Tax for NRIs in India: What Income Is Taxable?

With increasing global mobility, many Non-Resident Indians (NRIs) earn income across multiple jurisdictions. Understanding tax for NRIs in India is essential to ensure compliance with the Income-tax Act, 1961 and to avoid penalties, double taxation, or reporting errors.

Unlike residents, NRIs are taxed in India only on income that is received, deemed to be received, accrued, or deemed to accrue in India. However, the scope of taxable income often creates confusion, especially in cases involving property, investments, salary, or capital gains.

This article provides a comprehensive and legally accurate overview of what income is taxable for NRIs in India, the statutory framework, procedural requirements, judicial interpretations, and practical implications under Indian law.

Conceptual Overview: Who Is an NRI for Tax Purposes?

Under Section 6 of the Income-tax Act, 1961, residential status determines tax liability in India. An individual qualifies as a Non-Resident if they do not meet the prescribed stay conditions:

An individual is treated as a resident if:

• They stay in India for 182 days or more during the financial year; or

• They stay for 60 days or more in the financial year and 365 days or more in the preceding four years (subject to special rules for Indian citizens and Persons of Indian Origin).

If these conditions are not satisfied, the individual is classified as an NRI.

Scope of Taxation for NRIs

As per Section 5(2):
An NRI is taxed in India only on income that:

1. Is received or deemed to be received in India, or

2. Accrues or arises or is deemed to accrue or arise in India.

Foreign income earned and received outside India is not taxable in India.

Statutory Framework Under Indian Law

The taxation of NRIs is governed by the following provisions:

• Income-tax Act, 1961

  • Section 5 – Scope of total income

  • Section 6 – Residential status

  • Section 9 – Income deemed to accrue or arise in India

  • Chapter XII-A – Special provisions for NRIs

• Double Taxation Avoidance Agreements (DTAAs) under Section 90

• Foreign Exchange Management Act (FEMA), 1999 – Relevant for repatriation and compliance

• Income-tax Rules, 1962

Constitutional Basis

Under Article 265 of the Constitution of India, no tax shall be levied or collected except by authority of law, ensuring that NRI taxation follows statutory provisions strictly.

What Income Is Taxable for NRIs in India?

The following categories generally fall within the taxable scope for NRIs:

1. Salary Income

Salary is taxable in India if:

• It is earned for services rendered in India, regardless of where it is paid; or

• It is received in India.

Example:
If an NRI works abroad but receives salary directly into an Indian bank account for services performed outside India, it may still be taxable depending on receipt and accrual principles.

Relevant provision: Section 9(1)(ii) – Salary earned in India is deemed to accrue in India.

2. Income from House Property

Rental income from property located in India is fully taxable.

Tax treatment:

• Standard deduction of 30% under Section 24

• Deduction for interest on home loan (subject to limits)

• Tenant must deduct TDS at 30% under Section 195 if paying rent to an NRI

Capital gains arising from sale of property in India are also taxable (discussed below).

3. Capital Gains

NRIs are liable to tax on capital gains from transfer of capital assets located in India, such as:

• Immovable property

• Shares of Indian companies

• Mutual funds

• Securities

Tax Rates (indicative):

• Long-term capital gains (LTCG) on property: 20% with indexation

• LTCG on listed securities: 10% above prescribed threshold

• Short-term capital gains: As per applicable rates

The buyer is required to deduct TDS under Section 195.

4. Interest Income

The following interest income is taxable in India:

• Interest from NRO accounts

• Fixed deposits with Indian banks

• Corporate bonds or debentures

However:

• Interest on NRE and FCNR accounts is exempt under Section 10(4), provided the individual qualifies as an NRI under FEMA.

5. Business or Professional Income

Income from a business controlled or operated in India, or professional services rendered in India, is taxable.

Under Section 9(1)(i), income from a business connection in India is deemed to accrue in India.

6. Dividend Income

Dividend received from Indian companies is taxable in the hands of NRIs at applicable rates, subject to TDS under Section 195 and DTAA relief where available.

7. Other Income

The following are also taxable if sourced in India:

• Pension received from India

• Family pension

• Income from Indian investments

• Royalty or technical fees (Section 9)

Income Not Taxable for NRIs in India

The following categories are generally not taxable:

• Salary earned and received outside India for services rendered outside India

• Foreign business income earned abroad

• Capital gains from assets located outside India

• Interest on NRE/FCNR accounts (subject to conditions)

Rights, Duties, and Legal Obligations

NRIs must comply with the following obligations:

PAN Requirement

A Permanent Account Number (PAN) is mandatory for most financial transactions and tax filings.

