NRI Taxation in India: TDS, DTAA, Capital Gains and ITR Explained Simply

Most NRIs worry about two things: paying tax twice on the same rupee, and not knowing what India expects from them each year. Both are solvable once you understand three things.

India taxes NRIs only on income received in India or arising from Indian sources. Three things resolve most of the confusion:

• Only Indian-source income is taxable. Foreign salary, overseas dividends, interest on foreign accounts: none of it is taxable in India.
• DTAA caps the rate and eliminates double tax. Under the tax credit method, your home country taxes the income but credits the Indian tax paid. Under the exemption method, only one country taxes it. The outcome depends on the DTAA method and home-country rules.
• Filing ITR recovers over-deducted TDS. If TDS was deducted at a higher rate than your actual liability, the difference is refundable by filing a return.

This article explains each piece in plain terms: what India taxes, the rates that apply after Finance Act 2024, how DTAA works and what to submit before income is paid, AIF taxation, and when ITR filing is mandatory. All figures reflect FY 2025-26 (AY 2026-27).

Are You an NRI? How Residential Status Is Determined

Your residential status for a financial year decides what India taxes. Get this wrong and everything else follows incorrectly.

Step 1: Are you a Resident or Non-Resident? (Section 6(1) basic conditions)

Step 2: If Resident, are you ROR or RNOR? (Section 6(6) additional conditions)

• Status is assessed every financial year and can change year to year based on days spent in India.
• For Indian citizens leaving India for employment or on a vessel, the 60-day rule in Step 1 changes to 182 days.
• NRE account interest and FCNR deposit interest remain tax-free as long as NRI status is maintained. The exemption ends when you become a resident.

What India Taxes for NRIs

India taxes NRIs only on income that is received in India or that accrues or arises from Indian sources, under Section 5(2) of the Income Tax Act. Foreign income (salary earned abroad, dividends from foreign companies, interest on overseas accounts) is not taxable in India for an NRI.

The main categories of Indian-source income for NRIs are:

• Interest from NRO savings accounts and fixed deposits
• Capital gains from the sale of Indian assets (stocks, mutual funds, property)
• Rental income from property located in India
• Dividend income from Indian companies
• Business or professional income from operations in India

NRE account interest and FCNR deposit interest are completely exempt from Indian tax, provided NRI status is maintained. This exemption disappears the moment an NRI returns to India and becomes a resident.

A quick example: what Priya owes in FY 2025-26

Priya lives in Dubai. She has an NRO fixed deposit earning Rs 1.2 lakh interest per year, a Mumbai flat rented at Rs 40,000 per month (Rs 4.8 lakh per year), and Indian equity mutual funds she is not redeeming this year. She has submitted her UAE Tax Residency Certificate and Form 10F to her Indian bank.

Priya saves Rs 22,440 per year on FD interest alone by submitting the DTAA documents in time. The rental TDS she files ITR to recover the excess, since her total Indian income may be below the threshold after standard deduction under house property rules.

TDS for NRIs: How It Works and Where It Hurts

TDS stands for Tax Deducted at Source. For NRI investors, TDS is deducted before income reaches them: from bank interest, rental payments, mutual fund redemptions, and property sale proceeds. The deducted amount is deposited with the Indian government on the NRI's behalf.

TDS is not the final tax. It is a prepayment. If the actual tax liability after filing ITR is lower than TDS already deducted, the difference is refundable. Many NRIs overpay because they never file an ITR to claim the refund.

The Section 195 Property TDS Problem

The most costly TDS misunderstanding involves property sales. Under Section 195, the buyer deducts TDS on the entire sale consideration, not on the profit. On a Rs 1 crore property sale where the actual taxable gain may be Rs 20 lakh, the buyer still deducts TDS on the full Rs 1 crore. The NRI must file ITR to claim the excess back, or apply in advance for a Lower Deduction Certificate from the assessing officer to bring TDS down to the actual liability.

