NRI Taxation in India

Table of Content

1. Who is an NRI for Income Tax Purposes?

2. What Income is Taxable for NRIs in India?

3. NRI Income Tax Slab Rates

4. Tax Deductions & Exemptions for NRIs

5. TDS Rules for NRIs

6. Double Taxation Avoidance (DTAA) Explained

7. How to File Income Tax Returns as an NRI

8. Latest Updates in NRI Tax Rules (FY 2025–26)

9. Summary

10. Frequently Asked Questions

Who is an NRI for Income Tax Purposes?

For NRI taxation in India, an individual’s tax liability depends on residential status under the Income Tax Act of 1961 and the Foreign Exchange Management Act, 1999 (“FEMA”). A person is an NRI if they stay in India for less than 182 days in a financial year. Furthermore, residents live in India for 182 days or more, while those who are Resident but Not Ordinarily Resident (RNOR) fall between these two categories. 

Amended Definition of Resident but Not-Ordinary Resident (RNOR)

An individual will qualify as RNOR in a financial year if:

• They were a non-resident for 9 out of the 10 preceding the relevant financial year, or

• They stayed in India for 729 days or fewer during the 7 years preceding the relevant financial year.

The Finance Act, 2020 further modified the residency rules for Indian citizens and persons of Indian Origin visiting India for NRI taxation purposes. Such individuals will now be classified as RNOR if:

• Their total Indian income (excluding foreign income) is ₹15 lakh or more, and

• They have stayed in India for more than 120 days in the relevant financial year, and

• They have remained in India for 365 days or more in the four years, preceding the relevant financial year.

Earlier, these individuals were treated as non-residents. Now, they may fall under RNOR status, which could mean:

• Loss of Double Taxation Avoidance Agreement benefits 

• Increased taxability on global income

• Loss of exemptions previously available

Additionally, any individual staying in India for 182 days or more in the previous year will be considered a resident, regardless of their income level.

Note: The threshold increases from 60 days to 120 days if the Indian income exceeds ₹15 lakh.

Examples for All Three Categories:

• NRI: Sneha lives in London and visits India for 90 days annually. She remains an NRI, so only her Indian income, like rental earnings, is taxed in India.

• Resident: Priya works in India and stays for 200 days in FY 2024–25. She qualifies as a resident, so her global income, including salary from India and abroad, is taxable in India.

• RNOR: Raj, an Indian citizen working in Dubai, stayed in India for 130 days in FY 2024–25, with an Indian income of ₹20 lakh, and has been present for over 365 days in the last four years. Under the amended rules, he qualifies as an RNOR, so only Indian income and certain foreign incomes are taxable under income tax for NRI in India. 

What Income is Taxable for NRIs in India?

• Salary Income

Under NRI taxation in India, salary becomes taxable if services are performed in India, even if payment is received abroad. 

For instance, if Rahul works for a US company but spends 60 days on an Indian project, his Indian salary is taxable in India. However, if his entire work is abroad and the salary is credited overseas, it is not taxable in India. 

Conversely, if the salary for work done in India is credited to an Indian bank account, it is fully taxable under the Income Tax Act, 1961 for NRI in India.

Suppose Arjun, living in Singapore, works remotely for an Indian firm. If he performs all services from Singapore and the salary is paid overseas, it is not taxable in India. But if Arjun travels to India for a project and the salary is credited to his Indian account, that portion becomes taxable.

Note: If you are an Indian citizen employed by the Government of India and working abroad, your salary will still be taxable in India. However, income earned by Diplomats and Ambassadors remains tax-exempt.

• Income from Property in India

Rental income from property in India is always taxable in India for NRIs. A 30% standard deduction, municipal taxes paid, and home loan interest under Section 24(b) of the Income Tax Act, 1961 reduces the taxable income. Also, the NRIs can claim deduction under Section 80C upto overall ceiling limit of ₹1.5 lakh with respect to principal repayment of Home Loan as per the Income Tax Act, 1961. Rita, an NRI, earns ₹5,00,000 annually from renting her flat in Mumbai. 

After claiming a 30% standard deduction (₹1,50,000) and paying ₹25,000 as municipal taxes, her taxable rental income reduces to ₹3,25,000. This lowers her tax liability while still ensuring compliance with Indian income tax regulations for NRIs.

