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Moving abroad does not automatically end your tax responsibilities in India. Non-Resident Indians (NRIs) face a distinct tax framework compared to resident taxpayers. While resident Indians are taxed on their global income, NRIs are generally taxed only on income that accrues, arises, or is received within India.
This article will tell you how NRI tax status is determined, which Indian income sources are taxable, and how to file your return correctly.
Key Takeaways
- NRIs pay tax in India only on income earned, accrued, or received within Indian borders. Global foreign earnings remain non-taxable in India.
- You are classified as an NRI if you stay in India for fewer than 182 days in a financial year. If your Indian-sourced income exceeds ₹15 lakh, the stay limit drops to 120 days under specific conditions.
- Following tax reforms, short-term capital gains on listed equities are taxed at 20%, while long-term capital gains on equities and real estate are taxed at 12.5% without indexation.
- The New Tax Regime (Section 115BAC) is the default filing mode. Common deductions under Section 80C and 80D are available only if you actively choose the Old Tax Regime.
- NRIs cannot file ITR-1 (Sahaj). You must file your income tax return using ITR-2 or ITR-3.
How is NRI Status Determined for Income Tax Purposes?
Your tax liability in India depends entirely on your residential status for the relevant financial year (April 1 to March 31), regardless of your citizenship or foreign visa category.
An individual is classified as an Indian Resident if they satisfy either of the following primary conditions:
- They stay in India for 182 days or more during the financial year.
- They stay in India for 60 days or more during the financial year AND 365 days or more across the preceding four financial years.
Important Exceptions to the Basic Rules
- Indian Citizens Leaving for Overseas Employment: The 60-day threshold is extended to 182 days.
- Visits by NRIs / PIOs (Income above ₹15 Lakh): For Indian citizens or Persons of Indian Origin (PIOs) residing abroad who visit India, the 60-day threshold is extended to 120 days if their total Indian-sourced income (excluding foreign earnings) exceeds ₹15 lakh in that financial year.
- Deemed Residency under Section 6(1A): An Indian citizen whose total Indian-sourced income exceeds ₹15 lakh and who is not liable to pay tax in any other country or jurisdiction (due to domicile or residence, such as in the UAE or other zero-tax states) is deemed to be an Indian tax resident. Deemed residents are categorised as Resident but Not Ordinarily Resident (RNOR).
|
Tax Residential Category |
Scope of Taxable Income in India |
|
Resident and Ordinarily Resident (ROR) |
Worldwide global income is taxable in India. |
|
Resident but Not Ordinarily Resident (RNOR) |
Indian income is taxable, plus foreign income derived from a business controlled in or a profession set up in India. |
|
Non-Resident Indian (NRI) |
Only income earned, accrued, or received in India is taxable. |
What Income Is Taxable for an NRI in India?
NRIs are subject to Indian tax laws only on income sourced from within India.
1. Salary Income
Salary is taxable in India if it is received in India or earned for services rendered within Indian territory. If an overseas employer pays salary into an NRI's foreign bank account for work performed outside India, that income is not taxable in India.
2. Income from Indian House Property
Rental income from property located in India is fully taxable in India. NRIs can claim a standard deduction of 30% on the net annual value, alongside municipal taxes paid and eligible home loan interest deduction under the Old Tax Regime. Tenants paying rent to an NRI landlord must deduct Tax Deducted at Source (TDS) under Section 195 at 30% plus applicable surcharge and cess, unless a lower deduction certificate is presented.
3. Capital Gains from Indian Assets
Profits made from selling assets situated in India are subject to capital gains tax:
Listed Equity Shares & Equity Mutual Funds:
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Short-Term Capital Gains (STCG - held under 12 months): Taxed at 20%.
-
Long-Term Capital Gains (LTCG - held 12 months or more): Taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year, without indexation benefits.
Real Estate (Immovable Property):
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Short-Term Capital Gains (STCG - held up to 24 months): Added to Indian income and taxed at applicable income tax slab rates.
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Long-Term Capital Gains (LTCG - held over 24 months): Taxed at a flat 12.5% without indexation. Note that NRIs do not have the option to choose the legacy 20% indexed rate available to certain resident taxpayers for pre-July 2024 acquisitions.
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Unlisted Shares & Debt Instruments:
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STCG: Taxed at applicable slab rates.
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LTCG: Taxed at 12.5% without indexation.
4. Interest on Bank Accounts & Deposits
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Non-Resident Ordinary (NRO) Accounts: Interest earned on NRO savings accounts and fixed deposits is taxable in India at slab rates, subject to upfront TDS under Section 195 (typically 30% plus surcharge and cess).
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Non-Resident External (NRE) & FCNR Accounts: Interest earned on NRE and Foreign Currency Non-Resident (FCNR) deposits is completely exempt from income tax in India under Section 10(15).
