ITR Filing for NRIs: Why Refunds on Short-Term Capital Gains Are Not Allowed

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Introduction
When it comes to income tax filing in India, Non-Resident Indians (NRIs) often face confusion regarding refunds on short-term capital gains (STCG). Many assume that if their total income, including STCG, falls below the basic exemption limit, they can claim a refund of the tax deducted at source (TDS). However, under the Income Tax Act, STCG earned by NRIs on equities and similar investments is taxed at a special rate, independent of slab benefits. This means that refunds on such gains are not permitted, even if overall income is below the exemption threshold.

What Exactly Is the Update

  • The article (“ITR Filing for NRIs: Why Refunds on Short-Term Capital Gains Are Not Allowed”) explains that for NRIs (Non-Resident Indians) who earn short-term capital gains (STCG) in India, there is currently no provision to claim a refund of tax deducted at source (TDS) or taxes paid, even if those gains, when added to other income, remain below the basic exemption limit.
  • In particular, the example given is: an NRI invests through a PIS (Portfolio Investment Scheme) account, incurs STCG, and has the total STCG less than the basic exemption threshold (say Rs. 2.5 lakh). The question is: can they file ITR to get the TDS refunded? The answer (according to the update) is no.

Why Refunds on STCG Are Not Allowed for NRIs

Here are the main reasons:

  1. Special Tax Rates Apply to Certain Income
    Short-term capital gains from equities (or equity mutual funds) are taxed at a special flat rate for NRIs. These gains are not treated under the normal income tax slab rates. For example, even if your total income (including these capital gains) is below the exemption limit, the law says STCG gets taxed at the rate prescribed for STCG, which is independent of slab rates.
  2. Basic Exemption Limit Doesn’t Apply to These Gains
    The basic exemption limit (for resident taxpayers) allows income up to a certain threshold to be tax-free under slab rates. But this exemption does not extend to incomes taxed at special or fixed rates, such as STCG for NRIs. Thus, being below the exemption limit for “ordinary income” doesn’t automatically entitle relief when there is STCG taxed separately.
  3. TDS Deducted Upfront Under the Special Rate
    Because STCG is taxed at special rate, the payer (broker, bank, etc.) deducts the tax at source at that rate. Once TDS is done, there is no further adjustment via the exemption threshold for that portion of income. Thus, no excess tax is “overpaid” in the sense that would allow a refund, because the tax obligation (as per law) is already concluded at that special rate.
  4. No right to set off STCG against the Basic Exemption Limit for NRIs
    The law does not allow NRIs to offset short-term capital gains taxed at special rate against the basic exemption limit (unlike some scenarios for resident Indians under certain conditions). So even if total income is low, this specific tax treatment means no refund.

What Changed (If Anything New)

  • The update draws attention to the fact that many NRIs might be assuming incorrectly that they can claim refunds for TDS on STCG if their total income is below the exemption limit.
  • It emphasizes that this assumption is incorrect under current law. I don’t see a change in statute yet; rather, it’s clarification or reinforcement of existing law.

Legal / Statutory Basis

While there is no specific new amendment that says “NRIs cannot claim refund on STCG even if income is below exemption,” the explanation rests on:

  • Income-Tax Act provisions that define how different types of income are taxed (i.e., “normal income” taxed under slab rates vs income taxed under special rates) for NRIs.
  • Rules for tax deduction at source (TDS) on capital gains, especially equity shares / mutual funds; and
  • The interpretation that basic exemption (for resident individuals) applies to income taxed under slabs, and not to income already taxed under a fixed special rate.

Implications for NRIs

Here are what NRIs should note going forward:

  • If you are an NRI and you earn STCG on equities or similar investments in India, you cannot expect that income taxed at STCG special rate will become “tax-free” simply because your total Indian income is below the basic exemption limit.
  • You should plan for TDS being deducted at the STCG rate. You cannot get that back via ITR if the law treats it as special rate income.
  • Filing an ITR will still be relevant, especially if you have other incomes, or to carry forward losses, or if to claim any deductions or between different kinds of capital gains (if applicable), but not for the purpose of getting a refund of STCG tax just because your total is below exemption.

  • Be careful in investment decisions and understand your tax liability ahead of time.

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