TDS on Mutual Fund Redemptions for NRIs

For mutual fund redemptions, TDS is deducted at source based on fund type and gain classification:

• Equity MF (STCG): TDS at 20%
• Equity MF (LTCG): TDS at 12.5%. The Rs 1.25 lakh annual exemption applies but some AMCs withhold on the full gain; file ITR to recover the difference.
• Section 50AA funds (more than 65% in debt and money market instruments, acquired on or after 1 April 2023): gains taxed at slab rates, TDS up to 30%
• Other non-equity funds not under Section 50AA: long-term gains may be taxed at 12.5% under Section 112 with TDS at the corresponding rate

TDS rates for non-equity funds depend on fund classification, acquisition date, and holding period. Check the AMC tax note before redemption.

Surcharge on TDS

• Capital gains (Sections 111A, 112, 112A): surcharge capped at 15% regardless of total income; meaningful relief for HNI investors
• Interest and rental income: surcharge can reach 25% or 37% depending on income level

Capital Gains Tax for NRIs: The Updated Rates

The Finance (No. 2) Act, 2024, which took effect from July 23, 2024, changed capital gains rates and indexation rules significantly. These changes affect all taxpayers, but NRIs face one additional restriction that resident Indians do not.

Equity and Equity Mutual Funds

For listed equity shares and equity-oriented mutual funds where STT is paid:

• STCG (held less than 12 months): 20% flat under Section 111A. This rate increased from 15% effective July 23, 2024.
• LTCG (held 12 months or more): 12.5% on gains exceeding Rs 1.25 lakh per financial year under Section 112A. The rate increased from 10% and the exemption increased from Rs 1 lakh, both effective July 23, 2024.

• Residents with income below the exemption limit can apply the shortfall against STCG under Section 111A.
• NRIs cannot. The full 20% applies from the first rupee of gain, regardless of total income.

Non-Equity Mutual Funds and Debt Instruments

For non-equity mutual funds, debt instruments, and other specified assets:

• LTCG: 12.5% without indexation under Section 112. Indexation benefits were removed for transfers on or after July 23, 2024.
• STCG: Taxed at slab rates applicable to the NRI's total Indian income.

Property: The NRI-Specific Rule Most Articles Get Wrong

For immovable property held more than 24 months, the LTCG rate is 12.5% without indexation for all transfers on or after July 23, 2024.

For STCG on property held 24 months or less, gains are taxed at applicable slab rates, which can reach 30% plus surcharge and cess for NRIs with significant Indian income.

Capital Gains Exemptions Available to NRIs

NRIs can reduce or defer LTCG liability on property under three provisions:

Capital Gains Rates at a Glance: FY 2025-26

DTAA: How Double Taxation Actually Works and How to Stop It

India has active DTAAs with over 90 countries including the USA, UK, UAE, Canada, Australia, Singapore, and Germany. Each treaty sets a cap on the Indian withholding rate and specifies how the home country provides relief for tax already paid in India.

How DTAA Works: Two Methods

Capital Gains and DTAA: A Nuance

• Property: most DTAAs allow India to tax gains from immovable property in India. DTAA relief does not eliminate Indian capital gains tax on property sales. The home country credits the Indian tax paid.
• Mutual funds and securities: treaty treatment varies by country and asset type. Recent ITAT rulings (see below) have clarified the position for several treaty countries.
• UAE-based NRIs: since the UAE has no personal income tax, only Indian rates apply on Indian-source income, with no second layer of tax.

Two recent ITAT rulings have brought clarity on mutual fund capital gains for NRIs. In Saket Kanoi (UAE) vs DCIT (Delhi ITAT, October 2024), the Tribunal held that gains on Indian mutual fund units are not taxable in India for UAE residents, because the residual clause under Article 13(5) of the India-UAE DTAA assigns taxing rights exclusively to the country of residence. In Anushka Sanjay Shah (Singapore) vs ITO (Mumbai ITAT, March 2025), the same principle was applied under the India-Singapore DTAA.

Tax practitioners have noted that Germany, Oman, Qatar, Saudi Arabia, Kuwait, Malaysia, and France may be eligible for similar relief under the corresponding residual clauses of their DTAAs. These rulings are fact-specific, depend on the absence of a permanent establishment in India, and require proper documentary compliance. Please consult a qualified tax professional before claiming this position.