• Business or Professional Income

Any business or professional income is taxable if the company is controlled or managed from India. Anil, an NRI, runs a consulting firm registered in India. 

Even though he lives in the UAE, if major decisions, client meetings, and contracts are managed from India, his business income is taxable under Section 28 of the Income Tax Act, 1961 as per NRI taxation in India. Income earned entirely abroad and not under Indian control remains exempt in India.

• Investment Income and Capital Gains

Short-term capital gains (e.g., the sale of shares within 12 months) are taxed at 15%, while long-term gains on property or shares attract a 12.5% without indexation & 20% tax with indexation. Riya, an NRI, sells shares bought for ₹5, 00,000 within six months for ₹6, 00,000. 

The ₹1, 00,000 gain is treated as short-term capital gain and taxed at 15%. Similarly, if she sells a property purchased for ₹30 lakh after 10 years for ₹50 lakh, long-term capital gains tax at 20% applies.

• Bank Account Interest

The interest earned on bank accounts by NRIs varies based on the type of account, which affects taxability and reporting requirements.

• NRO Account: The Interest is taxable in India under the Income Tax Act, 1961.

• NRE Account: Interest is completely tax-free under Section 10(4)(ii) of the Income Tax Act, 1961, however it must be reported in the ITR.

• FCNR Account: Interest is tax-free and freely repatriable as per section 10(15)(iv)(fa) of the Income Tax Act, 1961.

Recent Update: For FY 2025–26, NRIs must also disclose interest earned in all Indian accounts exceeding ₹50,000 under ITR-2. Accurate reporting ensures compliance, helps claim DTAA benefits where applicable, and avoids penalties. This clarity enables NRIs to plan their taxes efficiently and manage the repatriation of funds without incurring legal issues.

NRI Income Tax Slab Rates

• Income Tax Slabs for NRIs (FY 2025–26)

Under NRI taxation in India, NRIs can choose between the Old and New tax regimes. The following table compares the slabs for FY 2025–26:

Under NRI taxation in India, NRIs can choose between the Old and New tax regimes, each with different slab rates. The Old Regime has higher rates but allows deductions, while the New Regime offers lower rates with fewer exemptions. A surcharge applies to tax (10%–37%), and a 4% Health & Education Cess is levied on the total tax plus surcharge.

Consider the following example:

An NRI earning ₹12,00,000 with minimal deductions:

• Old Regime: Tax ₹1,72,500 + surcharge(not applicable) + 4% cess → ₹1,79,400 total.

• New Regime: Tax ₹80,000 +  surcharge(not applicable) + 4% cess → ₹83,200 total.

This side-by-side comparison helps NRIs plan efficiently.

• Surcharge and Cess for NRIs

Under NRI taxation in India, a surcharge is applied on the tax amount, not income. The following table shows the surcharge and cess for NRI taxation in India:

Consider the following example for better understanding:

Tax liability ₹1, 00,000 with 10% surcharge = ₹1, 10,000. 

Adding 4% cess → total tax = ₹1, 14,400. 

This increases overall tax but ensures compliance and funds health initiatives.

• Choose the Old vs. the New Regime

Under NRI taxation in India, the choice between the Old and New tax regimes depends on the deductions available. The Old Regime is suitable for NRIs who have high deductions, such as those mentioned under Chapter-VI of the Income Tax Act, 1961 such as Section 80C of the Income Tax Act, 1961, home loan interest, or rental income deductions. The New Regime offers lower rates but minimal exemptions, ideal for NRIs with few deductions.

For instance, an NRI earns ₹12,00,000 and claims ₹2, 00,000 deductions. 

• Old Regime tax (with deduction) = ₹1,17,000 

• New Regime tax (no deductions allowed) = ₹83,200 . 

Filing Form 10-IEA is mandatory to opt for the Old Regime. Otherwise, the New Regime applies by default. This choice ensures optimal tax planning.

Tax Deductions & Exemptions for NRIs

Under NRI taxation in India, NRIs can legally reduce their taxable income by claiming various deductions. These include deductions under Sections 80C, 80D, 80E, 80G, and 24(b) of the Income Tax Act, 1961. Some popular Indian schemes like PPF, NSC, and SSY are not allowed for NRIs. Proper documents and compliance is mandatory as per the DTAAs such as receipts, PAN/TAN of trusts, insurance certificates, and loan interest statements are required for claiming deductions.

