NRIs earning income from India often face complications and confusion. Even though NRIs live abroad for the purposes of career or school or have moved their businesses overseas, at some point, they are likely to have a connection to India through either assets owned (including real estate), investment accounts, or bank accounts/pages. This creates a level of uncertainty for many NRIs with regard to determining whether or not they are subject to tax in India and what type of tax will apply to their income earned from an Indian source.
This article explains the income tax rules for NRIs in a simple and clear manner. It covers how residential status is determined, what types of income are taxable for NRIs, special provisions applicable only to them, and how their tax liability differs from that of resident Indians.
Introduction
Many NRIs assume that they do not have to pay income tax in India because they live abroad. However, Indian tax law does not consider residency based on nationality or visa status; it is based purely on the number of days one stays in India during a financial year.
Understanding tax obligations becomes essential for NRIs who earn income from sources such as rent, interest, dividends, or capital gains from assets located in India. At the same time, income earned outside India is usually not taxed in India, but that depends completely on one’s residential status.
Who is Considered an NRI for Income Tax Purposes?
The Income Tax Act defines residential status based on physical presence in India. A person is treated as a Non-Resident Indian if they do not satisfy any of the following conditions –
- Staying in India for 182 days or more during the financial year; or
- Staying in India for 60 days or more in that year and 365 days or more during the four years preceding it.
Most NRIs meet neither of the stated tests, as most NRIs reside outside of India for the majority of their time.
There are a few special relaxations for Indian citizens working abroad or staying outside India for employment, business, or crew duties, which often make it easier for them to be classified as non-residents.
Once residential status is determined as “non-resident,” only certain categories of income become taxable in India.
What Income is Taxable for NRIs in India?
The key rule for NRIs is simple –
Income that is earned or received in India is taxable, regardless of where the person lives.
Income earned outside India is not taxable for NRIs.
Below are the major types of income that fall under taxable categories –
1. Income from Salary (If Services Are Rendered in India)
If an NRI receives a salary for services performed in India, such a salary will be taxable here even if it is credited to a foreign bank account.
However, if the salary is earned for work done outside India, it is not taxed in India.
Many NRIs on overseas assignments fall into this category, where certain allowances or income generated for work abroad remain non-taxable in India.
2. Income from House Property in India
If an NRI owns property in India and earns rental income, it is taxable. The computation of income from house property (including standard deduction) is similar to that of residents.
Even a vacant property may be taxed based on “deemed rental income,” unless it qualifies as self-occupied.
Property ownership is one of the most common reasons why NRIs continue to file returns in India.
3. Income from Capital Gains
Any profit earned by selling immovable property, shares, mutual funds, or other capital assets located in India is taxable for NRIs.
Capital gains taxation depends on whether the gain is short-term or long-term, which in turn depends on the holding period.
Many NRIs often face tax liability when selling inherited property in India, because capital gains apply even in such cases.
4. Income from Indian Investments
Interest earned from bank deposits, NRO accounts, bonds, or other investments in India is taxable.
Interest on NRE and FCNR accounts, however, is exempt as long as the account holder maintains NRI status.
Dividends received from Indian companies are also taxable according to applicable slab rates.
5. Income from Business or Profession Controlled in India
If a business is located in India or controlled from India, the income generated from such a business is taxable, even if the owner lives abroad.
This rule ensures that individuals cannot avoid tax merely by shifting residence overseas.
How NRIs Are Taxed: Slab Rates and Special Rules?
NRIs are generally taxed at the same slab rates as resident individuals, but with a few important differences. These differences often surprise first-time filers.
NRIs are not allowed some common deductions such as –
- Rebate under Section 87A
- Certain savings-related deductions
- Standard deductions on rental income do apply, but some other exemptions are restricted
However, NRIs can still claim major deductions such as –
- Section 80C (investments like LIC, ELSS, PPF, though PPF is allowed only for existing accounts)
- Section 80D (health insurance)
- Section 80G (donations)
Another major difference is that many types of income for NRIs are taxed at special rates, especially capital gains and investment income.
Tax Filing Requirements for NRIs
Whether or not an NRI needs to file an income tax return in India depends on the nature and amount of income earned.
If the total taxable income in India exceeds the basic exemption limit, filing an income tax return becomes mandatory.
NRIs must have valid credentials, such as a PAN, to file the return. Many NRIs choose to file returns even when not mandatory because it helps in cases like –
- Claiming a refund of excess tax paid
- Maintaining tax records for future property transactions
- Compliance when earning rental or investment income
Another point to note is that NRIs cannot file certain return forms that are meant for resident taxpayers; instead, they must use ITR-2 or ITR-3, depending on the type of income.
Double Taxation Relief for NRIs
Many NRIs worry about being taxed in both India and the country where they currently live. India has signed Double Taxation Avoidance Agreements (DTAA) with many countries to prevent this from happening.
Under these agreements, NRIs can claim relief through –
- Exemption method (income taxed only in one country)
- Tax credit method (tax paid in one country is adjusted in another)
This ensures that NRIs do not face unfair double taxation.
Conclusion
Income tax for NRIs in India is designed with clarity and fairness, ensuring that only income earned or received in India becomes taxable. The most important step for every NRI is to correctly determine residential status because it forms the basis of taxation.
Once this is established, understanding taxable income categories such as salary for services in India, rental income, capital gains, and Indian investment earnings becomes much easier.
Although the rules for NRIs differ in certain aspects from those of resident taxpayers, the overall objective remains the same: ensuring transparency in income earned within India while avoiding taxation on income generated abroad.
For NRIs with regular income flowing from India, staying informed about these tax rules helps avoid confusion, ensures compliance, and supports smooth financial management across borders.