DTAA Maximum Withholding Rates for Key NRI Countries

How to Claim DTAA Benefits: The Three-Document Process

DTAA benefits are not automatic. The deducting party (bank, tenant, mutual fund) applies the standard domestic rate unless the NRI proactively submits the required documents before income is paid.

• Tax Residency Certificate (TRC): issued by the tax authority of the NRI's country of residence for the relevant financial year.
  • UAE: from the UAE Federal Tax Authority
  • USA: IRS Form 6166
  • Germany: Ansässigkeitsbescheinigung from the Finanzamt. Germany's tax year (Jan–Dec) differs from India's FY (Apr–Mar), so German NRIs typically need TRCs for both calendar years covering the Indian FY.
• Form 10F: A self-declaration form filed electronically on the Income Tax India portal. Since November 2022, Form 10F must be filed online and requires IT portal registration even without a PAN in some cases.
• Beneficial ownership declaration: A self-declaration that the NRI is the beneficial owner of the income and that it is not attributable to a permanent establishment in India.

These documents must reach the deducting party before income is distributed. Submitting them after TDS has been deducted at the higher rate requires an ITR filing and a refund claim.

Countries Without DTAA: Where Relief Must Come From

• Section 91 (unilateral relief) is available only to Indian residents, not NRIs.
• For NRIs in non-treaty countries, India taxes Indian-source income at full domestic rates.
• Relief depends on whether the home country grants a foreign tax credit for Indian tax already paid.

How to File ITR as an NRI

• Old regime: mandatory above Rs 2.5 lakh
• New regime (default): mandatory above Rs 4 lakh
• Due date FY 2025-26: July 31, 2026 (unless CBDT extends)
• Even below these limits, filing ITR is the only mechanism to claim a TDS refund.

Even below these limits, filing ITR is the only mechanism to claim a refund of excess TDS. Many NRIs with modest Indian income still have TDS deducted on NRO accounts at 30% and are entitled to a full or partial refund.

• Section 87A rebate: not available to NRIs
• Resident Indians with income up to Rs 12 lakh pay zero tax under the new regime after the rebate. NRIs do not get this benefit.
• Tax applies from the first rupee above the exemption limit.

Which ITR Form for NRIs

• ITR-1 (Sahaj): Not available to NRIs. This form is for resident individuals only.
• ITR-2: The standard form for NRIs with income from salary, house property, capital gains, or foreign income. Most NRI investors file ITR-2.
• ITR-3: For NRIs who also have business or professional income from India.

Documents Needed for ITR Filing

• PAN card (mandatory)
• Form 26AS and Annual Information Statement (AIS) from the IT portal: shows all TDS deducted against the PAN
• Form 16A: TDS certificate for interest and other income from banks
• Capital gains statement from brokers or AMCs
• Form 64C from AIF (for AIF investors)
• Tax Residency Certificate and Form 10F (if claiming DTAA)
• Details of foreign bank accounts (mandatory disclosure in ITR-2)
• Schedule AL: details of assets and liabilities, where total income exceeds Rs 50 lakh. For NRIs and RNORs, only India-located assets are generally reported.

• New regime is the default for NRIs. To use the old regime, actively opt out when filing.
• New regime is simpler for NRIs with few India-based deductions.
• Old regime may be better for NRIs with significant 80C investments (ELSS, life insurance) or home loan interest deductions. Run a comparison before filing.

AIF Taxation for NRIs: Pass-Through, TDS and Category III Complexity

NRIs investing in Alternative Investment Funds (AIFs) in India face a more layered version of the double taxation challenge. The tax treatment depends on the AIF category.

Category I and Category II AIFs are pass-through structures. Income flows to investors and is taxed in their hands by nature (capital gains, interest, or dividend rates). TDS is deducted by the fund trustee under Section 194LBB before distribution.

Category III AIFs structured as trusts are typically taxed at the fund level at the Maximum Marginal Rate (approximately 42.744% for FY 2025-26: 30% base + 37% surcharge + 4% cess). The investor receives post-tax distributions. Check the fund's tax note before committing capital.

For NRI investors in Category I and II AIFs, DTAA can reduce the TDS rate on distributions. The fund must receive the NRI's TRC and Form 10F before the distribution date. Late submission means TDS is deducted at the higher domestic rate and a refund must be claimed through ITR.