• Section 80C

NRIs can claim up to ₹1.5 lakh for specific investments/expenses, including premiums on life insurance coverage for NRIs (Must be from Indian insurance companies.), ELSS, tuition fees for up to two children, and principal repayment of Indian home loans. PPF, NSC (Allowed, but only for Indian residents at the time of purchase; NRIs cannot invest newly.), and SSY are excluded.

For example, investing ₹70,000 in ELSS and paying ₹50,000 as life insurance premium allows a total deduction of ₹1,20,000 under Section 80C.

• Section 80D of the Income Tax Act, 1961

For an individual, the deduction can be claimed towards Health insurance premiums of ₹25,000 for self, spouse, and children; an additional ₹25,000 (₹50,000 if parents are senior citizens ≥ 60 years above)) for parents as per the Income Tax Act, 1961.

For instance, premiums of ₹20,000 for family + ₹30,000 for senior parents → total deduction under Section 80D of the Income Tax Act, 1961 is ₹50,000.

• Section 80E of the Income Tax Act, 1961

As per Section 80E of the Income Tax Act, 1961 Interest on education loans from Indian banks is deductible for up to 8 years beginning from the year when repayment of interest starts, regardless of whether the studies are conducted in India or abroad. Only interest is deductible, not principal. This deduction can be claimed only under Old Tax Regime. 

Rahul, an NRI, takes out an education loan of ₹10 lakh from an Indian bank to pursue a Master’s degree in the UK. He pays ₹80,000 as interest in FY 2025–26. He can claim the full ₹80,000 as a deduction under Section 80E. The principal repayment is not deductible.

• Section 80G of the Income Tax Act, 1961

Donations to eligible Indian trusts/funds (e.g., PM CARES) qualify for deductions of 50%–100%. For claiming such deduction, it is mandatory to possess valid receipts along with  trust PAN/TAN as prescribed under the Income Tax Act, 1961.. 

Anita lives in London. She donates ₹50,000 to the PM CARES Fund and ₹20,000 to a local charitable trust eligible for a 50% deduction. She can claim ₹50,000 + ₹10,000 = ₹60,000 as a deduction under Section 80G of the Income Tax Act, 1961. She must keep receipts and note the PAN/TAN of each trust for tax filing purposes.

• Section 24(b) of the Income Tax Act, 1961

As per Section 24(b) of the Income Tax Act, 1961, the NRIs can claim up to ₹2 lakh per year on interest paid on home loans for the properties situated in India, whether self-occupied or let-out. A valid lender’s interest certificate is required to claim this deduction. The deduction is available even if the NRI is residing abroad, as long as the income is taxable in India.

Consider this example: ₹1,80,000 interest paid → full ₹1,80,000 deductible.

TDS Rules for NRIs

Under NRI taxation in India, Tax Deducted at Source (TDS) is a key mechanism to collect tax on income earned in India. The provisions are contained in Section 195. Moreover, NRIs are subject to TDS on salary, rent, capital gains, and interest, ensuring compliance even before filing income tax returns.

• TDS Rates on Different Types of Income

TDS ensures that tax on income earned by NRIs in India is collected at the point of payment, making compliance easier and reducing year-end tax burdens.

• Salary: TDS is deducted as per applicable slab rates under the Income Tax Act, 1961.

• Rent: 30% on rent paid to NRI if exceeding ₹50,000 per month.

• Capital Gains: 15% for short-term gains on equities, 20% for long-term property gains.

• Interest: 30% on interest from NRO accounts; NRE and FCNR interest is usually exempt.

• Surcharge and 4% Health & Education Cess may increase the effective tax deducted.

Example: If NRI earns ₹3, 00,000 as rent, TDS at 30% = ₹90,000.

• Role of DTAAs (Double Taxation Avoidance Agreements)

The Double Taxation Avoidance Agreements (DTAA) ensure that NRIs do not pay tax twice on the same income in India and their country of residence under Section 90, 90A, & 91 of the Income Tax Act, 1961. It helps reduce TDS rates on interest, dividends, and royalties for taxation of NRIs. 

