NRI taxation

Table of Content

1. Understanding NRI Status for Income Tax Purposes

2. Taxable Income Sources for NRIs in India

3. NRI Income Tax Slabs and Rates (FY 2025–26)

4. Tax Deductions and Exemptions Available to NRIs

5. TDS Rates and Implications for NRIs (FY 2025–26)

6. Double Taxation Avoidance Agreements (DTAA)

7. Tax Filing Process for NRIs

8. Frequently Asked Questions About NRI Taxation

9. Summary

Understanding NRI Status for Income Tax Purposes

It is essential to first determine your classification under Indian tax laws before determining how much tax you owe. Your residential status affects which income is taxable and also dictates the deductions and exemptions you may or may not claim.

1. Legal Definition of an NRI

The term Non-Resident Indian (NRI) is defined differently under two key laws. The initial is the Income Tax Act, 1961 and the Foreign Exchange Management Act (FEMA), 1999.

Under the Income Tax Act of 1961, an individual is considered an NRI if either of the following criteria matches:

● They stay in India for less than 182 days in the relevant financial year

● They stay in India for less than 60 days in that year and less than 365 days in the preceding four financial years.

FEMA states that if a person resides outside India for employment or business, or for any purpose indicating an indefinite stay abroad, he/she will fall under the NRI status.

To determine your status:

● Count your days of staying in India.

● Include the dates of arrival and departure.

2. How Residential Status Affects Taxation

The scope of income that is taxable in India is determined by your residential status in the following way:

● NRI: Taxed only on income earned or received in India.

● Resident but Not Ordinarily Resident (RNOR): Taxed on Indian as well as foreign income arising from a business or professional controlled/setup from India.

● Resident and Ordinarily Resident (ROR): Taxed on global income, including salary or capital gains earned abroad.

For instance, a U.S.-based NRI with ₹12 lakh in Indian rental income is taxed only on that Indian income. Another example is that if someone stays 190+ days in India with overseas earnings becoming ROR and therefore, liable for taxes on global income.

Taxable Income Sources for NRIs in India

It is crucial to understand the types of income that are taxable in India for NRIs. They are taxed only on income that is earned or received in India. But foreign income is fully exempt unless received directly in India.

● Income from Salary and Business

Salary income is taxable in India if services are rendered within India. This is regardless of where the salary is paid. But it is not taxable in India if an NRI earns a salary abroad for services performed outside India.

For example, the income tax for NRI processes where the individual is working remotely from Dubai for a U.S. company and receiving salary in a U.S. bank account will not be taxed in India. As per Section 5 of Income Tax Act, 1961 income earned and recived outside India, not taxed for NRIs.

However, if the same salary is transferred to an Indian Bank Account, it is considered as “received in India”. So even the work was done abroard, once the money enters India, it becomes taxable in India.

Business income is taxable in India if an NRI runs a business that is either managed from India or decisions taken from India or has any part of its work or operations happening within India as per section 9 of Income Tax Act, 1961 such income treated as income connected to India.

● Income from Property and Investments

Rental income from Indian property is fully taxable under “Income from House Property.” NRIs can claim:

● 30% standard deduction on the rental income.

● Deduction on municipal taxes (like property taxes).

● Home loan interest deduction under Section 24(b) of the Income Tax Act, 1961 This is up to ₹2 lakh per year for a self-occupied properties.

Investment gains:

Short-term capital gains (STCG) on listed stocks are taxed at 20%,

● Long-term capital gains (LTCG) , tax-free upto Rs. 1.25 lakh and above ₹1.25 lakh are taxed at 12.5%.

● Gains from Debt funds are taxable at the applicable rates .

Interest income:

● Non-Resident Ordinary (NRO) account interest is fully taxable, however, the NRI can avail reduce or lower rate if applicable under DTAA (Double Tax Avoidance Agreement).

