividends or interest, the investor files Form 10F and a Tax Residency Certificate from the US Internal Revenue Service with the Indian payer; without them the payer defaults to the higher domestic withholding. The foreign tax credit on the US side is claimed on Form 1116, and the credit is generally limited to the US tax otherwise due on that foreign-source income, so Indian tax paid above the US rate does not produce a refund. Because India's financial year runs 1 April to 31 March while the US tax year is the calendar year, the two filings cover overlapping but non-identical periods, and the investor must map the Indian tax to the correct US year to claim the credit.

One point that trips up US investors specifically: Indian mutual-fund units held on a non-repatriation basis are, for US tax purposes, generally passive foreign investment companies, which carry their own punitive US regime and annual reporting. That treatment is a function of US law, not the Indian FEMA classification, and it is unaffected by the fact that India deems the holding domestic.

Repatriation Mechanics

The defining feature of a Schedule IV investment is that the proceeds are not repatriable, and the account rules enforce that. Both the purchase consideration and the sale or maturity proceeds must flow through a Non-Resident Ordinary rupee account; the money may be funded from an NRE account, from fresh inward remittance, or from existing NRO balances, but once it goes in as non-repatriable investment it is ring-fenced on the NRO side.

The NRO account is where the one genuine escape valve lives. Under the RBI's remittance-of-assets facility, a non-resident may remit up to USD 1 million per financial year out of NRO balances, covering sale proceeds of investments and other current-account-plus-capital items, after the tax has been paid and certified. So although Schedule IV money is "non-repatriable" by design, an investor who later needs to move it can route it through the annual USD 1 million window rather than being trapped indefinitely. The NRI repatriation calculator helps size a remittance against that annual ceiling.

Every such remittance requires the Form 15CA self-declaration and, above the threshold, a chartered accountant's Form 15CB certifying that the correct tax has been deducted; the bank will not execute the outward transfer without them. The paperwork is the same whether the underlying tax was withheld under Section 195 at the 12.5% long-term rate or at a treaty-capped rate on dividends, and it is the step at which the Indian tax position is locked before any dollars leave the country.

Because the capital was committed on a non-repatriation basis, the investor cannot convert the holding into a repatriable one midstream simply by changing the account. A switch would require selling the Schedule IV holding, paying the resulting tax, and re-entering under the repatriable route if that is even permitted for the instrument; there is no administrative reclassification that turns deemed-domestic money back into foreign investment. Planning the account structure before the first rupee is invested is therefore the decision that matters most.

FAQ

Does "deemed domestic investment" mean I become a resident for tax?

No. The Schedule IV classification is a FEMA concept under the Non-debt Instruments Rules, 2019 and affects only exchange-control treatment and foreign-ownership counting. Your income-tax residency is decided separately by the day-count test in Section 6 of the Income-tax Act 1961, and a US-based NRI who fails that test remains a non-resident, taxed through Section 195 withholding.

Can I repatriate the money if my circumstances change?

Only through the NRO remittance-of-assets facility, which allows up to USD 1 million per financial year out of NRO balances once tax is paid and Forms 15CA and 15CB are filed. The investment itself stays classified as non-repatriable; the USD 1 million window is the mechanism that lets you move the proceeds out despite that classification.

Are my capital gains exempt under the India-US treaty?

No. India retains the right to tax capital gains on Indian assets, and domestic law applies the 12.5% long-term rate under Sections 112 and 112A. The India-US treaty, in force since 12 September 1991, does not exempt these gains; it only lets you claim a US foreign tax credit for the Indian tax under Article 24.

What withholding applies when I sell a Schedule IV holding?

Tax is withheld at source under Section 195 because you are a non-resident for income tax, even though FEMA deems the holding domestic. For long-term listed-equity gains the rate aligns with the 12.5% in Section 112A above the Rs 1,25,000 annual exemption, plus any applicable surcharge and the 4% cess.

How is this different from the Portfolio Investment Scheme route?

The Portfolio Investment Scheme under Schedule III is the repatriable route for listed shares, capped at 5% per NRI and 10% in aggregate of a company's paid-up capital, and the proceeds are freely repatriable. Schedule IV sits outside the scheme, is not counted against sectoral caps, and its proceeds are non-repatriable except via the USD 1 million window.

Can I invest in an LLP or a partnership firm this way?

Yes. Schedule IV permits NRIs and OCIs to contribute to the capital of a limited liability partnership, a partnership firm or a proprietary concern on a non-repatriation basis, which the repatriable routes generally do not allow. The contribution is again deemed domestic investment and the returns credit to the NRO account.

Do I still have to report the Indian income to the US IRS?

Yes. US residents are taxed on worldwide income, so Indian dividends, interest and capital gains are reportable regardless of the non-repatriable FEMA status. You then claim relief on Form 1116, and Indian mutual-fund units may additionally trigger the US passive-foreign-investment-company reporting that is a feature of US law, not Indian law.