Furthermore, to claim DTAA benefits, it is mandatory for NRIs must submit a Tax Residency Certificate (TRC) and Form 10F to the Indian payor.. For example, if an NRI earns ₹1, 00,000 as bank interest in India, DTAA provisions may reduce TDS from 30% to 15%, saving ₹15,000 in advance tax.

• How to Claim a Refund of Excess TDS

If excess TDS is deducted, NRIs can claim a refund by following these steps:

Step 1: Check TDS Credits- Review all TDS entries in Form 26AS/AIS to confirm the amount deducted.

Step 2: File Income Tax Return (ITR) in India - Report total income accurately, including TDS, to calculate actual tax liability.

Step 3: Provide PAN-Linked Bank Details - Ensure your bank account is linked to your PAN for seamless refund transfer.

Step 4: Claim Refund- Submit the ITR. The excess TDS will be credited to your bank after processing.

Double Taxation Avoidance (DTAA) Explained

Under NRI taxation in India, the Double Taxation Avoidance Agreement (DTAA) ensures that NRIs do not pay tax twice on the same income—once in India and again in their country of residence. 

These agreements are crucial for NRIs earning income in India while residing abroad. India has DTAA agreements with more than 90+ countries majorly  such as the US, UK, UAE, Canada, Australia, Singapore, and Germany, among others. These agreements help reduce the overall tax burden, making cross-border income more manageable.

For example, an NRI residing in the UK earns ₹2, 00,000 as interest from an Indian bank. Usually, TDS would be 30% (₹60,000). Under DTAA provisions, this rate can be reduced to 15%, resulting in a tax savings of ₹30,000. This demonstrates the financial advantage of correctly utilising DTAA benefits.

Key Documents Required for DTAA

To claim DTAA benefits as part of NRI taxation in India, they must submit certain essential documents:

Step-Wise Process to Avail DTAA

Following the steps given below helps NRIs legally minimize tax outflow, avoid double taxation, and maintain compliance with the income tax for NRIs in India rules while optimising tax planning: 

Step 1: Obtain TRC- Acquire the Tax Residency Certificate from your country of residence.

Step 2: Fill Form 10F- Complete the form with accurate personal and residency details.

Step 3: Submit Declaration- Provide the declaration of residential status to the Indian payer.

Step 4: PAN Submission - Ensure a valid PAN is linked to your claim for DTAA benefits.

How to File Income Tax Returns as an NRI

Filing income tax returns is crucial for NRIs to comply with NRI taxation in India, claim refunds on excess TDS, and maintain a clear tax record. The process can be straightforward if approached in a step-by-step manner.

Step 1: Choose the Correct ITR Form

• ITR-2: For NRIs earning salary, rental income, capital gains, or foreign income without business/professional income.

• ITR-3: For NRIs running a business or profession in India. Selecting the correct form avoids processing errors.

Step 2: Collect Required Documents

• PAN card and Aadhaar (if available)

• Form 16/16A for salary or TDS details

• Bank statements and NRO/NRE/FCNR account details

• TRC and Form 10F for claiming DTAA benefits

• Proof of deductions: Sections 80C (ELSS, insurance), 80D (health insurance), 80E (education loan interest), 80G (donations), 24(b) (home loan interest)

• Property documents for claiming deductions on rental income

Step 3: Prepare Online Filing

• Log in to the Income Tax e-filing portal.

• Select the applicable ITR form and financial year.

• Fill in personal details, income sources, and deductions.

• Enter TDS details from Form 26AS/AIS to ensure credit is claimed accurately.

• Verify all entries and calculate the tax payable or refundable.

Step 4: Submit and Verify Return

Submit electronically using Aadhaar OTP, net banking, or digital signature. Keep the acknowledgement (ITR-V) for records.

Step 5: Know Due Dates and Penalties

Due date: 31st July of the assessment year.

Late filing penalty: Up to ₹10,000 under Section 234F, plus interest under Section 234A on outstanding tax.

Latest Updates in NRI Tax Rules (FY 2025–26)

Under NRI taxation in India, staying updated with new rules is essential for compliance and optimal tax planning. For FY 2025–26, several changes affect NRI filing of ITRs, claiming deductions, and reporting of assets.

