What is NRI Indexation? Benefits, Calculation & Tax Savings on Capital Gains

When a Non-Resident Indian (NRI) sells a long-term asset in India, such as a property, the profit earned is subject to capital gains tax. However, the Indian tax laws provide a powerful tool called NRI indexation that can significantly reduce this tax burden. In simple terms, indexation is a method used to adjust the purchase price of your asset to account for inflation over the years. This guide will explain how the indexation benefit to NRI works and how you can use it effectively to save tax.

NRI Indexation - Quick Information

Here is a quick overview of the key aspects of indexation, a concept every NRI investor in India should understand.

Why Indexation Matters for NRIs?

Over a long period, inflation reduces the purchasing power of money. For instance, ₹50 lakhs in 2010 had significantly more value than ₹50 lakhs today. When you sell an asset, the profit is calculated as Sale Price minus Purchase Price. Without indexation, this calculation ignores the effect of inflation, leading to a higher, artificial profit and a larger tax bill. Indexation corrects this by allowing you to increase the original purchase cost to its inflation-adjusted value, which brings down your taxable profit substantially. This is especially important for NRIs who may have invested in Indian property many years ago.

Documents Required for Claiming Indexation

To claim the indexation benefit available to NRI when you file your ITR, you must have proper records of the asset's purchase and sale.

• Purchase Deed / Agreement: The original legal document showing the date and cost of purchase.
• Proof of Purchase Cost: Bank statements or receipts showing the payment made for the asset.
• Proof of Improvement Costs: Bills and receipts for any major improvements made to the asset (e.g., renovation of a house), as these can also be indexed.
• Sale Deed / Agreement: The legal document showing the final sale price of the asset.

Applicability of Indexation to NRIs

The indexation rules are the same for both resident Indians and Non-Resident Indians. An NRI is fully entitled to this benefit. The indexation benefit for NRI on sale of property is the most common use case, but it is also available on other long-term capital assets like:

• Unlisted shares
• Debt mutual funds
• Gold and other precious metals

It is crucial to note that the indexation benefit is not available for listed equity shares or equity-oriented mutual funds. These assets have a different long-term capital gains tax structure.

Capital Gains Tax With and Without Indexation

To truly understand the power of indexation, let's look at a simple comparison. Imagine an NRI sells a property and the tax is calculated with and without the indexation benefit.

As you can see, indexation cuts the taxable gain and the final tax amount in half in this example. This makes understanding the capital gains indexation benefit for NRIs in property essential.

How to Calculate Indexed Cost of Acquisition?

Calculating the indexation cost for NRI is a straightforward process using a simple formula and the government's Cost Inflation Index (CII) table. The CII is a set of numbers published by the Income Tax Department each year, representing inflation.

The Formula: Indexed Cost of Acquisition = (Original Purchase Cost) x (CII of the Year of Sale / CII of the Year of Purchase)

Example: Let's say an NRI bought a property in the financial year 2008-09 for ₹30 lakhs and sold it in the financial year 2024-25 for ₹1.2 crore.

• Original Purchase Cost: ₹30,00,000
• Year of Purchase: 2008-09 (CII = 137)
• Year of Sale: 2024-25 (Let's assume the CII is 410 for this example)

Calculation:

• Indexed Cost = ₹30,00,000 x (410 / 137)
• Indexed Cost = ₹89,78,102 (approximately)

Now, the capital gain is:

• Capital Gain = Sale Price - Indexed Cost
• Capital Gain = ₹1,20,00,000 - ₹89,78,102 = ₹30,21,898

The tax would be 20% of this reduced gain, which is far lower than the tax on the un-indexed profit of ₹90 lakhs. A clear understanding of your NRI Status is the first step to ensuring you apply these rules correctly.

TDS on NRI Capital Gains (With and Without Indexation)

This is a critical point for every NRI seller. The buyer of your property is legally required to deduct Tax at Source (TDS) at the time of payment. However, the TDS is deducted on the entire sale price, not on the calculated capital gain.

To avoid having a large chunk of your sale proceeds blocked as excess TDS, it is highly advisable to apply for a Lower TDS Certificate for NRI from the Income Tax Department before you finalise the sale. You can also explore options to save on capital gains further by reinvesting, as detailed in our guide on Long-term vs. Short-term Property Investments for NRIs.

The process of repatriating your sale proceeds outside India also involves compliance, such as filing Form 15CA and 15CB.

How NoBroker Can Help with NRI Services?

Understanding NRI indexation is the first step, but accurately calculating the indexed cost, applying for a Lower TDS Certificate, and filing the tax returns can be complex from abroad. NoBroker’s network of verified legal and tax professionals can provide expert assistance with these precise tasks, ensuring your documentation is perfect and you maximise your tax savings legally and efficiently.