India’s Revised Capital Gains Rules Could Raise Tax Outflows for NRIs

by R. Suryamurthy July 5, 2025

By R. Suryamurthy July 5, 2025 0 comments 3 minutes read

Courtesy: R.Suryamurthy

India’s Central Board of Direct Taxes (CBDT) recently set the Cost Inflation Index (CII) for the financial year 2025/26 at 376, a 3.58 percent increase from the previous year’s level of 363, as per an official notification.

The CII, which adjusts the cost of acquisition for inflation in long-term capital gains (LTCG) calculations, traditionally helps reduce tax liability on asset sales. However, recent changes to India’s capital gains tax laws have significantly curtailed its applicability, particularly for non-resident Indians (NRIs) with investments in Indian real estate and fixed-income instruments.

Under the revised tax framework, the updated CII will apply only to land and buildings purchased before July 23, 2024. Taxpayers, including NRIs and Hindu Undivided Families (HUFs), selling such properties can choose between paying a 12.5 percent tax without indexation or a 20 percent rate with indexation using the new CII.

This is a crucial tool for NRIs who plan to liquidate old property holdings in India, analysts said. Amit Maheshwari, tax partner at AKM Global said, “With the benefit of indexation, they can significantly lower the amount of tax owed on capital appreciation that is, in real terms, partly due to inflation.”

“This effectively reduces the tax liability on long-term capital assets and ensures that individuals and businesses are taxed only on real gains, not on notional appreciation due to inflation. It is a key mechanism that brings fairness and efficiency to India’s capital gains tax regime,” he added.

The new CII will apply for capital gains assessed in assessment year 2026/27.

Tax Impact on New Investments

For assets purchased on or after July 23, 2024, indexation benefits have been abolished. Capital gains from such property transactions will be taxed at a flat 12.5 percent, without any adjustment for inflation, potentially raising effective tax outflows for investors in a high-inflation environment.

The changes are expected to impact NRIs disproportionately, as real estate remains a major component of their long-term investment in India. The absence of indexation could lead to lower real returns, experts said.

Indexation benefits for debt mutual funds were already removed from April 1, 2023, under the Finance Act 2023. Gains from these investments are now taxed at the investor’s applicable income tax slab, rendering the CII irrelevant for such instruments.

Strategic Reassessment Urged

Tax professionals said NRIs holding legacy property should evaluate whether to opt for the 20 percent indexed tax rate or the 12.5 percent flat rate, depending on acquisition cost, holding period, and potential inflation adjustment.

“Planning becomes critical as the rules now create a clear tax distinction between legacy and new investments,” said a Mumbai-based tax advisor.

They added that with inflation protection removed for newer real estate and debt fund investments, NRIs may need to review their portfolio allocation and repatriation strategies.

Narrower Scope Reflects Policy Shift

The latest CII update highlights a broader policy shift toward a simplified capital gains tax structure with fewer exemptions. While it eases compliance, the removal of indexation benefits increases the effective tax burden for many long-term investors, including NRIs.

The updated CII provides limited relief and is primarily relevant for legacy real estate holdings. Tax experts say NRIs should act promptly to review their positions before the new tax regime fully takes effect.