5 Key FEMA Rules Every NRI Should Know

Since the changes introduced in 2018 and updated by the 2024 budget, long-term capital gains (LTCG) from the sale of listed Indian shares or equity-oriented mutual funds by any investor, including NRIs, are taxed under Section 112A of the Indian Income-Tax Act. Under this rule, the first ₹1.25 lakh of LTCG (in a financial year) from such instruments is exempt. LTCG above that threshold is taxed at 12.5% (plus applicable cess and surcharge) for sales on or after 23 July 2024; for sales before that date, the rate was 10%.

For NRIs, tax is often withheld at source by the buyer or the Indian payer at the applicable rate when the gains are paid out. This withholding (TDS) may apply even if the actual gain is small, and failure to file Indian returns may prevent you from claiming refunds or adjustments.
For other types of assets, unlisted shares, real estate, debt, mutual funds, gold, etc. the capital-gains tax treatment depends on the holding period and whether indexation benefits or special rates apply, but LTCG remains taxable and often attracts higher rates.
Short-term capital gains (STCG), such as when equity shares are sold within 12 months of purchase, are taxed at higher rates: under the revised law, STCG on listed equity shares is taxed at 20% for NRIs and residents alike.

Losses are also treated carefully: if an NRI incurs a long-term capital loss on listed shares (say under Section 112A), that loss can be carried forward up to eight years and set off against future long-term gains but not against short-term gains.

U.S. tax reporting obligations and foreign-tax credit

As a US resident or citizen, you are required to report your worldwide income, including capital gains realized from Indian assets. When you sell Indian shares or other investments, you must report the sale on your US tax return (e.g., on Form 8949 and Schedule D), indicating acquisition cost, sale proceeds, gain or loss in US dollars after converting Indian rupees at the appropriate exchange rates.

Because you may already have paid Indian tax (or had tax withheld) on that gain, you can generally avoid double taxation by claiming a foreign-tax credit under US law (using Form 1116). This credit reduces your US tax liability by the amount of Indian tax paid (subject to certain limitations).

Thus, the combination of Indian LTCG tax (or withholding) and the US foreign-tax-credit mechanism ensures that the same gain is not taxed twice, provided you report accurately, convert currency properly, and claim the credit.

You Can Also Read: US NRI Retirement Planning

Example: A US-resident NRI sells Indian listed shares in 2025

Suppose you bought 10,000 shares of an Indian listed company in 2017 for ₹100 each (total cost ₹10,00,000). On 1 August 2025, you sell all shares at ₹250 each. Because the shares were listed, and you held them for more than 12 months, the sale qualifies as long-term capital gains under Section 112A.

First, compute gain: sale proceeds = ₹25,00,000, cost of acquisition = ₹10,00,000, so gross gain = ₹15,00,000. In FY 2025, LTCG exemption for listed shares is ₹1.25 lakh, so taxable gain = ₹15,00,000 − ₹1,25,000 = ₹13,75,000. At a 12.5% tax rate, Indian tax liability = ₹1,71,875 (before cess/surcharge). Suppose 4 % health and education cess applies, so total Indian tax = ~₹1,78,750.

You Can Also Read: US NRI Investing in India: Here’s What You Need To Know

As an NRI, the payer or broker may deduct this as TDS at the time of sale, so you might receive net proceeds of around ₹23,21,250 (after TDS). Now, for US tax reporting: you will convert sale proceeds and cost basis into US dollars at the exchange rate prevailing on the date of sale and the date of purchase (as required). On your US return, you report the gain in USD. Suppose the gain in USD comes to, say, $16,500. Without any foreign tax credit, you would owe US capital-gains tax (at your applicable rate).

Because you already paid Indian tax, you file Form 1116 to claim foreign-tax credit for the ₹1,78,750 (converted to USD). If your US capital-gains tax liability on $16,500 is, say, $2,500, and the Indian tax converted to USD is $2,100, your net US tax may only be around $400, thus avoiding double taxation of the same gain.

This example shows why it is essential to keep clear records: purchase and sale dates, amount in INR, sale proceeds, TDS certificates, currency-conversion rates, and supporting documents. If you miss any step, you may end up overpaying or triggering compliance challenges.

You Can Also Read: How Are Dividends, Bonus Shares, Stock Splits, etc. are Taxed?

How professional help smooths the process

Given the dual obligations in India and the US and the complexity introduced by new rates, exemptions, TDS mechanics, currency conversions and foreign-tax credits, many NRIs find compliance challenging. That is where professional wealth-management come in.
Moneyvesta Wealth Management can help by analysing your holdings, projecting potential tax liability under Indian law, coordinating the filing of Indian income-tax returns (to claim refunds or reduce withholding), and liaising with US-tax advisors to ensure accurate reporting and optimal use of the foreign-tax credit.

In short, if you are a US-resident NRI with investments or property in India, using professional guidance such as Moneyvesta Wealth Management can turn a potentially stressful, error-prone process into a smooth, tax-efficient and compliant outcome.