Filing Income Tax Returns

NRIs must file a return if:

• Total taxable income exceeds the basic exemption limit, or

• They claim a refund, or

• TDS deducted exceeds actual liability.

Return filing is governed by Section 139.

TDS Compliance

NRIs often face higher TDS rates. They may:

• Apply for a lower or nil TDS certificate under Section 197

• Claim refund while filing returns.

Procedural Aspects and Legal Mechanisms

Step-by-Step Tax Compliance for NRIs

1. Determine residential status under Section 6

2. Identify income sourced or accrued in India

3. Check applicable DTAA provisions

4. Calculate tax liability

5. Verify TDS deductions

6. File income tax return electronically

7. Claim refund or credit for foreign taxes (if applicable)

DTAA Relief

India has signed DTAAs with multiple countries to prevent double taxation.

Relief methods:

• Tax credit method

• Exemption method

NRIs must submit:

• Tax Residency Certificate (TRC)

• Form 10F (if required)

Judicial Interpretation and Landmark Case Laws

CIT v. Eli Lilly & Co. (India) Pvt. Ltd. (2009) – Supreme Court

The Court clarified that salary for services rendered in India is taxable in India, even if paid abroad.

Vodafone International Holdings BV v. Union of India (2012)

The Supreme Court examined the scope of income deemed to accrue in India under Section 9, highlighting the territorial nexus principle.

Morgan Stanley & Co. Inc. v. DIT (2007)

The Court interpreted the concept of business connection and permanent establishment for foreign entities operating in India.

These judgments reinforce that the source and territorial nexus determine taxability.

Practical Implications for NRIs

Property Transactions

• Higher TDS rates apply

• Capital gains planning is important

• Repatriation subject to FEMA and tax clearance

Investment Planning

• Prefer NRE/FCNR accounts for tax efficiency

• Understand DTAA benefits

Employment Considerations

• Salary structuring must consider place of service and receipt

• Avoid unintended tax residency due to extended stay in India

Documentation

Maintain:

• Passport travel records

• Bank statements

• Form 16A (TDS certificates)

• TRC and foreign tax documents

Common Misconceptions and Clarifications

Frequently Asked Questions (AEO-Optimized)

1. Is foreign salary taxable for NRIs in India?
No, if the salary is earned and received outside India for services rendered outside India.

2. Is rental income from Indian property taxable for NRIs?
Yes, it is fully taxable and subject to TDS.

3. Do NRIs need to file income tax returns in India?
Yes, if taxable income exceeds the exemption limit or if a refund is claimed.

4. Is interest on NRE accounts taxable?
No, it is exempt if NRI status is maintained under FEMA.

5. Can NRIs avoid double taxation?
Yes, through DTAA benefits and foreign tax credit mechanisms.

6. What is the TDS rate on property sale by an NRI?
Typically 20% for long-term gains plus surcharge and cess, subject to actual capital gains calculation.

7. Is dividend income from Indian companies taxable for NRIs?
Yes, it is taxable and subject to TDS.

Emerging Trends and Legal Developments in India

Increased Reporting and Compliance

Recent years have seen:

• Enhanced information sharing under global tax frameworks (CRS, FATCA)

• Greater scrutiny of cross-border transactions

• Digital filing and faceless assessments

Changes in Residency Rules

Amendments introduced the concept of:

• Deemed residency for certain Indian citizens with significant economic presence

DTAA Renegotiations

India continues to update treaty provisions to:

• Prevent treaty abuse

• Align with OECD Base Erosion and Profit Shifting (BEPS) standards

Digital Tax Administration

The Income Tax Department now provides:

• Online return filing

• Pre-filled data

• E-verification systems for NRIs

Understanding tax for NRIs in India requires careful attention to residential status, source of income, and statutory provisions under the Income-tax Act, 1961. NRIs are taxed only on income that is received, accrued, or deemed to accrue in India, including salary for services performed in India, rental income, capital gains from Indian assets, interest from certain accounts, and business income linked to India.

Compliance involves determining taxability accurately, ensuring proper TDS credit, leveraging DTAA relief where applicable, and maintaining proper documentation. Judicial decisions and statutory provisions consistently apply the territorial nexus principle and link taxation to income sourced in India.

This framework helps NRIs manage their financial and legal obligations effectively while avoiding unnecessary tax exposure and ensuring compliance with Indian law.