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

Updated for Tax Year 2026–27

Living outside India does not automatically take you outside the Indian tax system.

If you still have bank deposits, mutual funds, shares, property, rental income or other financial interests in India, some of that income may continue to be taxable here.

The part that causes confusion is that there is no single “NRI tax rate”. Your tax position depends on four things:

• your residential status for the tax year,
• where the income is received or arises,
• the type of income or asset involved, and
• whether a Double Taxation Avoidance Agreement (DTAA) applies.

TDS adds another layer. Tax may be deducted before money reaches you, but that deduction is not always your final tax liability. You may be entitled to a lower treaty rate or a refund when you file your return.

This guide brings the complete framework together. It explains how India taxes NRIs, how NRE, NRO and FCNR accounts are treated, where TDS applies, how capital gains and mutual funds are taxed, how DTAA works, when ITR filing may be required, and what changes when you return to India.

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A New Income Tax Act Applies From 1 April 2026

India's tax framework changed from 1 April 2026.

Income earned up to 31 March 2026 continues to be governed by the Income Tax Act, 1961. Income earned from 1 April 2026 falls under the Income Tax Act, 2025.

The new Act also replaces the old “Previous Year” and “Assessment Year” terminology with a single Tax Year concept.

Most underlying NRI taxation principles continue, but section numbers and some compliance terminology have changed.

You may therefore continue to see older section references in tax documents, court rulings and online articles. This guide focuses on the rules applicable now while mentioning older references where they remain useful.

What Changed for NRIs in Budget 2026 (tap to expand)

The Union Budget 2026–27, presented on 1 February 2026, made no change to slab rates, capital-gains rates or the basic exemption limit. The changes that matter for NRIs are around compliance:

• Share buyback proceeds are taxed as capital gains from Tax Year 2026–27, so the dividend article of a DTAA no longer applies to buyback money.
• From 1 October 2026, a resident individual or HUF buying property from an NRI no longer needs a TAN to deduct TDS. A PAN-based challan can be used instead. Companies and firms still need a TAN.
• ITR due dates are staggered. Individuals filing ITR-1 or ITR-2 keep 31 July. Non-audit business cases move to 31 August.
• Form 41 replaces Form 10F for claiming DTAA benefits from 1 April 2026.
• The capital-gains exemption on redemption of Sovereign Gold Bonds bought in the secondary market is withdrawn from Tax Year 2026–27.
• A six-month foreign asset disclosure scheme has been opened for small taxpayers who missed reporting overseas assets in earlier returns. This is relevant to NRIs who have already returned to India.

Source: Finance Act, 2026; Income Tax Act, 2025; Income Tax Rules, 2026; Union Budget 2026–27 speech.

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Are You an NRI for Indian Tax Purposes?

Your passport, visa or NRI bank account does not decide your residential status for income-tax purposes.

Residential status is calculated separately for every tax year, mainly using the number of days you spend in India.

Step 1: Resident or Non-Resident

As a general rule, an individual becomes resident in India if either of these conditions is met:

• the individual stays in India for 182 days or more during the tax year, or
• the individual stays in India for 60 days or more during the tax year and 365 days or more in total during the preceding four years.

If neither condition is met, the individual is generally treated as non-resident.

But there are important exceptions.

Indian Citizens Leaving India for Employment

For an Indian citizen leaving India for employment outside India, or leaving as a crew member of an Indian ship, the 60-day condition is generally replaced with 182 days.

Indian Citizens and Persons of Indian Origin Visiting India

A separate rule applies when an Indian citizen or Person of Indian Origin living abroad visits India.

If Indian income, excluding income from foreign sources for this purpose, does not exceed ₹15 lakh, the 60-day condition is generally replaced with 182 days.

If such income exceeds ₹15 lakh, the individual can become resident where the stay in India is:

• 120 days or more during the tax year, and
• 365 days or more during the preceding four years.

A person falling within the 120-day to 181-day rule is generally treated as Resident but Not Ordinarily Resident rather than a full ordinary resident.

Deemed Residency

There is another special rule for Indian citizens.

