NRI Tax in India — What Income is Taxable and What's Exempt?

Introduction

Taxation for Non-Resident Indians (NRIs) is one of the most consistently misunderstood areas of Indian tax law. Many NRIs assume their India-sourced income is automatically exempt because they live abroad, while others overpay because they don't claim treaty benefits they are entitled to.

This guide covers the fundamentals: how residential status is determined, what income is taxable for an NRI, how TDS applies to NRI income, and how Double Taxation Avoidance Agreements (DTAAs) can reduce your tax burden.

Step 1: Determine your Residential Status

Your tax liability in India depends entirely on your residential status for that financial year, not on whether you hold an Indian passport or OCI card.

Under the Income Tax Act:

Resident (and Ordinarily Resident — ROR): Present in India for 182 days or more in the financial year. Taxable on worldwide income.

Resident but Not Ordinarily Resident (RNOR): A transitional status applying to persons who have been NRIs for 9 of the last 10 years, or who have been in India for 729 days or fewer in the last 7 years. Taxable on India-sourced income + income received/accrued in India.

Non-Resident (NR): Present in India for fewer than 182 days in the financial year (with some modifications under Section 6). Taxable only on income that accrues or arises in India, or is received in India.

Special Rule (Section 6(1A)): An Indian citizen earning more than ₹15 lakh from Indian sources who is not taxable in any other country due to their domicile/residence/citizenship is deemed resident in India. This rule was introduced to prevent stateless individuals from escaping tax entirely.

What Income is Taxable for an NRI?

An NRI is taxable in India on income that accrues or arises in India or is received in India. This includes:

Taxable in India:

Salary:

• Salary received in India → taxable
• Salary for services rendered in India, even if received abroad → taxable
• Salary received outside India for services rendered outside India → NOT taxable in India

Rental Income from Indian Property:

• Always taxable in India, regardless of where the rent is received (even if directly credited to an overseas bank account)
• Standard deduction of 30% on net annual value applies
• Municipal taxes paid are also deductible

Capital Gains from Indian Assets:

• Sale of Indian immovable property → taxable in India
• Sale of shares listed on Indian stock exchanges → taxable in India (LTCG above ₹1.25 lakh taxed at 12.5%; STCG at 20%)
• Sale of mutual fund units → taxable in India

Interest Income:

• Interest on savings accounts held in India → taxable (10% TDS deducted by bank)
• Interest on NRE accounts → EXEMPT (completely tax-free)
• Interest on FCNR accounts → EXEMPT (completely tax-free)
• Interest on NRO accounts → taxable (30% TDS)

Dividends from Indian Companies:

• Taxable in India (20% TDS for NRIs on dividends from domestic companies)

Business Income:

• If business is operated from India → taxable
• If business is purely outside India → not taxable in India

NRE vs NRO vs Fcnr Accounts — the Tax Difference

NRE and FCNR accounts are fully repatriable (money can be freely sent abroad). NRO accounts hold India-sourced income and have repatriation limits.

Practical implication: NRI rental income and pension income credited to an NRO account attracts TDS at 30%. If you are taxable in a DTAA country at a lower rate, you can apply for a lower TDS certificate.

TDS on NRI Income — what Deductors Must do

When any person pays income to an NRI, they are typically required to deduct TDS at specified rates — often higher than the rates applicable to residents. The key TDS rates for NRIs:

For property buyers: If you are an Indian resident buying property from an NRI seller, you must deduct TDS at 20% (LTCG) or 30% (STCG) on the entire sale consideration — not just the gain. This shocks many buyers who are unaware of this obligation.

Double Taxation Avoidance Agreements (DTAA)

India has signed DTAAs with over 90 countries. A DTAA specifies which country has the right to tax which type of income, and sets lower TDS rates for most income types for residents of treaty countries.

Common DTAA rate reductions:

How to claim DTAA benefits:

1. 1Obtain a Tax Residency Certificate (TRC) from the tax authorities of the country you are resident in
2. 2Submit Form 10F to the deductor (your bank, property buyer, company paying dividends)
3. 3Provide a self-declaration that you are the beneficial owner of the income

Without submitting TRC and Form 10F, the deductor is required to deduct TDS at the standard domestic rate — not the DTAA rate. Many NRIs overpay TDS simply because they don't submit these documents.

Filing Income Tax Returns as an NRI

When must an NRI file a return in India?

• Total India-sourced income (before TDS) exceeds the basic exemption limit (₹3,00,000 under new regime)
• You want to claim a refund of excess TDS deducted
• You have capital gains on Indian assets
• You want to carry forward a capital loss

Which ITR form? NRIs must use ITR-2 (for individuals with income other than business/profession) or ITR-3 (if business income).

Can an NRI file online? Yes — through the Income Tax e-filing portal. NRIs can authorise a representative via Form CA-1 or give a Power of Attorney to a CA to file on their behalf.

Common NRI refund situations:

• Bank has deducted 30% TDS on NRO interest, but your applicable tax (after accounting for all deductions and exemptions) is lower → refund due
• Property buyer deducted TDS on full sale value, but your actual LTCG (after deducting cost and indexation) is lower → refund due

Common Mistakes to Avoid

Mistake 1: Assuming all India income is tax-free because you live abroad.

NRIs are taxed on India-sourced income. Rental income, NRO interest, dividends, and capital gains are all taxable.

Mistake 2: Not submitting TRC and Form 10F for DTAA benefits.

Without these documents, deductors apply the domestic TDS rate (often 30%). Submit TRC every year at the start of the financial year to your bank and other deductors.

Mistake 3: Not filing a return to claim TDS refund.

Many NRIs don't file a return, assuming the TDS is the final tax. But if your actual liability is lower than the TDS deducted, a return is necessary to claim the refund.

Mistake 4: Buying property in India without planning for TDS obligations as the buyer.

If you are an Indian resident buying property from an NRI, you (not the NRI seller) are responsible for deducting TDS. Failure to deduct makes you personally liable for the tax, plus interest and penalty.

Mistake 5: Not declaring foreign assets in Indian ITR.

Resident Indians and RNORs must declare foreign bank accounts, assets, and income in Schedule FA of their ITR. NRIs are exempt from this — but once they become resident again, they must disclose all foreign assets from Day 1 of their first year of residence.

Key Takeaways

• Residential status (not passport or OCI status) determines tax liability in India
• NRIs are taxable on income accruing or arising in India — rental, NRO interest, capital gains, dividends
• NRE and FCNR account interest is fully exempt; NRO interest is taxable at 30%
• DTAA benefits can significantly reduce TDS — but you must submit TRC + Form 10F to your deductor
• File an ITR if your India income exceeds the exemption limit, or if you want to claim a TDS refund
• Property buyers purchasing from NRI sellers must deduct TDS on the full sale value

When to Seek Professional Help

NRI taxation touches income tax, FEMA (foreign exchange rules on property sale and repatriation), DTAA analysis, and often cross-border compliance in two jurisdictions simultaneously. A CA with international tax experience can model your India tax liability, identify DTAA benefits you may be missing, and ensure your ITR correctly claims all available deductions.