The global Indian diaspora, spread across continents, maintains deep economic, cultural, and financial links with India. For millions of Non-Resident Indians (NRIs), effectively managing income and assets in India requires navigating a complex tax system shaped by frequent legislative changes.
One of the most common misconceptions is that taxation depends on nationality or possession of an Indian passport. In reality, the Income-tax Act, 2025 determines tax liability strictly based on residential status, calculated annually.
This article provides a strategic, legally accurate overview of Indian taxation for NRIs, integrating the latest amendments, including the new LTCG regime effective 23 July 2024, the updated new tax regime, DTAA benefits, compliance obligations, and FEMA interplay.
The Foundation of NRI Taxation: Determining Residential Status (Section 6)
Residential status is determined each financial year based entirely on physical presence in India. An individual is considered a resident if they satisfy either of the following:
- Presence in India for 182 days or more in the relevant financial year; or
- Presence for 60 days or more in the year and 365 days or more in the preceding four years.
Relaxed Rule for Indian Citizens & PIOs
For Indian citizens or Persons of Indian Origin (PIOs):
- Who visit India, or
- Those who leave India for employment or as crew members of a ship
The 60-day requirement is substituted with 182 days (or 120 days in certain cases), making it easier to remain a non-resident.
Categories
- Resident
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
For tax purposes, an NRI is simply an individual classified as Non-Resident for the relevant year.
Section 5: Scope of Taxable Income
Residential status determines the extent of income taxable in India:
Resident:
Taxable on worldwide income.
RNOR:
Taxable on income received or accruing in India + income from a business controlled in India.
Non-Resident (NRI):
Taxable only on:
- Income received or deemed to be received in India
- Income accruing or arising or deemed to accrue/arise in India
Foreign income earned abroad (salary, business, rent, interest on foreign assets) remains outside the scope of Indian taxation.
Section 9: Income Deemed to Accrue or Arise in India
Even if paid outside India, the following income is deemed to accrue/arise in India:
a) Business Connection in India
Income attributable to a business presence, agent, or dependent agent in India.
b) Salary
Salary is taxable in India if services are rendered in India, irrespective of the place of payment or the employer’s location.
c) Capital Gains
Capital gains from the transfer of a capital asset situated in India, including:
- Immovable property in India
- Shares of Indian companies
- Rights or interests deriving value substantially from assets in India
d) Interest, Royalty, FTS
Interest, royalties, or fees for technical services payable by:
- The Government
- A resident (unless used for foreign business)
- A non-resident with an Indian business connection
Taxation of Major Income Categories for NRIs
Salary Income
Taxable in India if duties are performed in India, regardless of:
- Currency of payment
- Location of employer
Perquisites and allowances for services rendered in India are also taxable.
House Property Income
Income from property located in India is fully taxable.
NRIs are eligible for:
- 30% standard deduction
- Municipal taxes deduction
- Interest on home loan (subject to Section 24)
The tenant must deduct TDS before making the rent payment to the NRI.
Capital Gains
a. Listed Equity Shares / Equity-Oriented Mutual Funds
Short-Term Capital Gains (STCG — Section 111A): 15%
Long-Term Capital Gains (LTCG — Section 112A):
10% on gains exceeding ₹1,25,000 per year (updated from ₹1,00,000)
No indexation allowed
b. Unlisted Shares, Debt Mutual Funds, and Other Capital Assets
Effective 23 July 2024 for transfers on or after that date:
LTCG = 12.5% without indexation
Applicable to NRIs as well
The earlier 20% with indexation is no longer available for NRIs.
c. Immovable Property in India
For all NRIs (for transfers on or after 23 July 2024):
LTCG is taxed at 12.5% without indexation.
Option not available to NRIs:
The option to choose 20% with indexation is available only to resident individuals/HUFs for property acquired before 23 July 2024.
NRIs cannot avail this option, regardless of when the property was acquired.
Exemptions
Sections 54, 54F, and 54EC continue to apply normally even under the 12.5% regime.
Income from Other Sources
Interest on NRO Accounts
Taxable at normal slab rates; TDS applies.
Interest on NRE / FCNR Accounts
Exempt as long as the individual is an NRI or RNOR and the accounts comply with FEMA.
Dividends
Fully taxable for NRIs; TDS applies (often reduced under DTAA).
The New Tax Regime and NRIs
The new regime under Section 115BAC(1A) is the default for residents, but NRIs may opt for it only if they are residents for that year.
Salient Points
- Lower tax rates
- Most exemptions/deductions disallowed (e.g., 80C, 80D)
- Capital gains taxation unchanged under both regimes
- Choice must be made at the time of filing the return
Strategy
NRIs with significant deductions (insurance, investments) benefit from the old regime.
NRIs with simple income (rent, interest, capital gains) may prefer the new regime if they become residents.
TDS and Compliance Requirements
Tax Deducted at Source (Section 195)
TDS must be deducted on any taxable payment to an NRI, including:
- Sale proceeds of immovable property
- Rent
- Interest (other than NRE/FCNR)
- Professional fees, royalties, services, etc.
Sale of Property: TDS is under Section 195, not 194-IA.
There is no ₹50 lakh exemption threshold.
The TDS rate depends on the nature of the gain.
Typically 12.5% (LTCG) + surcharge + cess.
Higher if STCG.
An NRI may apply for a lower or NIL TDS certificate under Section 197.
Return Filing (Section 139)
NRIs must file a return if:
- Taxable income in India exceeds ₹2,50,000
- They have any capital gains, even if below the threshold
- A refund of excess TDS is sought
- They wish to carry forward capital losses
ITR Forms
ITR-2 for most NRIs
ITR-3 if business income exists
DTAA: The Most Powerful Relief Tool for NRIs
DTAA avoids double taxation and reduces withholding tax. It can be claimed by submitting a Tax Residency Certificate (TRC), Form 10F, and a self-declaration.
FEMA and Banking Rules for NRIs
Types of Accounts
- NRE Account: Repatriable, interest tax-free
- NRO Account: Non-repatriable beyond limits, taxable
- FCNR Account: Repatriable, interest exempt
Common Compliance Errors by NRIs
- Miscalculating residential status
- Receiving rent without the tenant deducting TDS
- Selling property without obtaining a lower TDS certificate
- Not filing returns, assuming “TDS is already deducted”
- Using the wrong bank accounts for receipts
- Ignoring DTAA benefits
- Not reporting foreign assets when becoming resident
Conclusion
The Indian tax system for NRIs is a dynamic framework built on the principles of residential status and source-based taxation. With major changes such as the new 12.5% LTCG regime, evolving global tax standards, and stricter compliance mechanisms, it has become essential for NRIs to adopt a strategic and well-informed approach. NRIs can confidently manage their Indian financial interests while avoiding disputes and optimising tax outcomes.
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Disclaimer: This article is for informational and educational purposes only and does not constitute legal, tax, or financial advice.
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