Before calculating your income tax liability in India, the first and most important step is to determine your residential status. Your residential status decides whether only your India-sourced income is taxable in India or whether your global income may also be taxed.
For NRIs, this distinction is crucial. A person living outside India may still have income from salary, rent, bank interest, investments, property, or capital gains in India. Understanding how each type of income is taxed helps avoid penalties, excess TDS, and double taxation.
How to Determine Residential Status of an NRI
For income tax purposes, an individual’s residential status is checked for every financial year. You are generally treated as a resident in India if you satisfy any one of the following conditions:
- You stay in India for 182 days or more during the relevant financial year; or
- You stay in India for 60 days or more during the financial year and 365 days or more during the immediately preceding four financial years.
If you do not satisfy these conditions, you are treated as a Non-Resident for that financial year.
However, special relaxation is available in certain cases, such as Indian citizens leaving India for employment, Indian ship crew members, and Indian citizens or Persons of Indian Origin visiting India. In such cases, the 60-day condition may be replaced by 120 days or 182 days depending on the facts and income level.
Types of Residential Status for Individuals
For individuals, residential status is further classified into three categories:
| Residential Status |
Meaning |
Tax Impact |
| Resident and Ordinarily Resident |
A resident who also satisfies additional stay-based conditions |
Global income may be taxable in India |
| Resident but Not Ordinarily Resident |
A resident with limited past stay or non-resident history |
Indian income and certain foreign income connected with India may be taxable |
| Non-Resident |
A person who does not satisfy the basic residency conditions |
Generally, only India-sourced income is taxable |
Is Foreign Income of NRIs Taxable in India?
The taxability of foreign income depends on your residential status.
If you are a Resident and Ordinarily Resident, your global income is generally taxable in India. This includes income earned or received outside India.
If you are a Non-Resident, only income that is received, accrued, or deemed to accrue or arise in India is taxable in India. Income earned and received outside India is generally not taxable in India.
Examples of Income Taxable in India for NRIs
The following types of income are usually taxable in India for NRIs:
- Salary received in India or salary earned for services rendered in India
- Rental income from house property located in India
- Capital gains from sale of property, shares, mutual funds, or other assets situated in India
- Interest from Indian fixed deposits or NRO accounts
- Income from a business connection, asset, or source in India
Tax Treatment of Different Types of NRI Income in India
1. Salary Income
Salary income is taxable in India if the services are rendered in India. This means that even if an NRI receives salary outside India, the income may still be taxed in India if the employment services were performed in India.
Similarly, salary received in India may be taxable in India even if the services are rendered outside India.
If an Indian citizen is employed by the Government of India and provides services outside India, salary may still be taxable in India. However, specific exemptions may apply to diplomats, ambassadors, and certain government employees depending on the nature of income and applicable provisions.
Example:
Ajay works on a project in China for an Indian company. If his salary is received in India, it may be taxable in India. To avoid unnecessary tax complications, he may choose to receive the salary outside India, subject to the applicable tax laws and employment structure.
2. Income from House Property in India
Income from a house property located in India is taxable in India, even if the owner is an NRI and receives the rent in a foreign bank account.
The tax calculation for house property income is broadly similar for residents and non-residents. An NRI can generally claim deductions such as municipal taxes paid, standard deduction, and home loan interest, subject to applicable conditions.
Rental income from house property is taxed according to the applicable income tax slab rates.
TDS on Rent Paid to an NRI Landlord
If a tenant pays rent to an NRI landlord, TDS is generally required under Section 195. This applies because the payment is made to a non-resident. The tenant may also need to comply with Form 15CA and Form 15CB requirements when remitting the rent outside India.
Example:
Nandini owns a house in Goa and lives in Bangkok. She rents out the property and receives rent directly in her Bangkok bank account. Since the property is located in India, the rental income is taxable in India.
3. Income from Other Sources
Income from other sources includes interest income, dividends, gifts, and similar receipts.
