Does an NRI Need to File Tax in India?

This article clarifies the tax responsibilities of Non-Resident Indians (NRIs) in India. It provides a guide to understanding their specific requirements for filing income tax returns.

Determining Non-Resident Indian Status

Understanding your residential status for tax purposes in India is the first step in determining your tax obligations. An individual’s tax liability is based on their residential status during a financial year (April 1st to March 31st). The Income Tax Act defines who is considered a Non-Resident Indian (NRI) based on physical presence in India.

You are considered an NRI if you do not meet the criteria for being a resident. A person is a resident if present in India for 182 days or more during the financial year. Alternatively, an individual is a resident if in India for 60 days or more during the financial year and 365 days or more during the four preceding financial years. For Indian citizens leaving for employment abroad or as a crew member of an Indian ship, the 60-day criterion extends to 182 days.

The “Resident but Not Ordinarily Resident” (RNOR) status applies to NRIs returning to India. An individual qualifies as RNOR if they were a non-resident in India for 9 of the 10 preceding financial years, or if they were in India for 729 days or less during the 7 preceding financial years. An Indian citizen or person of Indian origin with Indian income exceeding ₹15 lakh, staying in India for 120-182 days in a financial year, may also be classified as RNOR. An RNOR’s foreign income is generally not taxable in India, unlike a Resident and Ordinarily Resident (ROR) whose global income is taxable.

Understanding Taxable Income for NRIs

Income for Non-Resident Indians (NRIs) in India is taxed based on its source. Only income earned or accrued in India is subject to Indian income tax for an NRI. Income generated outside India is generally not taxable.

Several income types accrue or arise in India and are taxable for NRIs. This includes salary for services rendered in India, regardless of payment location. Income from Indian house property, such as rental income, is also taxable. NRIs can claim a 30% standard deduction on rental income and deduct property taxes paid.

Capital gains from the transfer of assets situated in India are a significant category of taxable income. This includes gains from the sale of Indian real estate, shares of Indian companies, and other Indian securities. Interest income from Indian deposits, specifically from Non-Resident Ordinary (NRO) accounts, is taxable. Dividends received from Indian companies are also taxable for NRIs.

Income deemed to accrue or arise in India is established under Section 9 of the Income Tax Act. This ensures income with a sufficient connection to India is taxed, even if not physically earned within the country. Examples include interest, royalties, and fees for technical services received from Indian sources.

Filing Requirements and Thresholds

An NRI must file an income tax return in India under specific conditions. Mandatory filing is triggered if an NRI’s gross total income in India exceeds the basic exemption limit. For the financial year 2024-25, this limit is ₹2,50,000. If an NRI’s taxable income surpasses this threshold, filing is mandatory.

Filing is also required in other scenarios, even if the basic income threshold is not met. For example, if an NRI has short-term capital gains on equity shares or units of equity-oriented mutual funds, or any long-term capital gain chargeable to tax, filing is necessary. This applies even if gains are below the basic exemption limit. Similarly, if an NRI wants to claim a refund of Tax Deducted at Source (TDS), filing an income tax return is essential.

The Permanent Account Number (PAN) is a ten-digit alphanumeric number issued by the Indian Income Tax Department, mandatory for filing income tax returns and many financial transactions. NRIs should ensure their PAN is active and linked with their Aadhaar card, if applicable, as an inoperative PAN can limit access to certain e-filing functionalities.

Tax Deducted at Source (TDS) applies to various NRI income types, such as rental income, capital gains, and interest. While TDS is deducted, it does not always negate the need to file a return. Filing allows NRIs to reconcile TDS credit against their actual tax liability and claim potential refunds. If an NRI’s income in India exceeds ₹50 lakh, they must also report their assets and liabilities in India.

Deductions, Exemptions, and Tax Relief

Non-Resident Indians (NRIs) can utilize provisions to reduce their taxable income or tax liability in India. Certain income sources are completely tax-exempt for NRIs. For instance, interest earned on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is typically tax-exempt. Long-term capital gains from the sale of listed equity shares and equity-oriented mutual funds are also exempt up to ₹1 lakh in a financial year, provided Securities Transaction Tax (STT) has been paid.

NRIs can claim various deductions under Chapter VI-A of the Income Tax Act, similar to resident Indians. Common deductions include investments made under Section 80C, such as life insurance premiums, children’s tuition fees, and home loan principal repayment. The maximum deduction allowed under this section is ₹1.5 lakh. Health insurance premiums paid can be claimed under Section 80D, with a maximum deduction of ₹25,000 for self, spouse, and dependent children. Interest on a home loan can also be claimed.

Double Taxation Avoidance Agreements (DTAAs) prevent income from being taxed in both India and an NRI’s country of residence. India has signed DTAAs with over 90 countries. These agreements provide relief from double taxation through methods like the credit method or the exemption method. Under the credit method, tax paid in one country can be claimed as a credit against the tax liability in the other. The exemption method allows certain income to be entirely exempt from taxation in one country.

To claim DTAA benefits, an NRI needs a Tax Residency Certificate (TRC) from their country of residence and must submit Form 10F to Indian tax authorities.

Preparing and Submitting Your Tax Return

Once an NRI determines their obligation to file a tax return in India, they must select the correct Income Tax Return (ITR) form and gather necessary documents. NRIs generally cannot use ITR-1, which is for resident individuals with simple income sources. Instead, NRIs commonly use ITR-2 or ITR-3. ITR-2 is suitable for salaried NRIs with income from capital gains, house property, or other sources, and for those with foreign assets. ITR-3 applies if an NRI has income from a business or profession in India.

To prepare the tax return, a comprehensive set of documents is required. This includes the Permanent Account Number (PAN) card, passport details for residency proof, and bank statements for all Indian accounts, including Non-Resident Ordinary (NRO) and Non-Resident External (NRE) accounts. Income proofs such as Form 16 (for salary income), Form 16A (for TDS on non-salary income), and bank interest statements are essential. If applicable, property documents, rent receipts, and investment statements for deductions under sections like 80C and 80D should also be collected.

The tax return is primarily submitted through e-filing via the official Income Tax Department portal (incometax.gov.in). After logging in and selecting the appropriate ITR form, all income, deduction, and tax payment details must be accurately entered. Reconcile income and taxes with Form 26AS, which summarizes all tax deducted at source and tax paid.

After filling out the form, the return must be submitted electronically and e-verified. Verification is mandatory and can be done through various methods, including Aadhaar One-Time Password (OTP), net banking, or by sending a signed physical ITR-V acknowledgment to the Centralized Processing Center (CPC). The due date for filing income tax returns for individuals is typically July 31st of the assessment year. Filing within the deadline avoids penalties and allows claiming benefits like refunds or carrying forward losses.