Key Takeaways
- CGAS Goes Digital: The Capital Gains Accounts (Second Amendment) Scheme, 2025, has already been notified. NRIs can now deposit funds into their CGAS account using electronic modes like Net Banking, UPI, and NEFT, a significant procedural simplification.
- Proposed Overhaul of Capital Gains Tax: The Direct Tax Code (DTC) 2025, which is currently a proposal to replace the 1961 Act from April 2026, aims to simplify tax law. This may involve replacing the 20% long-term capital gains tax with indexation benefit with a different structure, possibly taxing gains at slab rates or a flat rate without indexation.
- Repatriation Rules Remain Stringent: The core compliance for repatriating funds from an NRO account, including the USD 1 million annual limit and the requirement for Forms 15CA and 15CB, is expected to continue under the new regime.
- Proactive Planning is Essential: The potential removal of indexation benefits under the proposed DTC could significantly increase the tax liability for NRIs on long-held properties. Evaluating the impact before the new law takes effect is critical.
PART 1: EXECUTIVE SUMMARY
This compliance guide provides a detailed analysis for Non-Resident Indians (NRIs) on the transition from the Income Tax Act, 1961, to the proposed Direct Tax Code (DTC) 2025, with a specific focus on the Capital Gains Account Scheme (CGAS). It is important to note that while the DTC 2025 is a proposed legislative overhaul expected to be effective from the financial year 2026-27, significant procedural changes to the CGAS have already been enacted. Our team breaks down the confirmed changes and the potential impacts of the proposed code.
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The Old Law (1961): Under the Income Tax Act, 1961, NRIs selling a long-term property (held for over 24 months) are liable for a 20% tax on the gains after accounting for inflation through an 'indexation' benefit. To claim exemptions, such as reinvesting in a new property (u/s 54) or specified bonds (u/s 54EC), any unutilized gains had to be deposited into a Capital Gains Account Scheme (CGAS) account before filing their tax return. This process was traditionally manual, relying on cheques or drafts, causing delays for NRIs.
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The New Law (2025): The transition involves two key elements. Firstly, the Capital Gains Accounts (Second Amendment) Scheme, 2025, which was officially notified in November 2025, has modernized the CGAS. It now permits electronic deposits, mandates digital statements, and will facilitate online account closures from 2027. Secondly, the proposed Direct Tax Code 2025 aims to simplify the entire tax structure. Proposals suggest radical changes, including the potential elimination of indexation benefits for capital gains, which could then be taxed at a flat rate or as regular income at slab rates.
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Who is Impacted: This transition most significantly affects NRIs who own and plan to sell Indian real estate or other capital assets. The changes impact how they can claim tax exemptions using the CGAS and, more critically, could fundamentally alter their final tax liability on the sale. NRIs who have held property for many years and would benefit most from indexation have the most to gain or lose.
PART 2: DETAILED TAX ANALYSIS
1. Background for Non-Resident Indians
Non-Resident Indians are a primary source of investment in Indian real estate. However, the taxation of capital gains from the sale of these assets and the subsequent repatriation of funds present significant compliance challenges. The Capital Gains Account Scheme (CGAS), introduced in 1988, serves as a crucial tool. It allows an NRI to temporarily park the sale proceeds when they are unable to reinvest in a new asset before the due date for filing their income tax return, thereby preserving their eligibility for tax exemptions under sections 54, 54F, etc. The proposed shift to the Direct Tax Code (DTC) 2025, combined with the recent modernization of the CGAS, represents the most substantial change to this landscape in decades.
2. Comparison: 1961 Act vs Direct Tax Code 2025
The transition involves both confirmed procedural upgrades and proposed structural changes to tax liability. Understanding both is key for effective tax planning.
Table: Key Differences in Tax Regimes for NRIs
| Feature | Income Tax Act, 1961 (Old Law) | Direct Tax Code 2025 & Amendments (New Law) |
|---|---|---|
| CGAS Deposit Method | Primarily manual via cheque or demand draft at specified bank branches. | Confirmed: Fully digital. Deposits are now accepted via all electronic modes, including UPI, NEFT, RTGS, and net banking, per the Capital Gains Accounts (Second Amendment) Scheme, 2025. |
| LTCG Tax on Property | 20% on the capital gain amount, with the significant benefit of indexation (adjusting purchase price for inflation). | Proposed: Proposals vary. One major change under discussion is the removal of the indexation benefit. Gains might be taxed at a flat rate (e.g., 12.5%) or integrated with other income and taxed at applicable slab rates. |
| Tax Year Concept | Complex two-year system of "Previous Year" (when income is earned) and "Assessment Year" (when tax is filed). | Proposed: Simplification to a single "Tax Year" or "Financial Year" concept, aligning with global practices and reducing confusion for NRIs. |
| Taxpayer Classification | Three-tiered system: Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NRI). | Proposed: Simplification to just two categories: Resident and Non-Resident, making it easier for returning Indians and NRIs to determine their status. |
| CGAS Administration | Required physical passbooks and in-person procedures for account closure. | Confirmed: Electronic statements are now valid. From April 1, 2027, account closures (Form G/H) will be processed electronically via Digital Signature (DSC) or Electronic Verification Code (EVC). |
3. Repatriation & DTAA Implications
While the domestic tax law is set for an overhaul, the framework for moving money out of India, governed by the Foreign Exchange Management Act (FEMA), is expected to remain consistent.
