Let’s explore the complexities of NRI taxation can be daunting. Whether you’re an NRI (Non-Resident Indian) or planning to become one, understanding the tax implications is crucial. This guide answers the top 7 frequently asked questions about NRI taxation in 2025, providing clarity and helping you stay compliant with Indian tax laws.
How is “NRI” vs “Resident” status determined for taxes?
Determining your residential status for tax purposes is the first step in understanding your tax obligations. The Income Tax Act of India classifies individuals into three categories: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident Indian (NRI).
Resident and Ordinarily Resident (ROR)
You are considered an ROR if you meet either of the following conditions:
- You have been in India for at least 182 days in the current financial year.
- You have been in India for at least 365 days in the preceding four years and at least 60 days in the current financial year.
Resident but Not Ordinarily Resident (RNOR)
You are considered an RNOR if you meet any of the following conditions:
- You have been an NRI in 9 out of the 10 previous financial years.
- You have been in India for 729 days or less in the preceding seven financial years.
Non-Resident Indian (NRI)
You are considered an NRI if you do not meet the criteria for ROR or RNOR. This means you have spent less than 182 days in India in the current financial year and less than 365 days in the preceding four years.
Example:
Imagine you are an Indian citizen working in the United States. You visit India for 45 days in the current financial year and have been visiting India intermittently for a total of 300 days over the past four years. In this case, you would be classified as an NRI for tax purposes.
What income is taxable for NRIs in India?
NRIs are taxed differently compared to residents. While residents are taxed on their global income, NRIs are only taxed on income earned or accrued in India. Here are the types of income that are taxable for NRIs:
Income from Salary
If you receive a salary for services rendered in India, it is taxable. However, if you are employed outside India and receive a salary from a foreign employer, it is not taxable in India.
Income from House Property
Rental income from property located in India is taxable. If you have a vacant property, it is deemed to be rented out, and you are taxed on the notional rental income.
Income from Business or Profession: Income from a business or profession carried out in India is taxable. If you have a business outside India, the income from that business is not taxable in India.
Income from Capital Gains: Capital gains from the sale of assets located in India are taxable. This includes gains from the sale of property, shares, and other investments.
Income from Other Sources: Interest income from fixed deposits, savings accounts, and bonds is taxable. Additionally, income from royalty and technical services provided in India is also taxable.
Example: Suppose you are an NRI with a rental property in Mumbai. The rental income you earn from this property is taxable in India. Additionally, if you sell a piece of land in India, the capital gains from the sale are also taxable.
Do NRIs have to file Indian ITR even if income is below threshold?
Filing an Income Tax Return (ITR) is mandatory for NRIs if their total income in India exceeds the basic exemption limit. For the financial year 2024-25, the basic exemption limit for NRIs is Rs. 2.5 lakh. However, there are certain situations where NRIs should file an ITR even if their income is below the threshold:
Claiming Refund: If Tax Deducted at Source (TDS) has been deducted from your income, you should file an ITR to claim a refund.
Carry Forward Losses: If you have incurred losses from house property or capital gains, you can carry them forward to set off against future income. Filing an ITR is necessary to carry forward these losses.
Visa or Loan Applications: Some countries and financial institutions require proof of income and tax compliance for visa or loan applications. Filing an ITR can serve as proof of your income and tax compliance.
Example: Imagine you are an NRI with rental income from a property in India. The rental income is Rs. 2 lakh, which is below the basic exemption limit. However, TDS has been deducted from this income. In this case, you should file an ITR to claim a refund of the TDS.
How do Double Taxation Avoidance Agreements (DTAA) work for NRIs?
Double Taxation Avoidance Agreements (DTAA) are treaties signed between two countries to avoid taxation of the same income in both countries. India has signed DTAA with several countries, providing relief to NRIs from double taxation.
Types of Relief under DTAA: There are two methods of relief under DTAA: the Exemption Method and the Tax Credit Method.
Exemption Method: Under this method, income is taxed in only one country. For example, if you are an NRI residing in the US and earn rental income from a property in India, the income may be taxed only in India, and you may be exempt from paying tax on this income in the US.
Tax Credit Method: Under this method, you pay tax in both countries but can claim a credit for the tax paid in one country against the tax payable in the other country. For example, if you pay tax on your rental income in India, you can claim a credit for this tax against the tax payable on the same income in the US.
Example: Suppose you are an NRI residing in the UK and earn interest income from a fixed deposit in India. Under the DTAA between India and the UK, the interest income may be taxed only in India, and you may be exempt from paying tax on this income in the UK.
