You earn in dollars, pounds, or dirhams. You have an NRO account with some interest, maybe a flat you rent out, and a few mutual fund SIPs running. Tax season arrives and you’re staring at TDS entries in Form 26AS, wondering what you actually owe India.
Here’s the starting point: as an NRI, India only taxes your India-sourced income. Your foreign salary, overseas savings, pension from your employer abroad — none of that is taxable in India. Once you understand what falls inside the India tax net, the rest becomes manageable.
This guide walks you through the full picture — residential status, taxable income types, TDS, tax slabs, DTAA relief, ITR filing, and deductions — all updated for FY 2025-26.
How Your Residential Status Decides Everything
Before a single rupee is taxed, India needs to determine whether you’re a resident or non-resident. This classification drives your entire tax obligation.
Under Section 6 of the Income Tax Act, you’re treated as an NRI if you’ve spent fewer than 182 days in India during the financial year. For Indian citizens going abroad for employment, this 182-day threshold is the only test that applies — the usual 60-day alternative rule doesn’t apply to you.
There’s one exception to watch. If your Indian income exceeds ₹15 lakh in a financial year, the threshold drops to 120 days. Spend 120 days or more in India with that income level, and you could be reclassified as Resident but Not Ordinarily Resident (RNOR). The good news: RNOR status still means your foreign income stays outside India’s tax net. But it’s worth tracking your days if you visit India frequently.
The practical takeaway: count your days in India each financial year. Maintain records — boarding passes, passport stamps, travel itineraries. This one step prevents the most common NRI tax complication.
What's Taxable for NRIs — and What's Not
This is where most confusion lives. Here’s the clean split.
Taxable in India: Income that arises, accrues, or is received in India. This includes interest on NRO savings and fixed deposits, rental income from Indian property, capital gains from selling Indian shares or property, dividends from Indian companies, and salary earned for services rendered in India.
Not taxable in India: Your foreign salary, foreign rental income, interest on overseas bank accounts, and gains from selling foreign assets. Your NRE and FCNR fixed deposit interest is also fully exempt from Indian tax — one of the most valuable NRI benefits.
We regularly meet NRIs who assume they owe Indian tax on their entire global income. They don’t. Equally, we meet NRIs who assume their NRO interest is “too small to matter.” It isn’t — TDS gets deducted regardless, and without filing an ITR, you can’t claim refunds.
TDS: The Tax You Pay Before You Even File
For NRIs, Tax Deducted at Source is the primary tax collection mechanism. Unlike residents who may self-assess, NRIs face automatic TDS on almost every type of Indian income:
NRO account interest: TDS at 30% (plus 4% cess = 31.2% effective rate). This applies from the first rupee — there’s no ₹40,000 threshold that residents enjoy.
Rental income: TDS at 30% (plus cess, effective 31.2%). Your tenant is legally required to deduct this before paying you — even if the monthly rent is modest. No minimum threshold applies for NRI landlords.
Capital gains on equity/mutual funds: Short-term at 20% (changed from 15% in July 2024 Budget), long-term at 12.5% above the ₹1.25 lakh annual exemption. For a detailed breakdown by fund type, see our guide on how mutual funds are taxed for NRIs.
Capital gains on property: For properties held over two years, TDS is deducted by the buyer. For properties purchased before 23 July 2024, the rate is 20% with indexation; for properties purchased after that date, it’s 12.5% without indexation. Short-term property gains are taxed at slab rates.
Dividends: TDS at 20% (plus surcharge and cess).
The critical NRI difference: residents get TDS adjusted against the basic exemption limit. NRIs don’t. If your total Indian income is below the threshold, TDS is still deducted — and the only way to get it back is by filing your ITR.
Reducing TDS legally: You can apply for a Lower or Nil Deduction Certificate using Form 13 with the Income Tax Department. This is especially useful for NRIs selling property, where TDS on the full sale consideration can lock up significant capital. Our team handles these applications as part of the advisory process — it’s one of those things that saves real money when done proactively.
Tax Slabs: New Regime vs Old Regime
NRIs use the same income tax slabs as resident Indians. The new tax regime is the default for FY 2025-26, but you can opt for the old regime if it benefits you.
New tax regime (default): Income up to ₹4 lakh is tax-free. Above that, rates rise gradually — 5% for ₹4–8 lakh, 10% for ₹8–12 lakh, 15% for ₹12–16 lakh, 20% for ₹16–20 lakh, 25% for ₹20–24 lakh, and 30% above ₹24 lakh. Plus 4% health and education cess on the total tax.
Old tax regime (optional): Income up to ₹2.5 lakh is tax-free, then 5% for ₹2.5–5 lakh, 20% for ₹5–10 lakh, and 30% above ₹10 lakh. This regime allows deductions under Section 80C, 80D, home loan interest under Section 24(b), and others.
Which regime works for NRIs? If you have an Indian home loan, Section 80C investments, or health insurance under 80D, the old regime may save you more. Without significant deductions, the new regime’s lower rates work better. We run both calculations for our clients before recommending — the right choice varies based on individual circumstances.