An Indian citizen with income above ₹15 lakh, excluding income from foreign sources for this test, who is not liable to tax in any other country or territory because of residence, domicile or a similar criterion can be treated as a deemed resident of India.

This rule needs careful review because “not liable to tax” is different from simply living in a country with a low or zero personal income-tax rate.

Step 2: If You Become Resident, Are You ROR or RNOR?

Becoming resident does not automatically mean your worldwide income becomes fully taxable in India.

A resident individual may be:

• Resident and Ordinarily Resident (ROR), or
• Resident but Not Ordinarily Resident (RNOR).

RNOR status can apply, among other cases, when the individual:

• was non-resident in nine out of the preceding ten years, or
• spent 729 days or less in India during the preceding seven years.

Special RNOR rules also apply to certain visiting Indian citizens/PIOs and deemed residents.

Why does this matter?

Residential status should therefore be the first calculation an NRI makes every tax year.

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What Income Is Taxable in India for an NRI?

For a non-resident, India generally taxes income that is:

• received or deemed to be received in India, or
• accrues, arises or is deemed to accrue or arise in India.

This means an NRI can live entirely outside India and still have Indian taxable income.

At the same time, salary for services performed abroad and received abroad, foreign bank interest, overseas investment income and other genuinely foreign-source income will generally remain outside India's tax scope for a non-resident, subject to the facts and specific deeming provisions.

Common Income Sources

A common mistake is to look only at where the money sits.

The better question is:
Where did the income arise, where was it received, what type of income is it, and what does the applicable tax law or treaty say?

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NRE, NRO and FCNR Accounts: What Is Taxable?

NRE, NRO and FCNR accounts serve different purposes. Their tax treatment is also different.

NRO Account

Interest on an NRO savings account or fixed deposit is generally taxable in India.

Banks normally deduct tax at source on taxable NRO interest. For an NRI individual, domestic withholding on income that does not fall under another special category can be substantial, and applicable surcharge and cess may also affect the deduction.

A DTAA may provide a lower rate on interest for an eligible treaty resident, subject to treaty conditions and documentation.

NRE Account

Interest on an eligible NRE account can be exempt from Indian income tax.

But there is an important distinction.

The exemption is linked to the person being resident outside India under FEMA, or otherwise being permitted by the RBI to maintain the account. It should not be assumed that income-tax residential status and FEMA residential status are always identical.

So the statement “NRE interest becomes taxable the moment you return to India” is too simplistic.

Your FEMA status, account redesignation requirements and tax status should all be reviewed when you move back.

FCNR Deposit

Interest on eligible foreign-currency deposits with approved scheduled banks can be exempt for non-residents.

The exemption can also continue for an individual who becomes Resident but Not Ordinarily Resident, subject to the prescribed conditions.

This makes FCNR deposits particularly relevant to returning NRIs, but account status and tax treatment should be checked before assuming the exemption continues.

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How TDS Works for NRIs

TDS stands for Tax Deducted at Source.

Instead of waiting for you to calculate your final tax at the end of the year, Indian tax law requires the payer to withhold tax from several types of payments made to a non-resident.

TDS can arise on:

• NRO interest,
• dividends,
• rental payments,
• property transactions,
• mutual fund redemptions,
• capital gains,
• AIF distributions, and
• several other India-linked payments.

Common TDS Rates for NRIs

The rates below are the domestic rates in force. Surcharge and 4% cess apply on top. A DTAA rate or a lower-deduction certificate can reduce them where you qualify.

TDS Is Not Necessarily Your Final Tax

This is one of the most important things for an NRI to understand.

Suppose ₹60,000 is deducted as TDS during the year, but your final Indian tax liability after applying deductions, capital-gain rules or an eligible treaty position is ₹35,000.

The extra ₹25,000 is not an additional tax simply because it was deducted.

It can generally be claimed as a refund through the income-tax return, subject to applicable conditions.

The reverse is also possible. If the TDS deducted is lower than the final liability, additional tax may be payable.

Can TDS Be Reduced Before Payment?

In appropriate cases, yes.

Depending on the income and circumstances, an NRI may be able to use:

• DTAA benefits,
• a lower or nil withholding certificate, or
• other prescribed procedures.