● Non-Resident External (NRE) and FCNR(B) accounts is tax-free. However, the same should be reported in ITR

Here is an example to help you better understand:

Mr. Sharma, an NRI living in the UK, earns ₹50,000 per month as rental income from his apartment in Bengaluru. He also earns ₹2 lakh annually from interest on his NRO account and ₹1.5 lakh in long-term capital gains from Indian equities.

● He can claim a 30% standard deduction and municipal taxes on his rental income, and if he has a home loan, up to ₹2 lakh deduction on interest under Section 24(b).

● His NRO interest income is taxable

● Since his LTCG exceeds ₹1.25 lakh, the excess ₹25,000 will be taxed at 12.5%.

This shows how NRIs must consider multiple income sources and tax provisions while filing returns.

● Tax-Exempt Income for NRIs

Specific income streams for non-resident Indian taxation are fully exempt under specific conditions:

● NRE account interest: If the individual get interest on moneys standing in a Non-Resident (External) Account in any bank in India he/she qualifies for exemption under Section 10(4)(ii).,

● Foreign Currency Non-Resident (Banks) {FCNR(B)} account deposits: Where deposits are kept in foreign currency, interest is exempt under Section 10(15)(iv)(fa).

● Life insurance maturity proceeds: Get exempted under Section 10(10D) if the premium does not exceed the prescribed threshold limit along with the satisfaction of other conditions.

● Domestic company Dividends: Tax at 20% (plus applicable surcharge and cess) is applied when dividends are paid to NRIs. Provided that dividends received from unit in an IFSC shall be 10% instead of 20%

NRI Income Tax Slabs and Rates (FY 2025–26)

NRI taxation proceeds similarly to resident individuals for the financial year 2025–26. They also have the option to choose between the Old Tax Regime and the New Tax Regime based on which offers better tax efficiency.

Income Tax Slabs for NRIs (FY 2025–26)

Surcharge and Health & Education Cess

NRIs must account for surcharge and Health & Education Cess apart from base income tax. Surcharge is calculated as a percentage of the tax amount:

● 10% for income between ₹50 lakh and ₹1 crore.

● 15% for ₹1 crore to ₹2 crore.

● 25% for ₹2 crore to ₹5 crore.

● 37% for income above ₹5 crore under the Old Tax Regime. This is capped at 25% in the case of New Tax Regime.

For income such as Divident, capital gains under Section 111A, 112, or 112A, the surcharge is capped at 15%.

A flat 4% Health & Education Cess is applied on the total tax + surcharge..

An example of an income of ₹1.5 crore under the Old Tax Regime:

● Base tax = ₹45 lakh

● Surcharge @15% = ₹6.75 lakh

● Subtotal = ₹51.75 lakh

● Cess @4% = ₹2.07 lakh

● Total tax = ₹53.82 lakh

These surcharges can significantly elevate your effective tax rate.

Choosing Between Tax Regimes

NRI taxation in India is available under both the Old Regime and the New Regime. This depends on eligibility and financial profile. The Old Regime permits deductions under Sections 80C (upto Rs. 1.5 lakh for LIC premium, post offfice FD, NABARD Bond, Tuition fees, etc.) followed by 80D (Health insurance premium for self, Spouse, parents and dependant children), then 80G (donations to prescribed charity or relief funds) and Section 24(b) (interest on home loan upto Rs. 2 lakh per year).

The New Regime offers lower slab rates and a Rs 75,000 standard deduction for salaried taxpayers. But it disallows most other exemptions.

● When to choose the Old Regime?

The Old Regime may yield a lower tax burden if you are claiming over ₹2.5–₹3 lakh in deduction.

● When to opt for the New Regime?

The simplified New Regime may be more beneficial if deductions are negligible and your income is stable.

Moreover, NRIs must file Form 10-IEA before the due date of their ITR to opt for the Old Regime. If this form is not filed, the NRI will be taxed under the New Regime by default.

