NRI Taxation in India: A Practical Primer

For Indians living and working abroad, the most common tax question is also the most misunderstood: what exactly do I owe to India? The reassuring answer is that an NRI is not taxed on worldwide income the way a resident is. India taxes a non-resident only on income that has a connection to India — earned here, accrued here, or received here. Everything you earn and keep abroad is, broadly, outside India's reach.

The complications lie in the details: how your residential status is decided, which bank accounts are taxable, why TDS on your Indian income is so high, and how a DTAA stops the same money being taxed twice. This primer covers each, with a worked example in rupees.

It Is About Residence, Not Citizenship

Indian income tax does not care about your passport. It cares about your residential status for the financial year, which is decided purely by how many days you were physically present in India. There are three categories:

• Resident and Ordinarily Resident (ROR): taxed on global income.
• Resident but Not Ordinarily Resident (RNOR): taxed on Indian income plus certain foreign income; a transitional status often applying to returning NRIs.
• Non-Resident (NRI): taxed only on Indian-sourced income.

The basic test for a financial year (1 April to 31 March):

• You are a resident if you are in India for 182 days or more in that year; or
• You are in India for 60 days or more in that year and 365 days or more across the four preceding years.

If you meet neither, you are a non-resident for that year. There are relaxations of the 60-day test for citizens who leave India for employment abroad or who visit India, which extend the threshold — this is why genuine NRIs working overseas usually retain non-resident status even on long home visits. Because the count is day-by-day, NRIs who spend extended time in India should track their days carefully; crossing the threshold can flip them to resident and pull global income into the Indian net.

What Income India Can Tax for an NRI

As a non-resident, you are taxed in India on income that is:

• Earned or accrued in India — for example, salary for services rendered in India, profits from a business operated in India, or professional fees for work done here.
• Received in India — income first received in an Indian bank account, even if it relates to work done elsewhere.
• From an Indian source — rent from property in India, capital gains on Indian shares or property, interest from Indian deposits (other than exempt NRE/FCNR), and dividends from Indian companies.

Salary credited abroad for work done abroad is not taxable in India for an NRI. That single principle resolves most NRI tax worries.

NRE vs NRO vs FCNR: The Account That Decides Your Tax

NRIs cannot hold ordinary resident savings accounts. They operate special accounts, and the type of account changes the tax treatment of the interest:

Account	Funded by	Currency	Interest taxable in India?	TDS?
NRE (Non-Resident External)	Foreign earnings	INR	No — exempt	No
NRO (Non-Resident Ordinary)	Indian income (rent, dividends, pension)	INR	Yes — fully taxable	Yes, higher rate
FCNR (Foreign Currency Non-Resident)	Foreign earnings	Foreign currency	No — exempt	No

The practical rule of thumb: park your overseas earnings in NRE/FCNR to keep interest tax-free, and route your India-sourced income (rent, dividends, pension) through an NRO account, accepting that its interest is taxable. Funds in an NRE account are also freely repatriable, which is an added advantage.

Why TDS on NRI Income Is So High

This surprises almost every NRI. For residents, TDS rates are modest — for instance, TDS on bank interest is 10% above a threshold. For NRIs, TDS is generally deducted at higher and often flat rates, with no basic threshold, because the department cannot easily chase a non-resident for shortfalls later. Some indicative treatments:

• NRO interest: TDS at a flat 30% (plus surcharge and cess), versus 10% for residents.
• Rent paid to an NRI: TDS deducted at higher rates than the 2%/10% applicable to residents — the tenant or property manager must deduct under the NRI-specific provisions.
• Capital gains on shares and property: TDS deducted on the gain or sale value at the applicable capital gains rate.

The high TDS often over-deducts relative to your actual liability. The remedy is to either apply for a lower-deduction certificate from the Assessing Officer, claim DTAA relief (below), or file a return and claim the refund. NRIs who never file frequently leave large refunds unclaimed.

DTAA: The Shield Against Double Taxation

If income is taxable in India and in your country of residence, you could be taxed twice. India has signed Double Taxation Avoidance Agreements (DTAAs) with most countries — the UAE, USA, UK, Singapore, Canada, Australia and many more — to prevent this.

A DTAA works in one of two ways:

• Exemption method: the income is taxed in only one country.
• Credit method: the income is taxed in both, but the country of residence gives a credit for tax already paid in India.

Beyond eliminating double tax, DTAAs often offer a lower TDS rate than the domestic Indian rate. For example, the DTAA rate on interest may be 10–15% instead of the 30% domestic flat rate on NRO interest.

To claim DTAA benefits, you generally need:

• A Tax Residency Certificate (TRC) from the tax authority of your country of residence.
• Form 10F filed electronically on the Indian income tax portal.
• A self-declaration / PAN, as required by the deductor.

Without these, the deductor must apply the higher domestic rate.

A Worked Example in Rupees

Take Rohan, an NRI software engineer based in Dubai (UAE) throughout FY 2025-26 — clearly a non-resident. His India-linked income for the year:

• NRE fixed deposit interest: ₹3,00,000 — exempt, no tax, no TDS.
• NRO savings/FD interest: ₹2,00,000 — taxable, TDS deducted.
• Rent from a flat in Pune: ₹4,80,000 gross.
• Salary in Dubai: outside India's tax net entirely.

Step 1 — Exempt income. The ₹3,00,000 NRE interest is dropped immediately. It is not part of taxable income.

