Income Tax for NRI – Understanding Residential Status, Taxable Income & Indian Tax Rules

Filing income tax return is not just a legal responsibility; it's a contribution towards the nation’s development. For Non-Resident Indians (NRIs), understanding Indian tax laws is crucial, especially if you have income sources in India. While you may be living abroad for work, studies, or other reasons, your income earned or received in India may still attract tax liability under the Income Tax Act, 1961. This guide will help you understand who qualifies as an NRI, how residential status is determined, what types of income are taxable, and what tax benefits or exemptions are available.

Who is a Non-Resident Indian (NRI)?

An NRI, or Non-Resident Indian, is someone who holds Indian citizenship or is of Indian origin but resides outside India for an extended period. The reasons could be employment, education, business, or personal. However, simply living abroad doesn’t automatically make someone an NRI for tax purposes—your residential status is the deciding factor, and it must be checked for each financial year.

According to the Indian Income Tax Act, you are considered a resident of India if you were in the country for 182 days or more during the financial year, or if you spent 60 days or more in India during the financial year and at least 365 days during the four years preceding that year. For Indian citizens working abroad or crew members of Indian ships, only the 182-day condition applies. If you do not meet these conditions, you are treated as a Non-Resident for tax purposes.

What Income is Taxable for NRIs in India?

As an NRI, you are liable to pay tax only on the income that is either earned in India or received in India. Any income generated outside India is not taxed in India for NRIs.

One of the most common taxable income sources for NRIs is salary income. If the salary is earned for services rendered in India, or the payment is credited to an Indian bank account, it is taxable in India, regardless of where you currently live. Even if the employer is based abroad, the location of service and payment determines taxability.

House property income is another area where NRIs may have tax liability. If you own a property in India and earn rental income from it, this income is taxable in India. However, you can claim several benefits like a standard deduction of 30%, deduction of property taxes paid, and also the interest paid on a home loan. Principal repayment on home loans also qualifies for deduction under Section 80C.

When it comes to capital gains, any profit earned from the sale of property, mutual funds, or shares in India is taxable. Whether short-term or long-term capital gains apply depends on the duration of holding the asset. Long-term capital gains from listed equity shares and mutual funds exceeding ₹1 lakh attract tax at 10% without indexation, while short-term gains are taxed at 15%.

Another area where many NRIs earn income is from interest on bank deposits. Interest earned on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is exempt from income tax, provided you maintain NRI status. However, interest earned on NRO (Non-Resident Ordinary) accounts is fully taxable in India.

Special Tax Treatment for Certain Investments

Income generated by NRIs from specified Indian assets—when earned in foreign currency—is eligible for special tax treatment. These assets include shares in Indian companies (public or private), government securities, debentures of publicly listed Indian companies, and deposits in Indian banks and public companies. The income from such assets may be taxed at a reduced rate, but no deductions are allowed under Chapter VI-A (like Section 80C, 80D, etc.) for this type of investment income.

Conclusion

Tax rules for NRIs are slightly different but not overly complex. The key is to determine your residential status every financial year and understand which Indian income sources are taxable. While certain earnings like NRE account interest and foreign income are exempt, rental income, capital gains, and salary received in India may invite tax liability. Proper planning, record-keeping, and timely filing of ITR (if required) can help you avoid penalties and ensure compliance with Indian tax laws.

1. Is income earned abroad by an NRI taxable in India?

No, income earned and received outside India is not taxable for NRIs under Indian tax law.

2. Can NRIs claim deductions under Section 80C?

Yes, NRIs can claim deductions under Section 80C (like life insurance, PPF, tuition fees, etc.), but only on eligible investments made in India.

3. Do NRIs get the basic exemption limit of ₹2.5 lakh?

Under the new regime, yes. Under the old regime, it may not always apply—especially in cases of certain types of income like capital gains.

4. Can NRIs invest in Indian mutual funds?

Yes, NRIs can invest in Indian mutual funds. The returns (dividends or capital gains) are taxable depending on the type of fund and the duration of holding. TDS is also applicable on capital gains.

5. Can NRIs claim a refund if excess TDS is deducted?

Yes, NRIs can claim a refund of excess TDS deducted by filing an income tax return (ITR) in India for the relevant financial year.