Tax Regimes and Eligible Deductions for NRIs
The New Tax Regime (Section 115BAC) is the default tax regime for all individual taxpayers in India. Under this default regime, tax slabs are lower, but most chapter-level deductions are eliminated. NRIs can choose between the Old and New regimes based on which produces lower tax liability.
Income Tax Slabs under Default New Tax Regime (Section 115BAC)
|
Total Income Slab |
Tax Rate |
|
Up to ₹4,00,000 |
Nil |
|
₹4,00,001 to ₹8,00,000 |
5% above ₹4,00,000 |
|
₹8,00,001 to ₹12,00,000 |
10% above ₹8,00,000 |
|
₹12,00,001 to ₹16,00,000 |
15% above ₹12,00,000 |
|
₹16,00,001 to ₹20,00,000 |
20% above ₹16,00,000 |
|
₹20,00,001 to ₹24,00,000 |
25% above ₹20,00,000 |
|
Above ₹24,00,000 |
30% above ₹24,00,000 |
Deductions Available only Under the Old Tax Regime
NRIs who opt out of the default regime and choose the Old Tax Regime can claim the following deductions:
-
Section 80C (up to ₹1.5 Lakh): Eligible payments include life insurance premium payments, ELSS mutual fund investments, home loan principal repayments, and tuition fees for children studying in India.
-
Section 80D (Health Insurance): Deductions for health insurance premiums paid for self, spouse, dependent children, and parents in India.
-
Section 80E (Education Loan Interest): Deduction on interest paid towards higher education loans for self, spouse, or children, with no upper monetary cap.
-
Section 80G (Donations): Deductions for charitable contributions made to eligible registered funds and trusts in India.
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Section 80TTA (Savings Interest): Deduction up to ₹10,000 on interest earned from NRO savings accounts.
Restrictions on NRIs
NRIs cannot open fresh Public Provident Fund (PPF) accounts, National Savings Certificates (NSC), or Senior Citizen Savings Schemes (SCSS). PPF accounts opened prior to becoming an NRI may be operated until maturity on a non-repatriable basis.
Mitigating Double Taxation and Managing Section 195 TDS
Double Taxation Avoidance Agreements (DTAAs)
India has signed Double Taxation Avoidance Agreements (DTAA) with over 80 countries. If an NRI pays tax on Indian income in India, they can generally claim a Foreign Tax Credit (FTC) in their home country of residence, preventing the same income from being taxed twice.
To claim DTAA tax relief or reduced TDS rates in India, an NRI must submit:
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A valid Tax Residency Certificate (TRC) issued by the tax authorities of their country of residence.
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Form 10F submitted electronically on the Indian income tax e-filing portal.
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A valid Indian Permanent Account Number (PAN) linked to the account.
Section 195 TDS and Lower Deduction Certificates
Under Section 195, buyers purchasing property from an NRI seller must deduct TDS at the full applicable tax rate (e.g., 12.5% LTCG plus surcharge and cess) on the gross property value, rather than the net capital profit.
To avoid locking up large sums of capital in excess TDS until return filing, NRIs can apply online for a Lower or Nil TDS Certificate (Form 13) under Section 197 via the TRACES portal before completing the transaction. This allows the buyer to deduct tax based on the actual capital gain instead of the total sale price.
How NRIs Should File Income Tax Returns in India
An NRI must file an Income Tax Return (ITR) in India if:
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Total Indian taxable income exceeds the basic exemption threshold.
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Excess TDS was deducted, and a refund needs to be claimed.
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Short-term or long-term capital losses need to be carried forward to offset future gains.
Ineligibility for ITR-1 (Sahaj)
NRIs are legally restricted from filing ITR-1. Depending on the income profile, NRIs must select:
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ITR-2: For NRIs earning income from salary, house property, capital gains, or dividends.
-
ITR-3: For NRIs earning profits or gains from a business or profession in India.
The standard deadline for filing non-audit tax returns for a financial year is July 31 of the assessment year.
Tax Implications for Returning NRIs (RNOR Status)
When an NRI moves back to India permanently, their tax status does not change to Resident and Ordinarily Resident (ROR) immediately. They may qualify for Resident but Not Ordinarily Resident (RNOR) status if:
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They were an NRI in 9 out of the 10 financial years preceding the current year, OR
-
They spent 729 days or fewer in India during the 7 preceding financial years.
RNOR status offers a transitional buffer lasting 1 to 3 years. During this period, global foreign income remains exempt from Indian taxation unless it is derived from a business controlled in or a profession set up in India.
Conclusion
NRI income tax depends largely on where the income is earned, the individual’s residential status, and applicable international tax agreements. While NRIs enjoy benefits such as taxation only on Indian income and access to several deductions, they must carefully track rental income, investments, capital gains, and compliance requirements.