Step 2 — NRO interest. Taxable. Domestic TDS would be 30% + cess ≈ ₹62,400 on ₹2,00,000. But under the India–UAE DTAA, with a valid TRC and Form 10F, the TDS rate on interest is lower (say 12.5%), so the bank deducts about ₹25,000 instead. Rohan's actual tax depends on his total Indian income and slab.

Step 3 — Rental income. Rent is computed like any rental income in India: a standard 30% deduction applies.

• Gross rent: ₹4,80,000
• Less standard deduction (30%): ₹1,44,000
• Income from house property: ₹3,36,000
• The tenant must deduct TDS on rent paid to an NRI at the applicable NRI rate.

Step 4 — Total taxable Indian income:

₹2,00,000 (NRO interest) + ₹3,36,000 (rent) = ₹5,36,000

NRE interest of ₹3,00,000 stays out. Rohan applies the slab rates (he can choose old or new regime) to ₹5,36,000, then adjusts the TDS already deducted on NRO interest and rent. Because TDS was deducted at flat-ish rates, he may well be due a refund — which he can only claim by filing an Indian return.

This example shows the three NRI realities at once: NRE interest escapes tax, NRO and rental income are taxed, DTAA cuts the punishing TDS rate, and filing a return is how the numbers are squared.

The RNOR Status: A Cushion for Returning NRIs

NRIs who move back to India do not jump straight from non-resident to fully taxed resident. There is a transitional category — Resident but Not Ordinarily Resident (RNOR) — that acts as a soft landing.

You are generally RNOR for a year if you have been a non-resident in 9 of the 10 preceding years, or your stay in India in the preceding 7 years totals 729 days or less, among other conditions. While RNOR:

• Your foreign income is largely not taxed in India (unless it is derived from a business controlled in or a profession set up in India).
• Only your Indian income is taxed, much like an NRI.

This status typically lasts two to three years after return, giving a returning NRI time to bring back overseas earnings, mature foreign deposits, and reorganise investments before global income becomes taxable as an ordinary resident. Planning the return around the RNOR window can save a substantial amount, so returning NRIs should map out their residential status year by year rather than assuming an abrupt switch.

A Note on Selling Indian Assets as an NRI

Two NRI transactions deserve special care because the TDS is heavy and front-loaded:

• Selling Indian property: the buyer must deduct TDS on the sale consideration paid to an NRI at the applicable capital gains rate — far higher than the 1% that applies when the seller is a resident. The NRI then claims exemptions (such as reinvestment under Section 54/54EC) and recovers the excess as a refund by filing a return. Without filing, the high TDS becomes a sunk cost.
• Selling Indian shares or mutual funds: capital gains are taxable in India, and TDS may be deducted. The same DTAA and refund mechanics apply.

In both cases, the NRI can apply to the Assessing Officer for a lower or nil deduction certificate before the transaction, so that TDS is deducted closer to the real liability rather than over-deducted up front.

Do NRIs Need to File a Return?

You must file an Indian return if:

• Your taxable income earned/received in India exceeds the basic exemption limit; or
• You want to claim a refund of excess TDS (very common for NRIs); or
• You want to carry forward losses (e.g., capital losses); or
• Specific high-value transaction conditions are met.

NRIs cannot use the simplest ITR-1 form if they have capital gains or more than one house property — they typically file ITR-2. For which form fits, see which ITR form to use. Even when most income is exempt NRE interest, filing to reclaim NRO/rent TDS usually makes financial sense.

Common Mistakes

Assuming citizenship decides tax. It does not. Residential status, based on days in India, is what determines your liability. An Indian citizen can be a non-resident; a foreign citizen can be a resident.

Miscounting days in India. A few extra weeks of home visits can tip you over the threshold into resident status, suddenly exposing your global income to Indian tax. Track your travel dates.

Holding the wrong account. Routing foreign earnings through an NRO account makes the interest taxable when an NRE/FCNR account would have kept it exempt.

Ignoring high TDS as if it were final. The flat NRI TDS rates often over-deduct. Claim DTAA relief upfront, or file a return to recover the excess — do not write it off.

Skipping the TRC and Form 10F. Without these, the deductor must apply the higher domestic rate, and you lose the DTAA's lower rate at source.

Not filing at all. Many NRIs assume no filing is needed because salary abroad is exempt. They then forfeit refunds on NRO interest, rent, and capital gains TDS.

What to Do Next

• Determine your residential status for the year using the day-count tests before anything else.
• Make sure overseas earnings sit in NRE/FCNR accounts (interest exempt) and India income flows through an NRO account.
• If you have NRO interest, rent, or capital gains in India, obtain a Tax Residency Certificate and file Form 10F to claim the lower DTAA TDS rate.
• File an Indian return if your Indian income crosses the exemption limit or if TDS has been over-deducted and you want a refund — usually ITR-2.
• For anything involving the sale of Indian property or shares, or borderline residency, consult a CA who handles NRI cases; the TDS and DTAA interaction is easy to get wrong.

NRI taxation is far less frightening once the core idea lands: India taxes your Indian income, not your global income. Get your residential status and account types right, lean on the DTAA, and file to recover the heavy TDS, and the system works in your favour.

Disclaimer: This article is for educational purposes only and is not tax advice. Tax rules change frequently — verify current provisions on the official income tax portal or with a qualified CA before filing.