Residential status, not nationality, decides how much tax an NRI owes in India. And that status is recalculated every single financial year.
The Income Tax Act, 2025, which applies from the 2026-27 tax year onward, changes the terminology but not the substance. The day-count tests, the 120-day threshold for high-income visitors, and the deemed residency provision all carry forward. What matters is understanding how those rules interact with the money an NRI actually earns.
how residency status gets decided
The basic test is physical presence. An individual is a resident if they stay in India for 182 days or more in a tax year. There is a second route: 60 days or more in the current year combined with 365 days or more across the previous four years. For Indian citizens and persons of Indian origin visiting India, that 60-day threshold is replaced by 182 days .
High earners face a tighter window. Indian citizens and PIOs with Indian income above ₹15 lakh become Resident but Not Ordinarily Resident (RNOR) after 120 days. Crossing that limit does not make them full residents, but it does bring them into the tax net for Indian income .
Then there is the deemed residency provision. An Indian citizen with Indian income above ₹15 lakh who is not liable to tax in any other country is treated as a resident regardless of how many days they spend in India. Professionals based in the UAE, Bahrain, or Qatar run into this most often. They are classified as RNOR, not full residents .
how capital gains on shares and mutual funds are taxed
The holding period decides the rate. Sell listed equity shares or equity-oriented mutual funds within 12 months and the gain is short-term. For an NRI, the rate is 20%, with TDS deducted at the same rate under Section 111A .
Hold for more than 12 months and the gain is long-term. Gains above ₹1.25 lakh in a financial year are taxed at 12.5% without indexation under Section 112A .
There is a benefit NRIs do not get. Residents can use the unused basic exemption limit to reduce tax on certain capital gains. NRIs cannot. The Section 87a rebate, which makes income up to ₹12 lakh effectively tax-free for residents under the new regime, is also unavailable to NRIs .
For unlisted shares, the long-term holding period is 24 months, not 12. Long-term gains are taxed at 12.5% without indexation. Short-term gains are taxed at slab rates, which can reach 30% .
how property sales are taxed and why TDS hurts
Property follows different rules. Hold for more than 24 months and the gain is long-term. For properties sold on or after July 23, 2024, the tax is 12.5% without indexation. Properties sold before that date may still qualify for 20% with indexation, though NRIs cannot claim the grandfathering option available to residents .
The bigger problem is TDS. Under Section 195, the buyer must deduct tax before paying the seller. If no lower-deduction certificate is obtained, TDS is often computed on the gross sale value rather than the net gain. A property sold for ₹1 crore could see ₹20 lakh or more withheld, even if the actual gain is far smaller .
The fix is Section 197. An NRI can apply for a lower or nil TDS certificate using Form 13 before the sale. This aligns the deduction with the estimated capital gains rather than the full transaction value. Without it, the excess tax stays blocked until a refund is processed, which can take months .
foreign income and the RNOR window
An NRI’s foreign income is not taxable in India. Foreign salary, foreign rent, interest on foreign bank accounts: none of it enters the Indian tax calculation.
The situation changes when an NRI returns to India. Under the rules, a returning NRI can qualify as RNOR if they were non-resident in 9 of the previous 10 years, or if they spent 729 days or less in India during the 7 previous years .
During the RNOR period, which typically lasts two to three financial years, Indian income is taxable. Foreign income generally remains outside the net, unless it comes from a business controlled from India or a profession set up in India. This window gives returning NRIs time to reorganise foreign assets before worldwide income becomes taxable under Resident and Ordinarily Resident (ROR) status .
NRE vs NRO: the tax divide
The account an NRI holds determines how interest is taxed.
NRE account interest is exempt from tax and carries no TDS. FCNR deposits have the same treatment. This exemption depends on the holder qualifying as a non-resident under FEMA, not under income tax law .
NRO account interest is fully taxable. Banks deduct TDS at 30% plus surcharge and cess. The actual liability is at slab rates, so an NRI in a lower bracket may be able to claim a refund .
