Do NRIs Need to File Tax in India?

For Non-Resident Indians (NRIs), understanding Indian tax law is important. India’s tax system operates on a residency basis, determining an individual’s tax liability by their residential status for a financial year (April 1st to March 31st). NRI tax obligations differ from residents, focusing on income sourced within India. This article clarifies the specific tax requirements and processes for NRIs.

Understanding Your Tax Residency Status

An individual’s tax residency status in India dictates the scope of income taxable in the country. The Income Tax Act, 1961, outlines specific criteria to determine if a person is a Resident, a Resident but Not Ordinarily Resident (RNOR), or a Non-Resident Indian (NRI) for tax purposes. This determination is made annually.

The primary test for tax residency involves the number of days an individual spends in India during the financial year. An individual is generally considered a Resident if they stay in India for 182 days or more in that financial year. If their stay is less than 182 days, they are typically classified as an NRI.

Specific conditions modify this 182-day rule for certain individuals. For Indian citizens or Persons of Indian Origin (PIOs) visiting India, the 60-day rule (present in India for at least 60 days in the current year and 365 days or more in the preceding four years) is replaced with 182 days. However, if an Indian citizen or PIO has a total Indian income exceeding INR 15 lakh and stays in India for 120 days or more but less than 182 days, they may be classified as RNOR. This RNOR status also applies if they were an NRI for 9 out of the last 10 years or spent 729 days or less in India over the preceding seven years.

For NRIs, only income earned or accrued in India is subject to Indian income tax. Income earned outside India is generally not taxable in India for an individual classified as an NRI.

Indian Income Tax Rules for NRIs

For Non-Resident Indians, taxable income in India is limited to “income accrued or arisen in India” or “income deemed to accrue or arise in India” as per the Income Tax Act. This means only income generated from sources within India is subject to Indian taxation, while foreign-sourced income remains untaxed.

Salary income is taxable in India if it is received in India or earned for services rendered within India. For instance, if an NRI works remotely for a U.S. company but the salary is credited to an Indian bank account, it may be considered received in India and thus taxable.

Income from house property located in India, whether rented out or vacant, is fully taxable for NRIs under the head “Income from House Property.” NRIs can claim a standard deduction of 30% on rental income, deduct municipal taxes paid, and claim interest deductions on home loans. Capital gains arising from the transfer of assets located in India are also taxable. This includes capital gains from the sale of Indian property, shares of Indian companies, or other financial assets situated in India.

Interest income from Indian bank accounts, specifically Non-Resident Ordinary (NRO) accounts, is fully taxable for NRIs. However, interest earned on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is typically exempt from tax in India. Dividend income from Indian companies became taxable for NRIs from Financial Year 2020-21 onwards. Income from a business or profession is taxable in India if the business is managed from India, or any part of its operations occur within India.

Information and Documents Needed for Filing

Before initiating the tax filing process in India, NRIs must gather specific information and documents. A Permanent Account Number (PAN) is a prerequisite for most financial transactions and tax filings in India.

NRIs will need their Indian bank account details, as any tax refunds are directly credited to a pre-validated Indian bank account. Bank statements for Non-Resident Ordinary (NRO) accounts are essential to track taxable interest income, while Non-Resident External (NRE) account statements are needed to report exempt interest income. Comprehensive details of all taxable income sources, including specific amounts and any Tax Deducted at Source (TDS), must be compiled. This includes salary slips and Form 16 from Indian employers for salary income.

For other income subject to TDS, such as interest income or capital gains, Form 16A is required. Documents related to capital gains, such as share transaction statements or property sale deeds, are also necessary for accurate computation. If claiming any deductions or exemptions under Chapter VI-A of the Income Tax Act, supporting documents like life and health insurance premium receipts, tuition fee receipts, or home loan principal repayment certificates are needed.

NRIs typically use ITR-2 or ITR-3 forms for filing their income tax returns. ITR-2 is suitable for salaried NRIs with income from multiple residential properties, capital gains, or foreign income (if taxable). ITR-3 is for NRIs engaged in business or professional activities in India. These forms can be accessed and downloaded from the Income Tax Department’s e-filing portal.

The Tax Filing Process for NRIs

Once necessary information and documents are gathered, the tax filing process begins on the Income Tax Department’s e-filing portal. Taxpayers should log in using existing credentials or register as a new user. Ensure the mobile number and email ID linked to the portal are active for verification.

After logging in, select the correct assessment year, which corresponds to the financial year for which income is reported. For instance, income earned in Financial Year 2024-25 will be filed for Assessment Year 2025-26. Choose the appropriate Income Tax Return (ITR) form based on income sources, typically ITR-2 or ITR-3 for NRIs.

The prepared ITR form can be uploaded to the portal. All details pertaining to income, deductions, tax liabilities, and payments must be accurately entered. Cross-check details against Form 26AS and the Annual Information Statement (AIS)/Taxpayer Information Summary (TIS) reports to ensure all income and Tax Deducted at Source (TDS) entries are correctly reflected.

After successful submission, the return needs to be e-verified. Common e-verification methods include Aadhaar OTP, Net Banking, or Bank Account EVC. If tax is still due after accounting for TDS, payment must be made online through the portal before the submission deadline. An acknowledgment receipt is generated upon successful submission and verification. The Income Tax Department typically processes returns within a few weeks to several months.

Important Considerations for NRIs

Double Taxation Avoidance Agreements (DTAAs) are bilateral tax treaties between India and various countries, designed to prevent income from being taxed twice. India has DTAAs with over 90 countries, offering significant relief to NRIs. To claim DTAA benefits, an NRI must obtain a Tax Residency Certificate (TRC) from the tax authority of their country of residence. This certificate serves as proof of tax residency and is mandatory for claiming DTAA benefits in India.

In addition to the TRC, NRIs claiming DTAA benefits in their ITR are often required to file Form 10F electronically through the Income Tax portal. This form provides additional details not always present on a standard TRC, such as nationality and tax identification number, and helps substantiate the claim for treaty benefits. Failure to submit a valid TRC and Form 10F can lead to the disallowance of DTAA claims.

Certain income types are specifically exempt from tax for NRIs in India. For example, interest earned on Non-Resident External (NRE) accounts and Foreign Currency Non-Resident (FCNR) accounts is generally tax-free in India under Section 10(4) and 10(15) of the Income Tax Act. However, this interest may still be taxable in the NRI’s country of residence, depending on their local tax laws.

The Permanent Account Number (PAN) is mandatory for filing tax returns, opening NRE or NRO accounts, and conducting property transactions exceeding INR 10 lakh. Even if an NRI’s income falls below the taxable threshold, filing an Income Tax Return is often recommended to claim TDS refunds or to carry forward losses for future set-off.