• Asset Disclosure Rule

NRIs filing ITR-2 must now disclose assets held in India exceeding ₹1 crore. This includes bank deposits, property, investments in mutual funds, and shares of stock. NRIs must also report liabilities exceeding ₹50 lakh associated with these assets. Accurate reporting ensures compliance with the Income Tax Department and avoids penalties.

• Changes in DTAA and Tax Slabs

Specific DTAA provisions have been revised with partner countries like the UK, UAE, and Singapore. These changes can reduce TDS rates on interest, dividends, and royalties. Additionally, for FY 2025–26 tax slabs for NRIs under both the Old and New regimes have been updated, which affects the total tax payable for high-income NRIs.

• RBI and IT Department Circulars

New RBI guidelines emphasise mandatory reporting of foreign assets and income by NRIs in the ITR. The IT Department has issued circulars clarifying TDS on NRO accounts and property sales, including procedural changes for refunds.

• Practical Impact on NRIs

NRIs with Indian assets worth over ₹1 crore must maintain detailed records to avoid notices. Those claiming DTAA benefits require updated TRCs and Form 10F to be eligible for reduced TDS. High-income NRIs should review slab changes to choose the optimal tax regime.

These updates highlight the importance of staying informed. Following them ensures that NRIs comply with the income tax rules for NRIs in India, reduce tax liability legally, and avoid penalties or litigation.

Note: NRIs must regularly review changes in DTAA provisions, tax slabs, and asset disclosure requirements to ensure compliance and avoid penalties under FY 2025–26 rules.

Summary

In FY 2025–26, NRI taxation in India covers updated tax slabs, TDS rules, DTAA benefits, and deductions under Sections 80C, 80D, 80E, 80G, and 24(b) of the Income Tax Act, 1961 if opted for the Old Tax Regime. NRIs must disclose assets above ₹1 crore, file the correct ITR form, and submit TRC, Form 10F, and PAN to claim DTAA benefits under Section 90, 90A & 91 of the Income Tax Act, 1961. Staying informed about these updates ensures compliance, legal tax optimization, and smooth refund processing, helping NRIs manage their Indian income efficiently.

Frequently Asked Questions

1. How much income is tax-free for NRIs?

For NRIs, income up to ₹2.5 lakh in a financial year is tax-free in India, the same as for resident individuals under the Old Tax Regime and up to ₹3 lakh if opted for New Tax Regime in a financial year. However, only income earned or accrued in India, such as rent, capital gains, or business income, is subject to taxation. Foreign income is not taxed unless it originates from Indian sources.

2. What are the new NRI tax rules in India?

The latest NRI tax rules mandate NRIs to pay taxes on Indian income above ₹2.5 lakh annually. Interest on NRO accounts, capital gains, and rental income remain taxable. Residency criteria have tightened, where NRIs staying 120 days or more in India with income above ₹15 lakh may qualify as residents for tax purposes as per Section 6 of the Income Tax Act, 1961.

3. How can NRIs avoid double taxation?

As per Section 90 & 91 of the Income Tax Act, 1961, the NRIs can avoid double taxation by utilizing the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence. Under DTAA, income taxed in one country may be exempted or receive tax credits in the other. Submitting tax residency certificates alongwith Form 10F while filing ITR and choosing appropriate DTAA provisions to help minimize or eliminate double tax liabilities effectively.

4. What is the penalty for not declaring NRI status?

Failure to declare NRI status while filing taxes may attract penalties under the Income Tax Act, 1961. Misreporting residential status can result in additional tax demands under Section 147, interest on unpaid taxes, and fines & penalties ranging from 50% to 200% of the tax due. In severe cases, it may even lead to prosecution for tax evasion offences under Section 276B & Section 276C of the Income Tax Act, 1961.

5. How is tax calculated on NRI income?

The tax on NRI income in India depends on the type of income and the applicable slab rates. Under Old Tax Regime, for income exceeding ₹2.5 lakh, tax is levied as per individual tax slabs. Capital gains are taxed at specific rates: 15% on short-term gains (from equities) and 20% on long-term gains (from property). TDS applies directly, with NRIs required to file returns for refunds.

6. 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.

7. 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.

8. Can NRIs buy life insurance in India?

NRIs can take out an insurance risk policy with any Indian insurer, such as HDFC Life. When opting for life insurance for NRI, they should complete KYC and make payments through NRE/NRO accounts.

9. 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.

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