Tax Deductions and Exemptions Available to NRIs

NRIs are entitled to several tax deductions under the Income Tax Act. It is essential for optimising your tax liability in India by knowing which deductions are available and which are restricted. These deductions apply only if the NRI has taxable income in India.

1.Section 80C Deductions

NRIs can claim a maximum deduction of ₹1.5 lakh per financial year against certain eligible investments and expenses under Section 80C. The eligibility criteria to understand are:

● Life Insurance Premiums paid for self, spouse, or children,

● Equity-Linked Savings Scheme (ELSS) mutual funds,

● Principal repayment of home loans for property in India.

● Tuition fees paid to Indian educational institutions for up to two children.

For instance, your total 80C claim is ₹1.5 lakh on paying ₹45,000 annually toward an HDFC Life term plan and ₹1.2 lakh in ELSS.

Documentation Needed:

● Receipts of term plan premium payment.

● Statements regarding investments in ELSS.

● Invoices of the tuition fee with the institution's PAN.

● Certificates for repayment of home loans are issued by the lender.

Not Allowed under 80C for NRIs:

● The Public Provident Fund (PPF)

● National Savings Certificate (NSC)

● Sukanya Samriddhi Yojana (SSY)

2. Other Available Deductions

Under Section 80D, NRIs can claim up to:

● ₹25,000 for health insurance premiums paid for spouse, self, and dependent children

● Additional ₹25,000 for parents under the age of 60 years.

● ₹50,000 if parents are senior citizens above the age of 60.

For instance, you can claim ₹46,000 on paying ₹18,000 towards a family floater and ₹28,000 for your senior citizen parents.

Interest on education loans for higher studies either in India or abroad is fully deductible for up to 8 years with no cap under Section 80E. Moreover, when you make donations to some specified charitable institutions like the PM CARES Fund, these may be eligible for a 50% or even 100% deduction under Section 80G, depending on the cause and the registration of the trust or institution under Section 80G.

Another way an NRI can claim a deduction is under Section 24(b), by interest on a housing loan for a self-occupied or vacant property for up to ₹2 lakh per annum, when the loan is taken for buying or constructing the property, wherein the Certificate from the lender is mandatory.

TDS Rates and Implications for NRIs (FY 2025–26)

NRIs earning income in India are subject to Tax Deducted at Source under Section 195 of the Income Tax law. Section 195 provides for the deduction of tax at source by way of withholding tax on various types of payments.

This is to enable tax collection at the source. Such rates vary according to the type of income. However, an NRI may avail the benefit of Double Taxation Avoidance Agreements (DTAA) between India and the country of residence of such foreign taxpayer.

TDS Rates for NRIs (FY 2025–26)

Claiming Appropriate TDS

NRIs can take the following steps to manage TDS deductions effectively:

1. DTAA Benefits: You may be eligible for reduced TDS rates if India has a DTAA with your country of residence. Obtaining a Tax Residency Certificate (TRC) from your resident country and submitting Form 10F and a self-declaration to the deductor can be done to avail this.

2. Lower/Nil TDS Certificate: Apply for a certificate under Section 197 from the Income Tax Department, by submitting Form 13 electronically via the TRACES Portal and providing the documents like last year’s ITR, computation of income, PAN, TRC (if DTAA is claimed), and any supporting proof of income as this certificate facilitates the deductor to apply a lower or nil rate of TDS. This is if your actual tax liability is lower than the standard TDS rate.

TDS Refund: File an Income Tax Return (ITR) in India to claim a refund after ensuring you have a valid PAN and maintain all relevant documents. This is if excess TDS has been deducted. Refunds are made directly to the Indian Bank Account if it is linked to the PAN Card.

Double Taxation Avoidance Agreements (DTAA)

The Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty between India and other different countries designed to prevent NRIs from being taxed twice on the same income in both countries.

This agreement ensures that NRIs can either claim tax exemptions or receive credits for taxes paid in India. This reduces their overall tax liability.