The important part is timing.

If supporting documentation is required, it should normally be arranged before the payment or transaction rather than after excess tax has already been withheld.

A Simple Example

Priya lives outside India and receives:

• NRO fixed-deposit interest,
• rent from an apartment in Mumbai, and
• investment income from India.

Tax may be deducted separately by the bank and other payers during the year.

Her final tax return then brings all taxable Indian income together, applies the relevant tax rules and credits the tax already deducted.

If the total TDS exceeds the final liability, Priya can claim the difference as a refund.

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Capital Gains Tax for NRIs

Capital gains are one of the biggest areas of NRI tax confusion because the treatment changes by asset.

Shares, equity mutual funds, debt-oriented investments, property and gold do not necessarily follow the same rules.

For Tax Year 2026–27, the broad capital-gain framework continues to include special rates for eligible equity assets and a 12.5% long-term capital-gains rate for many other capital assets.

Capital Gains at a Glance

Surcharge and cess can apply in addition to the headline rate.

The Property Indexation Difference NRIs Should Know

The change made in 2024 removed indexation for long-term capital assets transferred on or after 23 July 2024.

This issue became widely discussed under the second proviso to Section 112(1)(a) of the Income Tax Act, 1961 and remains important for NRIs holding older Indian property.

Can NRIs Claim Capital-Gain Exemptions?

NRIs can access several capital-gain reinvestment provisions when the prescribed conditions are satisfied.

These can include relief for eligible reinvestment in:

• residential property in India, or
• specified bonds.

The eligibility, reinvestment amount, timelines and caps differ by provision, so the transaction should be planned before the sale proceeds are redeployed.

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Mutual Fund Taxation for NRIs

An NRI investing in Indian mutual funds is taxed based on the tax classification of the fund and the nature of the gain.

There is no single “NRI mutual fund tax rate”.

The answer can depend on:

• whether the scheme is equity-oriented,
• whether it falls within special rules for specified mutual funds,
• when the investment was acquired,
• how long it was held,
• whether the gain is short term or long term, and
• whether an applicable DTAA changes the position.

Equity-Oriented Mutual Funds

Where the relevant equity capital-gain provisions apply:

• eligible short-term capital gains are broadly taxed at 20%, and
• eligible long-term capital gains are broadly taxed at 12.5% above the applicable annual threshold of ₹1.25 lakh.

Non-Equity and Debt-Oriented Funds

This area needs more care.

Certain specified mutual funds can fall under rules that treat the gains as short-term regardless of the actual holding period.

This rule applies to units acquired on or after 1 April 2023 in funds that invest more than 65% in debt and money-market instruments. Units bought before that date follow the normal holding-period rules.

Other non-equity investments may follow different holding-period and capital-gain rules.

This is one reason an NRI should not assume that every mutual fund held for several years automatically receives long-term tax treatment.

TDS on Mutual Fund Redemption

For NRIs, tax may be withheld when units are redeemed.

That does not always mean the amount deducted equals the final tax.

The final position depends on the actual taxable gain, applicable exemption or threshold, treaty treatment where relevant, and the return filed.

Can DTAA Change Mutual Fund Capital-Gain Tax?

Potentially, but not for every country.

Capital-gain articles differ across India's tax treaties, and the treatment of mutual fund units has also been examined in judicial rulings.

In 2025, the Mumbai bench of the Income Tax Appellate Tribunal (Anushka Sanjay Shah) held that Indian mutual fund units are not “shares” under the India–Singapore treaty, so the gains were taxable only in Singapore. Similar wording exists in the treaties with the UAE and some other countries. The ruling is fact-specific and can be appealed, so it should be applied with professional advice rather than assumed.

The correct answer therefore depends on the NRI's country of tax residence, treaty wording, asset type and facts.

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DTAA for NRIs: Can You Be Taxed Twice?

India has tax treaties with many countries.

These Double Taxation Avoidance Agreements are designed to allocate taxing rights between India and the other country and provide relief where the same income could otherwise face tax in both places.

But DTAA does not mean that every Indian income becomes tax-free.