For NRIs, interest earned from Indian bank accounts is treated differently depending on the type of account.
| Account Type |
Purpose |
Tax Treatment |
| NRO Account |
Used to manage income earned in India, such as rent, pension, dividends, interest, and sale proceeds |
Interest is taxable in India |
| NRE Account |
Used to park foreign earnings in India in Indian rupees |
Interest is generally exempt from tax in India |
| FCNR Account |
Foreign currency deposit account for NRIs |
Interest is generally exempt from tax in India, subject to conditions |
4. NRO, NRE, and FCNR Account Taxation for NRIs
As per FEMA rules, once a person becomes an NRI, they should not continue using a regular resident savings account in India. The existing resident account is generally converted into an NRO account.
NRO Account
A Non-Resident Ordinary account is used to manage income earned in India. This may include rent, pension, dividends, interest, gifts, and sale proceeds from immovable property in India.
Interest earned on an NRO account is taxable in India. TDS may also be deducted by the bank.
NRE Account
A Non-Resident External account is used to park foreign income in India. Deposits are made from foreign earnings and converted into Indian rupees at the applicable exchange rate.
Interest earned on an NRE account is generally exempt from tax in India, subject to eligibility conditions.
FCNR Account
A Foreign Currency Non-Resident account allows NRIs to hold deposits in foreign currency. Interest on FCNR deposits is generally exempt from tax in India, subject to applicable conditions.
5. Income from Business and Profession
Business or professional income may be taxable in India if it is connected with India. For example, income from a business set up in India, business operations carried out in India, or income arising through a business connection in India may be taxable.
For NRIs, the key question is whether the income accrues, arises, or is deemed to accrue or arise in India. If yes, it may be taxable in India.
6. Income from Capital Gains
Capital gains earned by an NRI from the transfer of assets situated in India are taxable in India.
This includes gains from:
- Sale of immovable property in India
- Sale of Indian shares
- Sale of Indian mutual funds
- Sale of securities or other Indian capital assets
TDS on Sale of Property by NRI
When an NRI sells property in India, the buyer is generally required to deduct TDS under Section 195 at the applicable rate. The exact rate depends on the nature of the asset, holding period, type of capital gain, surcharge, cess, and any applicable relief.
In certain cases, an NRI may apply for a lower or nil TDS certificate to avoid excess tax deduction.
Capital Gains Exemptions for NRIs
NRIs may be eligible to claim capital gains exemptions, subject to conditions. Common exemptions include:
- Section 54: Exemption on long-term capital gains from sale of a residential house property if reinvested in another eligible residential house property
- Section 54EC: Exemption by investing eligible long-term capital gains in specified capital gains bonds
These exemptions are subject to timelines, limits, lock-in periods, and other conditions.
7. Special Provisions for NRI Investment Income
NRIs may be eligible for special tax provisions on certain investment income and long-term capital gains from specified assets.
In some cases, investment income may be taxed at a special rate. If the NRI’s total income consists only of specified investment income or eligible long-term capital gains and proper TDS has already been deducted, the NRI may not be required to file an income tax return in India, subject to conditions.
However, filing a return may still be beneficial if excess TDS has been deducted and the NRI wants to claim a refund.
When Should an NRI File an Income Tax Return in India?
An NRI should consider filing an income tax return in India if:
- Their taxable income in India exceeds the basic exemption limit
- TDS has been deducted and they want to claim a refund
- They have capital gains from sale of property, shares, or mutual funds in India
- They want to claim deductions or capital gains exemptions
- They have income from house property in India
- They want to maintain proper tax compliance records in India
Can NRIs Avoid Double Taxation?
Yes, NRIs may be able to avoid double taxation through the Double Taxation Avoidance Agreement, also known as DTAA. India has DTAAs with many countries.
If the same income is taxable in India and another country, the NRI may be able to claim relief under the applicable DTAA. The benefit depends on the type of income, country of residence, tax residency certificate, Form 10F, and other documents.
Conclusion
For NRIs, income tax in India depends mainly on residential status and the source of income. If you are a non-resident, your foreign income is generally not taxable in India unless it is received in India or is deemed to accrue or arise in India.
However, income from Indian salary, house property, bank deposits, business connections, capital assets, and investments may be taxable in India. Since NRI tax rules involve TDS, DTAA, FEMA, capital gains exemptions, and account-specific taxation, it is advisable to review your tax position every financial year.