India has established over 94 comprehensive DTAAs and 8 limited DTAAs. It includes countries like the United States, the United Kingdom, Canada, Australia, the UAE, and Singapore. These agreements often stipulate reduced tax rates on specific income types such as dividends, interest, royalties, and capital gains.

Claiming DTAA Benefits

NRIs should follow these steps to avail benefits under DTAA:

1. Obtain a Tax Residency Certificate (TRC): This certificate is issued by the tax authorities of the NRI's country of residence, which confirms their tax residency status.

2. Submit Form 10F: This form provides essential details about the NRI that aid in claiming DTAA benefits.

3. Provide a Self-Declaration: A declaration affirming eligibility for DTAA benefits followed by ensuring that the income is subject to tax in the resident country.

4. Furnish PAN Details: A valid Indian PAN is required to process DTAA claims, without PAN, TDS may be deducted at a higher rate (20% or more under Section 206AA).

Tax Filing Process for NRIs

The following are the steps to follow to file taxes for NRIs in India:

Step 1: Determine residential status

Step 2: Collect income details

Step 3: Choose the correct ITR form

Step 4: Gather required documents

Step 5: File return online

Step 6: Complete the verification process

Some details regarding the tax filing process are discussed below:

ITR Forms and Filing Deadlines

ITR-2: This is applicable for NRIs with income from salary along with capital gains, multiple house properties, or other sources. But no income from business or profession.

ITR-3: This is pertinent for NRIs with income from business or profession in India. This includes those who are partners in firms or engage in freelancing or consultancy.

Required Documentation

NRIs should gather the following documents to ensure a smooth filing process:

● PAN Card: Mandatory for filing ITR.

● Passport and Visa Details: This is to establish residential status.

● Bank Statements: In the case of both Indian and foreign accounts.

● Form 16/16A: TDS certificates for salary and other incomes.

● Form 26AS and AIS: This is for verifying tax credits and financial transactions.

● Investment Proofs: For deductions under sections like 80C, 80D, etc.

● Property Documents: If claiming deductions under Section 24(b).

● Foreign Income Details: Including salary slips and tax returns from the country of residence.

● Form 10F and Tax Residency Certificate (TRC): If claiming DTAA benefits.

You can refer to the Income Tax Department's official portal for a step-by-step guide on filing ITR as an NRI.

Frequently Asked Questions About NRI Taxation

1. Is NRI income taxable in India?

NRIs are taxed only on income earned or received in India in terms of rent followed by capital gains and interest from NRO accounts. Foreign income is not taxed in India unless the individual qualifies as a resident or RNOR.

2. Do NRIs need to file returns if TDS is deducted?

If the income in India exceeds ₹2.5 lakh, NRIs must file the Income Tax Return. Filing helps claim refunds or carry forward losses.

3. Can NRIs buy life insurance in India?

NRIs can take out an insurance risk policy with any Indian insurer, such as HDFC Life. They should complete KYC and payments out of NRE/NRO accounts.

4. Are premiums eligible for tax deductions?

Premiums paid for life insurance policies are eligible for deduction under Section 80C (maximum ₹1.5 lakh). Provided that, of course, the income is taxable in India. Payouts from life insurance policies can also be tax free if the conditions mentioned in Section 10(10D) are satisfied.

Summary

An understanding of the laws of tax for NRIs in India is paramount for tax compliance and effective planning. Proper utilisation of benefits like Section 80C and double taxation avoidance treaties can result in optimal tax payments. Explore tailored solutions like those offered by HDFC Life’s NRI plans and consult a qualified tax advisor for informed decisions.

Note: - If assessee opted for Old tax regime, assessee shall be eligible to claimed deduction under chapter VI-A.If assessee opted for New tax regime only few deductions under Chapter VI-A such as 80JJAA, 80CCD(2), 80CCH(2) is available.

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