The result depends on the treaty article covering that particular income.

For example:

• interest may have a maximum treaty withholding rate,
• dividends may have a treaty rate,
• income from Indian immovable property is generally taxable in India,
• capital gains treatment can differ by treaty and asset, and
• the country of residence may provide credit for Indian tax paid.

Two Common Ways Double Tax Relief Works

Documents Commonly Needed for DTAA Benefits

Depending on the income and payer, an NRI may need documents such as:

• a valid Tax Residency Certificate (TRC),
• Form 41, which replaced Form 10F from 1 April 2026 and must be filed electronically before the payer deducts TDS,
• PAN where required,
• beneficial ownership declarations, and
• other payer-specific documents.

Treaty benefits should not be treated as automatic simply because the individual lives in a treaty country.

Eligibility and documentation matter.

Domestic Law or DTAA: Which One Applies?

A tax treaty is generally intended to provide relief where its provisions are more beneficial to the eligible non-resident.

If Indian domestic law gives a better result for a particular income, the taxpayer does not normally need to choose a worse treaty outcome.

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Property Taxation for NRIs

Indian property can create tax at three different stages:

1. while earning rent,
2. when the property is sold, and
3. when sale proceeds are moved or reinvested.

Rental Income

Rent from property situated in India is generally taxable in India even if the owner lives abroad.

The normal house-property computation rules, including eligible deductions, need to be applied before arriving at the final taxable amount.

TDS may also be relevant when rent is paid to an NRI.

Selling Indian Property

Selling property can create capital gains.

Broadly:

• property held for more than the applicable long-term holding period can qualify as a long-term capital asset, and
• shorter holdings are taxed under the applicable short-term rules.

The buyer can also have withholding obligations when the seller is a non-resident.

Until 30 September 2026, a resident buyer must obtain a TAN before deducting and depositing this TDS, which often delays deals. From 1 October 2026, a resident individual or HUF buyer can deduct and deposit the TDS using their own PAN through a challan-cum-statement, with no TAN needed. The TDS rate itself does not change.

This is one area where relying only on the amount deducted by the buyer can produce the wrong conclusion. The capital gain, TDS position and final tax computation should be reviewed together.

Reinvesting the Gain

Depending on the asset sold and what the NRI does with the proceeds, capital-gain exemptions may be available for eligible reinvestment in a residential property or specified bonds.

The conditions and deadlines differ, so this is best planned before the transaction rather than after the return is due.

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When Does an NRI Need to File an Income Tax Return in India?

Having TDS deducted does not automatically settle your filing obligation.

An NRI may need to file an Indian income-tax return depending on:

• total taxable income,
• type of income,
• capital gains,
• business or professional income,
• transactions covered by mandatory filing rules,
• loss carry-forward requirements, or
• the need to claim a TDS refund.

Tax Slabs for Tax Year 2026–27

Under the default tax regime for Tax Year 2026–27, the normal individual slab rates are:

Special-rate income such as certain capital gains is taxed separately and should not simply be run through these slab rates.

An NRI can also opt for the old tax regime. The basic exemption there is ₹2.5 lakh with no senior-citizen enhancement, but deductions such as Section 80C, 80D and home-loan interest under Section 24(b) become available. Where Indian income is mostly rent with a home loan, or where large 80C investments exist, the old regime can sometimes give a lower tax, so both should be compared before filing.

There is another important difference between residents and NRIs.

Which ITR Form Does an NRI Use?

There is a transition point to understand here.

For income earned up to 31 March 2026, returns for AY 2026–27 are filed under the Income Tax Act, 1961. The original due date of 31 July 2026 has passed; a belated return can still be filed up to 31 December 2026 with a late fee, and a revised return can be filed up to 31 March 2027, or before completion of assessment, whichever is earlier.

• ITR-1 is not available to a non-resident.
• ITR-2 is commonly used by an NRI with salary, house property, capital gains or other income but no business/professional income.
• ITR-3 applies where business or professional income is involved.

For Tax Year 2026–27 under the Income Tax Act, 2025, the return is filed after the tax year ends. The applicable return forms and detailed instructions are to be notified for that filing cycle.

