Chapter XII-A Explained: Section 115E and the Flat 20% Tax on NRI Investment Income

Chapter XII-A of the Income Tax Act 1961 is a self-contained code that most non-resident Indians never read, yet it governs how a large slice of their Indian portfolio is taxed. At its centre sits Section 115E, which fixes a flat 20% rate on the investment income a non-resident Indian earns from foreign-exchange assets, and a concessional 10% rate on long-term capital gains from transferring specified foreign-exchange assets. These rates have survived the Budget 2024 overhaul that moved the general long-term capital gains regime to 12.5%, so knowing when Chapter XII-A applies is worth real money. This explainer covers the statute, the Indian tax mechanics, the foreign side of the ledger, and the repatriation rules, using only figures traceable to the Income Tax Act, RBI notifications, and India's Double Taxation Avoidance Agreements. The primary source for Section 115E is the text reported at indiankanoon.org/doc/1816707/.

FEMA / DTAA Position

Chapter XII-A applies to a "non-resident Indian" as defined in Section 115C — an individual who is an Indian citizen or a person of Indian origin (PIO) and who is not resident in India for the relevant year under Section 6. Your residential status is therefore the first gate: if you fail the residency test in a given year, Chapter XII-A stops applying to fresh income unless you elect to continue under Section 115H. The definitions in Section 115C are the anchor for every rate discussed below.

A "foreign-exchange asset" under Section 115C is a specified asset the NRI acquired, purchased with, or subscribed to in convertible foreign exchange. The "specified assets" broadly cover shares in an Indian company, debentures of or deposits with an Indian public company, and Central Government securities — instruments funded from foreign earnings rather than Indian rupee income. That convertible-foreign-exchange condition is what separates a Chapter XII-A asset from an ordinary domestic holding, which is why the source of your subscription money matters years later when you sell.

On the treaty side, a Double Taxation Avoidance Agreement (DTAA) can lower the Indian withholding rate below the domestic figure, but it never makes Indian capital gains disappear. India retains taxing rights on capital gains from shares of an Indian company under every major treaty, and the treaty long-term capital gains rate is 12.5%, not "exempt". The India-UAE treaty, effective from 22 September 1993, states plainly that capital gains on shares of an Indian company are taxable in India; the India-Singapore treaty, effective 27 May 1994, taxes such gains in India for shares acquired after 1 April 2017 following its 2017 Protocol.

The Foreign Exchange Management Act 1999 (FEMA) sits alongside the tax code and controls the movement of money, not its taxation. Under Section 6 of FEMA, a capital-account transaction needs RBI permission unless specifically permitted; the resident counterpart, the Liberalised Remittance Scheme, allows residents to remit up to USD 250,000 per financial year, while NRIs remit under the separate account rules covered below. Keeping the tax question (Chapter XII-A) and the remittance question (FEMA) mentally separate prevents most of the confusion here.

Tax Treatment in India

Section 115E does two distinct things, and it is worth stating them separately. First, the "investment income" of an NRI from foreign-exchange assets is charged at a flat 20%. Second, "income by way of long-term capital gains" from the transfer of specified foreign-exchange assets is charged at 10%. Neither rate is a slab rate; both are flat, so a large gain does not push the whole return into the 30% bracket. The table below sets the Chapter XII-A rates against the general regime that applies to residents and to NRI income falling outside Chapter XII-A.

A critical restriction accompanies the 10% long-term rate: no deduction under Chapter VI-A is allowed against long-term capital gains taxed under Section 115E, and the benefit of indexation under the provisos to Section 48 is also unavailable. So an NRI cannot layer an 80C or 80D deduction on top of the concessional rate — the 10% is close to a final figure before surcharge and cess. Readers can model the full computation with the NRI income tax calculator.

On top of the base tax, a surcharge applies according to total income, ranging from 10% above Rs 50 lakh to 25% above Rs 2 crore, as the table below sets out. Above Rs 5 crore the surcharge is capped at 25% in the new regime and reaches 37% only in the old regime — the new regime does not carry a 37% surcharge. A health and education cess of 4% then applies to the sum of tax and surcharge.

TDS is the operational reality for most NRIs, because tax is collected at source before the money reaches you. Section 115E income and gains are typically withheld under Section 195, and the payer must deduct at the applicable rate before crediting your account. Where a treaty rate is lower, you can access it only by furnishing a Tax Residency Certificate and Form 10F, as our recent explainer on claiming DTAA relief sets out. Without those documents, the payer defaults to the domestic rate and you are left to claim a refund by filing a return.

Chapter XII-A also offers three procedural reliefs. Section 115F grants a rollover exemption: if an NRI reinvests the net consideration from a long-term specified asset into another specified asset or savings certificate within six months, the capital gain is exempt to the extent reinvested, subject to a three-year lock. Section 115G can relieve an NRI from filing a return where total income consists only of investment income or long-term capital gains from foreign-exchange assets and tax has been deducted at source. Section 115H allows an NRI who becomes resident to keep the Chapter XII-A concessional treatment on existing foreign-exchange assets by filing a declaration with the return, until those assets are converted into money.

Tax Treatment Abroad

The country where you are resident will usually tax your worldwide income too, which is why the foreign-tax-credit machinery matters. India's treaties route relief through the residence country: Article 24 of the India-US treaty, effective 12 September 1991, provides a foreign tax credit in the country of residence, and Canada grants the equivalent credit under Section 126 of its Income Tax Act per the India-Canada treaty effective 6 May 1997. The Indian tax you pay on Section 115E income becomes creditable abroad, subject to each country's own limitation rules. The foreign tax credit calculator helps estimate the net position.