- Repatriation of Funds: The proceeds from the sale of immovable property by an NRI are credited to their Non-Resident Ordinary (NRO) account. From this account, an NRI can repatriate up to USD 1 million per financial year (April-March). This limit is comprehensive and includes the principal sale amount and any capital gains. To execute this transfer, the following documents are mandatory:
- Form 15CA: A self-declaration by the NRI submitted online, stating that applicable taxes on the income have been paid.
- Form 15CB: A certificate from a qualified Chartered Accountant verifying that the tax liability has been correctly calculated and paid as per the Income Tax Act.
- Form A2: The outward remittance application form provided by the bank.
- Supporting Documents: Banks will require the sale deed, proof of tax payment (challans), and a copy of the income tax return acknowledgment.
The proposed DTC might simplify the calculations required for Form 15CB, but the procedural necessity of these forms will not change.
- Double Taxation Avoidance Agreement (DTAA) Impact: The DTAA's role is to prevent the same income from being taxed in both India and the NRI's country of residence. For capital gains on immovable property, the taxing rights are almost universally granted to the country where the property is located (i.e., India). An NRI pays the capital gains tax in India as per Indian law (the 1961 Act now, and the DTC later) and then claims a Foreign Tax Credit in their country of residence. The transition to the DTC does not change this principle. However, if the DTC results in a higher tax liability in India (due to the removal of indexation), the amount of tax paid in India will increase, which in turn affects the foreign tax credit calculation abroad.
4. NRI Action Plan & Documentation
A strategic approach is required to navigate these changes effectively.
Short-Term Action Plan (In line with confirmed CGAS amendments):
- Embrace Digital CGAS: For any property sold now, immediately use the new electronic methods to deposit funds into a CGAS account. This is faster, more secure, and provides a clear digital trail.
- Verify Authorized Banks: The list of banks authorized to open CGAS accounts has been expanded to include major private sector banks, offering more choice and convenience.
- Update Contact Information: Ensure your email and mobile number are correctly linked to your bank accounts to receive electronic statements and facilitate future online closures.
Long-Term Action Plan (Preparing for the proposed DTC 2025):
- Model Tax Liability: Before deciding to sell a long-held property, consult with a tax expert to calculate the potential capital gains tax under the proposed DTC scenarios (e.g., without indexation). This will reveal the true financial impact.
- Review Holding Period: The classification of an asset as short-term or long-term might see changes. Keep an eye on the final provisions of the DTC before finalizing a sale.
- Consolidate Documents: A smooth transaction and repatriation process depends entirely on having pristine documentation.
Essential Documentation Checklist:
- PAN Card (linked with Aadhaar, if applicable).
- Tax Residency Certificate (TRC) from the country of residence to claim DTAA benefits.
- Original and Indexed Cost of Acquisition (Purchase Deed, Stamp Duty Receipts).
- Cost of Improvement (Invoices and receipts for any renovations).
- Sale Deed detailing the final sale consideration.
- Bank Statements (NRE/NRO) reflecting the inflow of sale proceeds.
- Forms 15CA/15CB for repatriation.
5. Conclusion
The transition towards a new direct tax regime, starting with the digital overhaul of the Capital Gains Account Scheme, is a move towards simplification and transparency. For NRIs, the procedural ease offered by the CGAS amendments is a welcome change. However, the proposed structural changes to capital gains taxation within the Direct Tax Code 2025 require careful and proactive financial planning. The potential removal of the indexation benefit could substantially increase the tax burden on gains from property held over long periods. Our team advises NRIs to stay informed, review their real estate portfolios, and seek professional guidance to navigate this evolving tax landscape effectively.
💡 NRI Tax Tip: Managing foreign assets or DTAA? Ensure you are compliant with the updated NRI taxation rules in 2025.