Budget 2026 introduced staggered due dates. For individuals filing the ITR-1 or ITR-2 type of return, which covers most NRIs, the return for Tax Year 2026–27 is due 31 July 2027. Non-audit cases with business or professional income get until 31 August 2027.

Documents an NRI Should Keep Ready

Depending on the income involved:

• PAN
• bank interest certificates
• TDS details
• Form 26AS / applicable tax-credit records
• AIS information
• capital-gain statements
• broker and AMC statements
• rental and property documents
• purchase cost records
• TRC and treaty documentation
• AIF tax statements
• proof of taxes paid outside India where treaty relief is relevant

Do not wait until the return deadline to collect these documents if a major property sale, redemption or cross-border transaction is planned.

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AIF Taxation for NRIs

Alternative Investment Funds require a separate tax analysis because the treatment depends heavily on the AIF category and the nature of the income distributed.

Category I and Category II AIFs

These generally operate under a pass-through tax framework for specified income.

The income retains its character in the investor's hands, which means the tax result can depend on whether the underlying income is:

• capital gains,
• interest,
• dividend, or
• another form of taxable income.

Tax can be withheld before distributions are made to an NRI investor.

Category III AIFs

Category III structures can have a different tax framework, and the outcome depends on the legal structure of the fund and the income involved.

This should be reviewed from the fund's tax documentation rather than assuming the tax treatment is the same as a Category I or II AIF.

DTAA and AIF Income

Treaty benefits may be relevant for certain income distributed to an eligible NRI, but the result depends on:

• nature of income,
• country of residence,
• treaty article,
• fund structure, and
• documentation.

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What Changes When an NRI Returns to India?

Returning to India can change more than your income-tax status.

It can affect:

• residential status,
• taxation of overseas income,
• NRE and NRO account eligibility,
• FCNR deposits,
• overseas assets,
• investment accounts,
• foreign income reporting, and
• future repatriation.

The change is not always immediate or identical across laws.

For example, income-tax residential status and FEMA residential status are determined under different frameworks.

A returning NRI may also qualify as Resident but Not Ordinarily Resident (RNOR) for a period depending on prior years spent outside India.

RNOR status can be useful because the scope of Indian taxation during this transition period can be narrower than for a Resident and Ordinarily Resident.

However, RNOR should not be assumed from the fact that someone has recently returned. It needs to be calculated using the statutory tests.

FCNR deposit interest can also remain exempt for eligible RNOR individuals, subject to the prescribed conditions.

If you are planning a permanent return, review your residential status, overseas assets, bank accounts and investments before the move rather than after the first Indian tax return becomes due.

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Common NRI Tax Mistakes

Most NRI tax problems come from a handful of repeat errors. Check yourself against these:

• Assuming NRE interest stays exempt after returning to India without checking FEMA status and redesignating the account.
• Treating the TDS cut by a bank, tenant or property buyer as the final tax and never filing for the refund.
• Sending the TRC and Form 41 to the payer after the TDS has already been deducted. Treaty rates cannot be applied backwards.
• Ignoring the 120-day rule during long visits to India when Indian income is above ₹15 lakh, and becoming resident by accident.
• Assuming every mutual fund held for years gets long-term treatment, when specified debt funds are always short term.
• Expecting the ₹12 lakh rebate or the resident-only indexation protection on old property. Neither applies to an NRI.
• Selling property or redeeming large investments first and looking at reinvestment exemptions or lower-deduction certificates afterwards.

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NRI Tax Checklist: What to Review Every Year

NRI tax planning becomes easier when it is treated as an annual process rather than a return-filing exercise.

Before the end of each tax year, check:

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Final Thoughts

NRI taxation is rarely about finding one tax rate.

A bank deposit, property sale, mutual fund redemption and dividend can all be treated differently even when they belong to the same person.

Residential status decides the starting point. The source and type of income determine how India taxes it. TDS determines how much is collected upfront. DTAA can change the outcome where treaty conditions are satisfied. Your final return then brings these pieces together.

The more countries, income sources and assets involved, the more important it becomes to look at the complete financial picture rather than treating every tax event separately.