The treaty withholding ceilings differ by income type and country, so the same dividend can face very different Indian tax depending on where you live. The table below consolidates the treaty rates for the five most common corridors. Note that the long-term capital gains column is 12.5% across the board, reflecting that India retains its taxing right on Indian-company shares.

The dividend figures carry an important qualifier. Under Article 10 of the India-US and India-Canada treaties, the lower 15% dividend rate applies only where the recipient holds at least 10% of the voting stock or power of the paying company; portfolio holders below that threshold face 25%. So a US-resident NRI holding a small stake in an Indian listed company faces a 25% treaty ceiling on dividends, well above the 10% a UAE-resident NRI would face under the India-UAE treaty of 22 September 1993. You can compare the net outcome using the DTAA benefit calculator.

Fees for technical services and royalties add another layer. The India-US, India-UK, and India-Singapore treaties each include a "make available" test in Article 12. The royalties-and-fees rate is 15% under the US and UK treaties and 10% under the UAE and Singapore treaties, a spread worth checking before structuring any consultancy income alongside your investment portfolio.

Repatriation Mechanics

Moving investment proceeds out of India is a FEMA question answered by which account the money sits in. The three NRI account types — NRE, NRO, and FCNR — carry different repatriation rights, and Section 115E income typically lands in an NRO account first because it is India-sourced. The RBI Master Direction on deposits and accounts, published at rbi.org.in, is the governing reference for the rules summarised below.

Balances in an NRO account are repatriable up to USD 1 million per financial year under the Foreign Exchange Management (Remittance of Assets) Regulations 2016, covering the balance and current-year income after applicable taxes are paid. This USD 1 million ceiling is the single most important number in NRI remittance planning, because dividends, interest, rent, and sale proceeds of Indian assets all typically flow through the NRO route, as our rental income tax calculator illustrates.

The paperwork is standardised. A remittance from an NRO account requires Form 15CA (a self-declaration filed on the income-tax portal) and, in most cases, Form 15CB (a chartered accountant's certificate confirming the correct tax has been deducted), before the bank processes the outward transfer on Form A2. The bank will not release funds beyond the USD 1 million annual ceiling without specific RBI approval, so timing large redemptions across two financial years is a common and legitimate planning step. The repatriation calculator helps sequence these transfers.

NRE and FCNR accounts sit in a friendlier position because they are funded from foreign earnings and are fully repatriable without the USD 1 million cap. Interest earned on NRE and FCNR deposits is exempt from Indian tax so long as you remain a non-resident, which is why many NRIs route fresh foreign-currency savings there rather than into NRO. The moment your status changes to resident, that interest exemption ends, and Section 115H becomes the tool that preserves your Chapter XII-A treatment on the underlying foreign-exchange assets.

FAQ

What exactly is "investment income" under Section 115E?

Investment income is income derived from a foreign-exchange asset as defined in Section 115C of the Income Tax Act 1961. It is charged at a flat 20% under Section 115E, without the slab progression that applies to ordinary income up to 30%. The asset must have been acquired, purchased with, or subscribed to in convertible foreign exchange, the condition that brings it inside Chapter XII-A.

Is the Section 115E long-term capital gains rate 10% or the Budget 2024 rate of 12.5%?

For long-term capital gains on the transfer of specified foreign-exchange assets, Section 115E fixes a concessional 10% rate, which Chapter XII-A has retained even after Budget 2024 moved the general long-term regime to 12.5% with effect from 23 July 2024. The trade-off is that no Chapter VI-A deduction and no indexation benefit are available against these gains. You can confirm the computation against the text reported at indiankanoon.org/doc/1816707/.

Can I claim my DTAA to make Indian capital gains tax-free?

No. India retains taxing rights on capital gains from shares of an Indian company under every major treaty, and the treaty long-term capital gains rate is 12.5%, not exempt. The India-UAE treaty effective 22 September 1993 and the India-Singapore treaty (2017 Protocol, in force from 27 May 1994) both confirm that such gains remain taxable in India. What a DTAA can do is cap the rate and grant a foreign tax credit in your residence country under provisions like Article 24 of the India-US treaty of 12 September 1991.

How much can I repatriate from my NRO account each year?

An NRO account balance is repatriable up to USD 1 million per financial year under the Foreign Exchange Management (Remittance of Assets) Regulations 2016, after the applicable Indian taxes are paid and Forms 15CA and 15CB are filed. NRE and FCNR balances, by contrast, are fully repatriable without this USD 1 million ceiling because they are funded from foreign earnings. Verify current procedures against the RBI Master Direction at rbi.org.in before initiating a large transfer.

What happens to my Chapter XII-A benefit when I return to India permanently?

Section 115H lets an NRI who becomes resident continue to enjoy the Chapter XII-A concessional treatment on foreign-exchange assets already held, provided a declaration is filed along with the return of income for that year. The benefit continues until those specified assets are converted into money or transferred. This is a one-time election, so the declaration in the year of return is what preserves the 10% and 20% rates on the existing portfolio rather than defaulting to slab taxation.

Do I still have to file an Indian tax return if TDS was already deducted?

Section 115G can relieve an NRI from filing a return where total income consisted only of investment income or long-term capital gains from foreign-exchange assets and tax was deducted at source under Section 195. If you have any other Indian income, or wish to claim a refund because the treaty rate was lower than the TDS withheld, you must file a return and attach your Tax Residency Certificate and Form 10F.

Which assets qualify as "specified assets" for Chapter XII-A?

Specified assets under Section 115C broadly include shares in an Indian company, debentures of or deposits with an Indian public company, and Central Government securities, in each case funded in convertible foreign exchange. Ordinary rupee-funded holdings, immovable property, and gold do not qualify for the Section 115E rates. The definitions in Section 115C, read with the Act on indiacode.nic.in, are the controlling reference.