Income Tax Act 1961 · FEMA 1999 · FY 2025-26 · By ASAS & Associates / KarSahi

For Indians living and working abroad, one of the most misunderstood areas of compliance is Indian income tax. Many NRIs assume that once they leave India, their Indian tax obligations cease. This is incorrect. The Income Tax Act of India taxes you based on your residential status and the source of your income — not your citizenship or where you physically reside at the time of filing. Understanding how the law applies to you is the first step to staying compliant and avoiding unexpected tax demands.

Determining Your Residential Status

Your tax liability in India for any financial year depends entirely on your residential status for that year. The Income Tax Act recognises three statuses: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident Indian (NRI).

You are a Resident if you were present in India for 182 days or more during the financial year, or if you were present for 60 days or more during the year and for 365 days or more in the preceding four financial years. If you are a resident, you are further classified as Ordinarily Resident unless you were a non-resident in nine of the ten preceding years, or were present in India for 729 days or fewer in the preceding seven years — in which case you are classified as RNOR. If you do not meet the conditions for residency, you are an NRI.

There is also a category of Deemed Resident introduced for Indian citizens with income exceeding ₹15 lakh who are not liable to tax in any other country. Such individuals are taxed on their Indian-sourced income even without satisfying the physical presence tests.

The practical significance of this classification is significant. An ROR is taxed on global income — income from all sources worldwide. An RNOR and an NRI are taxed only on income earned, accrued, or received in India.

What Income is Taxable for NRIs in India?

As an NRI, you are liable to pay income tax in India on income that is earned or arises in India, or that is received in India. This includes salary paid for services rendered in India; rental income from property located in India; capital gains on the transfer of assets situated in India such as property, shares of Indian companies, and mutual fund units; interest income from NRO (Non-Resident Ordinary) accounts and fixed deposits in Indian banks; dividends from Indian companies; and business income from a business that is wholly or partly set up in India.

Certain income is expressly exempt for NRIs. Interest earned on NRE (Non-Resident External) savings and fixed deposit accounts is fully exempt from Indian income tax under Section 10(4). Similarly, interest on FCNR (Foreign Currency Non-Resident) deposits held in India is exempt. These exemptions make NRE and FCNR accounts tax-efficient vehicles for parking foreign earnings in Indian banks.

NRO, NRE, and FCNR Accounts — The Tax Difference

NRO accounts are meant for depositing income arising in India — rental receipts, pension, dividends, and similar income. Interest earned on NRO accounts is fully taxable and subject to TDS at 30% plus applicable surcharge and cess. The principal in NRO accounts can be repatriated abroad, but only up to USD 1 million per financial year, and only after obtaining a certificate from a chartered accountant.

NRE accounts, in contrast, are meant for depositing income earned outside India and remitting it to India. Interest on NRE accounts is tax-free in India. Both principal and interest are freely repatriable. NRE accounts are the preferred choice for NRIs wanting to keep foreign earnings in India without a tax burden.

FCNR deposits allow NRIs to maintain fixed deposits in a foreign currency (USD, GBP, EUR, etc.) in an Indian bank, eliminating currency risk. Interest on FCNR deposits is also fully exempt from Indian income tax, and the deposits are freely repatriable.

TDS on NRI Income

One of the most practically impactful aspects of NRI taxation is that almost all income paid to an NRI is subject to TDS at higher rates than those applicable to resident Indians. Rental income paid to an NRI is subject to TDS at 30%. Interest on NRO accounts is deducted at 30%. Capital gains on equity and equity mutual funds attract TDS at 20% for short-term gains and 12.5% for long-term gains. Other income payments to NRIs are generally subject to TDS under Section 195 at rates specified by the Finance Act or the applicable tax treaty.

These TDS deductions are not final taxes — they are advance taxes. When you file your ITR, you reconcile these deductions against your actual tax liability and either claim a refund for excess deduction or pay the balance. This is why filing an ITR is important even for NRIs with modest Indian income: you may be owed a refund.

Claiming DTAA Benefits

India has Double Taxation Avoidance Agreements with over 90 countries. A DTAA ensures that the same income is not taxed twice — once in India and once in your country of residence. Under these agreements, you may either be exempt from Indian tax on certain income, or the Indian tax may be credited against your foreign tax liability.

To claim DTAA benefits, you must submit a Tax Residency Certificate (TRC) issued by the tax authority of your country of residence to the bank, company, or other entity paying your Indian income. You also need to file Form 10F on the Income Tax portal if your TRC does not contain all the information prescribed under Section 90 of the Income Tax Act. Once DTAA benefit is claimed, the TDS deductor must apply the treaty rate instead of the domestic rate.

For example, residents of the UAE benefit from the India-UAE DTAA which provides relief on certain categories of income. Residents of the USA must navigate the India-US DTAA, which has different provisions for different types of income. The applicable DTAA and its specific articles must be studied for each situation — there is no uniform treatment across all treaty countries.

Filing Your ITR as an NRI

NRIs must file an ITR in India if their Indian income exceeds the basic exemption limit applicable to them. The correct form is ITR-2 if your income is from salary, capital gains, property, or other sources without business income. If you have business income, use ITR-3.

Importantly, ITR-1 cannot be used by NRIs — it is restricted to resident individuals only. If your employer deducted TDS based on you being a resident (which sometimes happens in the year of departure), you may need to file under the NRI status and claim a refund.

One significant difference from resident filers is that NRIs are not required to disclose foreign assets in Schedule FA of the ITR. This disclosure requirement applies only to resident individuals. NRIs only need to report their Indian income and the corresponding taxes.

E-verification of your ITR can be done using Aadhaar OTP (if your Aadhaar is linked to your Indian mobile number), through net banking of your NRO/NRE account, or by sending the signed ITR-V acknowledgement to the CPC in Bengaluru within 30 days.

NRI filing from anywhere in the world? KarSahi files your ITR live on Google Meet — join from any country. We handle residential status determination, DTAA relief, TDS reconciliation, and Schedule FA compliance. Book at karsahi.com.