For large property sales, investment redemptions, returning-to-India decisions or cross-border portfolios, review the tax and investment impact before taking action.

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FAQs

1. Do NRIs have to pay income tax in India?

Yes, where income falls within India's tax scope. A non-resident is generally taxed on income received or deemed received in India and income that accrues, arises or is deemed to accrue or arise in India. Genuine foreign income earned and received outside India is generally outside Indian taxation for a non-resident, subject to specific provisions.

2. What income is taxable in India for an NRI?

Common taxable income includes NRO interest, rent from Indian property, dividends from Indian companies, capital gains from Indian assets and income from business or professional activities linked to India. NRE and eligible FCNR interest can qualify for exemption when the prescribed conditions are met.

3. Is salary earned outside India taxable in India for an NRI?

Salary for services performed outside India and received outside India is generally not taxable in India for a non-resident. The position can change where services are performed in India, income is received in India or another deeming provision applies.

4. Is NRE interest taxable for an NRI?

Interest on an eligible NRE account can be exempt. The exemption depends on the individual being resident outside India under FEMA or otherwise being permitted by the RBI to maintain the account. Income-tax residency and FEMA residency should not be treated as the same test.

5. Is NRO interest taxable in India?

Yes. NRO interest is generally taxable in India and tax is normally deducted at source. If the final liability is lower than the tax deducted, the excess may be refundable after filing the applicable tax return.

6. Do NRIs pay capital gains tax in India?

Generally yes when taxable capital gains arise from Indian assets. The rate depends on the asset, holding period and applicable tax provision. Treaty provisions can also matter for some assets and countries.

7. Can an NRI use DTAA to avoid double taxation?

An eligible NRI may claim treaty relief where the applicable DTAA provides it. Depending on the income type and treaty, this can involve a lower Indian tax rate, allocation of taxing rights or a foreign tax credit in the country of residence. A DTAA does not automatically make Indian income tax-free.

8. Can an NRI claim a refund of excess TDS?

Yes. If tax deducted in India exceeds the final Indian tax liability, the excess can generally be claimed as a refund by filing the applicable income-tax return and satisfying the required conditions.

9. Does every NRI need to file an ITR in India?

No. Filing depends on taxable income, type of income, transactions and other statutory conditions. An NRI may still choose or need to file where excess TDS must be refunded, losses need to be carried forward or other filing requirements apply.

10. Is the ₹12 lakh tax rebate available to NRIs?

No. The rebate under the current default tax regime is available to eligible resident individuals. A non-resident individual cannot claim the resident-only rebate merely because total income is ₹12 lakh or below.

11. What TDS rate applies to an NRI?

It depends on the payment. NRO interest and rent are generally deducted at 30%, dividends at 20%, equity short-term gains at 20% and long-term gains at 12.5%, all plus surcharge and cess. A DTAA rate or a lower-deduction certificate from the tax department can bring these down if arranged before payment.

12. What changed for NRIs in Budget 2026?

Slab rates and capital-gains rates did not change. The main changes are that buyback proceeds are now taxed as capital gains, resident individual and HUF buyers no longer need a TAN to deduct TDS on property bought from an NRI from 1 October 2026, ITR due dates are staggered between 31 July and 31 August, and Form 41 has replaced Form 10F for treaty claims.

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Disclaimer: This article is for general information and educational purposes only. It does not constitute investment advice, tax advice, legal advice, a recommendation or an offer to buy or sell any security or financial product. Tax treatment depends on residential status, source and character of income, transaction dates, applicable treaty, documentation and individual circumstances. The article reflects publicly available provisions of the Income Tax Act, 2025, Finance Act, 2026, Income Tax Act, 1961 where relevant for earlier periods, and related official guidance available at the time of publication. Tax laws, rules, treaty interpretations and filing requirements may change. Judicial decisions can also be fact-specific and subject to appeal. Please consult a qualified tax professional for tax filing, treaty interpretation and individual tax positions, and a SEBI-registered investment adviser for investment advice. Mutual fund, AIF and securities investments are subject to market risks. Please read all related documents carefully before investing.