For capital gains distributions from AIFs, surcharge is capped at 15% under Sections 111A, 112, and 112A, a meaningful relief for HNI NRI investors in equity-focused AIFs. This cap does not apply to interest income distributions, where surcharge can rise to 25% or 37% depending on income level.

Final Thoughts

The July 2024 capital gains changes were the most significant in over a decade. NRIs face one asymmetry residents do not: no indexation option on property, written directly into the legislation. Understanding this before transacting matters more than understanding it after.

For NRIs with multiple income types, AIF investments, property sales, or cross-border business income, the interaction between DTAA, surcharge, and different income heads makes the effective tax rate difficult to estimate without a full computation. Please consult a SEBI-registered investment adviser and a qualified tax professional before making investment decisions.

FAQs

1. How can I avoid double taxation on my India investments as an NRI?

Submit a Tax Residency Certificate and Form 10F to the bank, AMC, or paying party before income is distributed. India then deducts TDS at the lower DTAA rate, and your home country credits the Indian tax paid against your local liability. Please consult a SEBI-registered investment adviser for guidance specific to your treaty country and income type.

2. What is the capital gains tax rate for NRIs selling property in India?

For property held more than 24 months and sold on or after July 23, 2024, the LTCG rate is 12.5% without indexation under Section 112. NRIs cannot use the dual-computation option (20% with indexation vs 12.5% without) available to resident individuals. The second proviso to Section 112(1)(a) applies only to resident individuals and HUFs. For property held 24 months or less, gains are taxed at applicable slab rates.

3. What is the tax rate on dividends from Indian companies for NRIs?

Dividend income from Indian companies is taxable for NRIs. TDS is deducted at 20% where PAN is provided. Under DTAA, many treaty countries allow a reduced rate: India-UAE and India-Germany DTAAs both cap dividend withholding at 10%, and the India-USA DTAA caps it at 15 to 25% depending on the shareholding level. Claiming DTAA requires submitting a TRC and Form 10F to the company's registrar or paying bank before the dividend record date.

4. Is TDS on NRO account interest refundable?

Yes. TDS at 30% plus cess is deducted on NRO account interest by default. If the actual tax liability is lower (because the NRI's total Indian income falls below the basic exemption limit or because a lower DTAA rate applies), the excess TDS is refundable by filing ITR. NRIs who do not file ITR leave this money with the government permanently. Alternatively, DTAA documents submitted to the bank in advance reduce TDS to the treaty rate before deduction occurs.

5. How is AIF income taxed for NRIs?

Category I and II AIFs are pass-through structures; income is taxed at the investor level with TDS deducted under Section 194LBB. Category III AIFs structured as trusts are taxed at the fund level at approximately 42.744% MMR. DTAA benefits on distributions require TRC and Form 10F submitted to the fund before the distribution date.

6. Do NRIs need to file ITR in India even if TDS has already been deducted?

ITR filing is mandatory if total Indian income exceeds Rs 4 lakh (new regime) or Rs 2.5 lakh (old regime). Even below these limits, filing ITR is the only mechanism to claim a refund for excess TDS. NRIs are not eligible for the Section 87A rebate available to residents. The due date for FY 2025-26 returns is July 31, 2026. The appropriate form for most NRI investors is ITR-2; ITR-1 is available only to resident individuals.

Disclaimer: This article is for general information and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or financial instruments. NRI tax rules, DTAA provisions, capital gains rates, TDS rates, and ITR requirements referenced in this article are based on publicly available sources including the Finance (No. 2) Act 2024, Income Tax Act 1961, and CBDT notifications applicable for FY 2025-26 (AY 2026-27) and are subject to revision. ITAT rulings cited are subject to further appeal and should not be relied upon as settled law without consulting a qualified tax professional. Past market behaviour and tax treatment of financial instruments are not indicative of future outcomes. Investors should not make any investment decision based solely on this article. Please consult a SEBI-registered investment adviser and a qualified tax professional before making investment decisions. Mutual fund investments, AIF investments, and securities investments are subject to market risks. Please read all related documents carefully before investing.