How does TDS apply to NRI income—interest, rent, property sale?
Tax Deducted at Source (TDS) is a mechanism where tax is deducted at the source of income. For NRIs, TDS is applicable on various types of income, including interest, rent, and property sales.
TDS on Interest Income: Banks and financial institutions deduct TDS at the rate of 30% (plus applicable surcharge and cess) on interest income earned by NRIs. This includes interest from fixed deposits, savings accounts, and bonds.
TDS on Rental Income: Tenants deduct TDS at the rate of 30% (plus applicable surcharge and cess) on rental income paid to NRIs. The tenant is responsible for deducting TDS and depositing it with the government.
TDS on Property Sale: When an NRI sells a property in India, the buyer is responsible for deducting TDS at the rate of 20% (plus applicable surcharge and cess) on the sale consideration. The buyer must deposit the TDS with the government and provide a TDS certificate to the NRI.
Example: Imagine you are an NRI with a fixed deposit in an Indian bank. The bank pays you an interest of Rs. 1 lakh. The bank will deduct TDS at the rate of 30%, which amounts to Rs. 30,000, and deposit it with the government. You will receive the remaining Rs. 70,000.
What are capital gains tax rules for NRIs selling Indian assets?
Capital gains tax is applicable on the sale of assets located in India. For NRIs, capital gains can be classified into two types: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).
Short-Term Capital Gains (STCG): STCG arises from the sale of assets held for less than 36 months. For example, if you sell a property within 36 months of purchase, the gains are considered STCG. STCG is taxed at the applicable slab rates.
Long-Term Capital Gains (LTCG): LTCG arises from the sale of assets held for more than 36 months. For example, if you sell a property after 36 months of purchase, the gains are considered LTCG. LTCG is taxed at a flat rate of 20% (plus applicable surcharge and cess) with the benefit of indexation.
Indexation: Indexation is a process that adjusts the purchase price of an asset for inflation, reducing the taxable capital gains. The Cost Inflation Index (CII) is used for this adjustment.
Example: Suppose you are an NRI who purchased a property in India in 2010 for Rs. 50 lakh and sold it in 2025 for Rs. 2 crore. The property was held for more than 36 months, so the gains are considered LTCG. Using the CII, the purchase price is adjusted for inflation, reducing the taxable capital gains. The LTCG tax is calculated at 20% (plus applicable surcharge and cess) on the adjusted gains.
Can NRIs claim Foreign Tax Credit (FTC) in India?
Foreign Tax Credit (FTC) is a mechanism that allows NRIs to claim credit for taxes paid in a foreign country against their tax liability in India. This helps avoid double taxation of the same income.
Eligibility for FTC: To claim FTC, you must be a resident of India and have paid tax on foreign income in a country with which India has a DTAA. The foreign tax must be similar to the tax payable in India.
Process for Claiming FTC: To claim FTC, you need to provide proof of tax paid in the foreign country, such as a tax residency certificate and a tax payment receipt. You can claim FTC while filing your ITR in India.
Example: Imagine you are an NRI residing in the US and earn rental income from a property in India. You pay tax on this rental income in the US. Under the DTAA between India and the US, you can claim FTC in India for the tax paid in the US. You need to provide proof of tax paid in the US while filing your ITR in India.
Final Takeaways & Next Steps
Understanding NRI taxation is crucial for compliance and optimizing your tax liability. Here are the key takeaways:
- Determine your residential status for tax purposes.
- Know the types of income taxable for NRIs in India.
- File an ITR even if your income is below the threshold in certain situations.
- Leverage DTAA to avoid double taxation.
- Be aware of TDS applicability on various types of income.
- Understand the capital gains tax rules for selling Indian assets.
- Claim Foreign Tax Credit to avoid double taxation of the same income.
Next Steps:
Consult a Tax Advisor: Given the complexities of NRI taxation, it is advisable to consult a tax advisor who specializes in NRI taxation. They can provide personalized advice and help you stay compliant with Indian tax laws.
Stay Updated: Tax laws and regulations are subject to change. Stay updated with the latest developments in NRI taxation to ensure compliance and optimize your tax liability.
Plan Ahead: Tax planning is crucial for NRIs. Plan your investments and income sources to minimize your tax liability and maximize your returns.
By understanding and addressing these frequently asked questions, you can navigate the complexities of NRI taxation with confidence and ensure compliance with Indian tax laws.
