Last reviewed: 24 September 2026. Most NRI tax queries we get about the capital market are really three different questions bundled into one – how is my dividend taxed, how is my capital gain taxed, and can my DTAA reduce either. The rules genuinely differ across the two income types, and treating them as one is where most NRI investors under-withhold, over-withhold, or miss a treaty benefit they were entitled to.
Dividend income: the mechanics
Dividend paid by an Indian company to an NRI shareholder is taxable in India under Section 115A, and the paying company or its RTA deducts TDS under Section 195 at the time of payment – not under Section 194 (which applies to resident shareholders). The default withholding is 20% plus applicable surcharge and cess on the gross dividend, with no deduction for expenses. If your country's DTAA with India prescribes a lower rate on dividends (commonly 10% to 15% depending on the treaty), you can claim that lower rate at source by furnishing a Tax Residency Certificate and the treaty self-declaration – now Form 41, which has replaced the earlier Form 10F process, to the payer before the dividend is credited.
If the lower rate was not applied at source and 20%-plus TDS was deducted, the difference is not lost – it is recovered by filing your ITR and claiming a refund, but this ties up the excess amount until the return is processed.
Capital gains: STCG and LTCG on listed securities
| Holding period | Applicable section | Current position |
|---|---|---|
| Listed equity shares/equity mutual funds held ≤12 months, sold via recognised exchange with STT paid | 111A (STCG) | Taxed at the specified STCG rate on listed securities, same rate as applicable to resident investors |
| Listed equity shares/equity mutual funds held >12 months, sold via recognised exchange with STT paid | 112A (LTCG) | Taxed beyond the Rs 1.25 lakh annual exemption threshold, same mechanism as for residents |
| Unlisted shares, debt mutual funds, other capital assets | 112 / other applicable provisions | Different holding-period thresholds and rates apply – treat separately from listed-equity gains |
A common misconception is that NRIs pay a different capital gains rate than residents on listed shares – for STCG under 111A and LTCG under 112A, the rate itself is the same. What differs for NRIs is the TDS mechanism: brokers and mutual fund houses are required to deduct tax at source on capital gains credited to an NRI's account under Section 195, at rates that can, in practice, run higher than the final tax liability, again recoverable only through the return.
Where DTAA does and does not help
DTAA relief works differently for the two income streams. For dividends, most treaties explicitly cap the source-country withholding rate, so claiming the treaty rate directly reduces TDS. For capital gains on shares, many of India's treaties (read the specific Article on "Capital Gains" in your applicable DTAA) either leave taxing rights with the country of residence, or carve out exceptions for gains from shares deriving substantial value from Indian immovable property. This means a DTAA claim that works cleanly for dividend TDS may not automatically extend to your capital gains TDS – each income head needs its own treaty analysis, not a blanket assumption.
Worked example. An NRI resident in the UK holds listed Indian equity shares and also receives dividends from an Indian company. The dividend is taxed in India at the DTAA rate (say 15% under the India-UK treaty, against the default 20%-plus) once TRC and Form 41 are furnished to the payer. The capital gains on sale of those same shares, however, are governed separately under the India-UK treaty's capital gains article and the domestic 111A/112A provisions – the lower dividend rate has no bearing on how the capital gain itself is taxed or withheld. Filing the ITR consolidates both, applies any excess TDS as credit, and settles the final position.
Filing and reconciliation
- NRIs with capital market income typically file ITR-2, reporting dividend income and capital gains under their respective schedules, along with foreign asset/bank details as applicable.
- Reconcile Form 26AS/AIS TDS entries against actual broker and RTA statements before filing – mismatches between what was deducted and what is reflected are common and delay refund processing.
- Where TDS has been deducted at a higher rate than the actual liability (dividend or capital gains), the excess is claimed as refund in the return, not adjusted separately with the deductor.
- Repatriating the post-tax proceeds, once due tax is settled, generally follows the NRO account and Form 15CA/15CB route – relevant if you plan to move these funds abroad, which we've covered in our note on the NRO/NRE/FCNR distinction for NRI accounts.
Frequently asked questions
Is dividend TDS for NRIs always 20%?
20% plus surcharge/cess is the default rate under Section 195, but it can be reduced to the DTAA rate (commonly 10-15%) if the NRI furnishes a Tax Residency Certificate and Form 41 to the payer before the dividend is paid.
Do NRIs pay a higher capital gains tax rate than residents on listed shares?
No, the STCG rate under Section 111A and the LTCG rate under Section 112A for listed, STT-paid equity shares and equity mutual funds are the same for NRIs and residents. What differs is the TDS deduction mechanism applied at source.
Can I use my DTAA to reduce TDS on capital gains from mutual funds the same way as dividends?
Not automatically. Dividend relief and capital gains relief are governed by different treaty articles. Check the specific capital gains article of your applicable DTAA rather than assuming the dividend rate carries over.
What if excess TDS was deducted on my dividend or capital gains?
The excess is recoverable only by filing your Income Tax Return and claiming it as refund; it cannot generally be adjusted separately with the broker, AMC or company that deducted it.
Which ITR form should an NRI with dividend and capital market income file?
Most NRIs with dividend and capital gains income from listed securities file ITR-2, reporting each income head under its respective schedule along with applicable TDS credits.
Does the Rs 1.25 lakh LTCG exemption under Section 112A apply to NRIs too?
Yes, the exemption threshold for long-term capital gains on listed equity shares and equity mutual funds under Section 112A applies to NRIs on the same basis as resident taxpayers.
We handle DTAA-rate TDS claims, capital gains computation and ITR filing for NRI investors.
NRI Lower TDS Certificate Form 15CA/15CB & Remittance Talk to usThis article summarises the taxation of NRI dividend and capital market income as understood on the date of review. General information, not advice on your specific facts – confirm details against the current forms/portal and consult us or your tax advisor before acting. CA Somesh Chandak & Associates, FRN 158694W.