DTAA: How to Avoid Paying Tax Twice
India has Double Taxation Avoidance Agreements with more than 90 countries — including the US, UK, UAE, Australia, Canada, Singapore, and Germany. The full list is maintained by the Income Tax Department.
DTAA works through two mechanisms. Under the exemption method, income is taxed in only one country. Under the tax credit method, if income is taxed in both countries, you claim credit in your country of residence for tax already paid in India. Several Gulf countries have 0% treaty rates with India on certain income types, which can mean significant savings.
What you need: A Tax Residency Certificate (TRC) from your country of residence and a completed Form 10F filed on the Indian income tax portal. Without these, your payer deducts TDS at full domestic rates rather than the lower treaty rate. Get these sorted before your income starts flowing. Our pre-investment checklist covers the timing in detail.
Filing Your ITR: When It's Mandatory and Why It Matters Anyway
Filing is mandatory if your Indian income exceeds ₹2.5 lakh (old regime) or ₹4 lakh (new regime) in a financial year. Capital gains from selling Indian assets trigger mandatory filing regardless of the amount.
Even if your income is below these limits, filing is worth doing if any TDS has been deducted. Without filing, you cannot get excess TDS refunded. We see this every year — NRIs with NRO interest below the exemption limit who’ve had 30% TDS deducted and never filed to claim it back.
NRIs must use ITR-2 (or ITR-3 if they have business income in India). ITR-1 and ITR-4 are not available to NRIs. The due date for FY 2025-26 is 31 July 2026, and e-verification is required after submission. Check Form 26AS on the e-filing portal to ensure all TDS entries match before you file.
2026 update worth noting: The new Income Tax Rules 2026 introduced Rule 9, which gives tax authorities clearer guidelines to estimate India-linked income when documentation is incomplete. For NRIs with rental income, property transactions, or business connections in India, this makes clean record-keeping more important than ever.
Deductions NRIs Can Still Claim
Under the old tax regime, NRIs can claim most deductions available to residents: Section 80C up to ₹1.5 lakh (life insurance, ELSS, home loan principal), Section 80D up to ₹25,000 for health insurance (₹50,000 for senior citizen parents), home loan interest under Section 24(b) up to ₹2 lakh, and a standard 30% deduction on rental income.
Under the new tax regime, deductions are minimal — mainly the ₹75,000 standard deduction for salaried individuals and employer NPS contributions.
One restriction: NRIs cannot open new PPF accounts. Existing accounts opened while you were a resident can continue until maturity, but no new contributions are allowed.
What This Means for Your Investments
Taxation shapes how you structure investments, which accounts you use, and when you redeem. The difference between routing an investment through your NRE vs NRO account changes your tax position entirely. Timing a mutual fund redemption can shift gains from short-term (20% TDS) to long-term (12.5% TDS).
For an NRI with ₹50 lakh across mutual funds, rental income, and NRO FDs, the difference between well-structured and poorly-structured tax planning can easily be ₹1–2 lakh per year.
If you’re unsure whether your setup is optimised — or if you’ve never filed an Indian ITR despite having TDS deducted — we can review your complete India financial picture and help you get it right.
Frequently Asked Questions
Do NRIs pay tax on foreign income in India?
No. NRIs pay tax only on income that arises, accrues, or is received in India. Your foreign salary, overseas bank interest, and gains from foreign investments are not taxable in India. Only India-sourced income — such as NRO interest, Indian rental income, and capital gains from Indian assets — falls under Indian tax law.
Is NRE fixed deposit interest taxable for NRIs?
No. Interest earned on NRE and FCNR fixed deposits is completely tax-free in India for NRIs. However, NRO fixed deposit interest is taxable at 30% (plus cess), and TDS is deducted automatically.
Can NRIs claim the Section 87A tax rebate?
Under the new tax regime, individuals with taxable income up to ₹12 lakh can benefit from the Section 87A rebate. However, this rebate does not apply to special rate income like capital gains. If your Indian income is primarily from capital gains, the rebate may not help. It’s best to calculate both scenarios before filing.
What happens if an NRI doesn't file an ITR in India?
If your Indian income exceeds the basic exemption limit and you don’t file, you risk penalties and interest on unpaid taxes. More practically, you lose the ability to claim refunds on excess TDS — which for many NRIs is the bigger cost. If you’ve had TDS deducted on NRO interest or rental income but your total Indian income is below the exemption limit, you’re effectively overpaying tax with no way to recover it without filing.
How does DTAA benefit NRIs in the UAE or Gulf countries?
India has DTAA agreements with the UAE, Saudi Arabia, Kuwait, Qatar, and other Gulf nations. Several treaties specify 0% rates on certain income types. You can use DTAA provisions to ensure you’re not taxed higher than treaty rates. A Tax Residency Certificate and Form 10F are essential to claim these benefits.
Disclaimer: This blog is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws and rates are subject to change. NRIs should consult a qualified tax professional for advice specific to their individual circumstances. Mutual fund investments are subject to market risks — read all scheme-related documents carefully before investing.