Once a returning NRI becomes a resident under FEMA, the NRE account must be redesignated. Interest from that point is no longer exempt. FCNR deposits held until maturity remain exempt during the RNOR period .
filing requirements
An NRI must file an ITR if taxable income in India exceeds the basic exemption limit. Under the new regime, that threshold is ₹4 lakh .
Filing is also mandatory in specific cases regardless of income: deposits exceeding ₹1 crore in current accounts, foreign travel spending above ₹2 lakh, electricity consumption above ₹1 lakh, or TDS of ₹25,000 or more.
Filing is often necessary even when no tax is due. If TDS has been deducted and the actual liability is lower, an ITR is the only way to claim a refund. Filing is also required to carry forward capital losses or to claim DTAA relief.
DTAA relief
India has double taxation avoidance agreements with the US, UK, Canada, Australia, Singapore, the UAE, and close to a hundred other countries.
These treaties can reduce the tax burden. NRO interest that would normally face 30% TDS often drops to 10-15% under a treaty. Dividends taxed at 20% domestically can fall to 10-15% .
Relief is not automatic. An NRI must obtain a Tax Residency Certificate from their home tax authority and submit it, along with Form 10F, to the payer before the payment is made. Without these documents, the deductor applies the full Section 195 rate .
what retail investors should know
The rules reward planning. Selling an investment without understanding the TDS and capital gains treatment can result in excess tax being withheld and a long wait for a refund.
For returning NRIs, the RNOR window is the most valuable planning tool. Foreign income stays outside the Indian tax net for two to three years. Using that period to restructure foreign holdings can reduce future tax exposure.
For NRIs with Indian investments, the key distinction is between NRE and NRO. Foreign earnings routed through NRE accounts stay tax-free. Indian-source income through NRO accounts does not.
Frequently Asked Questions
1. Is foreign income taxable in India for an NRI?
Foreign salary, overseas rent, interest on a foreign bank account. None of it enters the Indian tax net for an NRI, because the tax is tied to the source of the income, not the nationality of the person earning it. The exception is narrow: money from a business controlled in India or a profession set up here can still be pulled in. But an NRI earning in Dubai and parking that money in an NRE account owes nothing to India on that income.
2. What is the tax rate on short-term capital gains for NRIs?
20%. That is the flat rate under Section 196 (formerly Section 111A) when listed equity shares or equity-oriented mutual funds are sold within 12 months. TDS comes off at the same rate before the money reaches the NRI. Worth knowing: NRIs cannot use the unused basic exemption limit to soften this, and the Section 87A rebate that makes income up to ₹12 lakh tax-free for residents does not apply here at all.
3. Why is TDS on property sales a problem for NRIs?
Three reasons stacked on top of each other. First, the buyer must deduct before paying. Second, if no lower-deduction certificate is obtained, the TDS is often calculated on the gross sale value, not the actual gain. Third, the difference between what was deducted and what is actually owed gets stuck until a refund is processed. A ₹1 crore property sale can see ₹20 lakh withheld even when the real gain is a fraction of that. The fix is Form 128 (previously Form 13), applied for before the sale, which brings the deduction in line with estimated capital gains.
4. What is RNOR status and how long does it last?
RNOR sits between NRI and full resident. It is for people who have returned to India but have not spent enough time here to be fully integrated. During this window, typically two to three financial years, Indian income is taxed, but foreign income stays outside the net. Foreign salary, overseas rent, capital gains from foreign assets: none of it is taxed in India during this period. Once RNOR expires and ROR begins, worldwide income enters the tax base. That transition window is the most valuable planning period a returning NRI gets.
5. When does an NRI need to file an income tax return in India?
The short answer is when Indian income crosses ₹4 lakh under the new regime. But the practical answer is more useful: file if TDS was deducted, even when income falls below that threshold. NRO interest suffers TDS at 31.2%, while the actual tax liability computed across slabs is often far lower. The gap is a refund, and filing is the only way to claim it. Filing is also mandatory in specific cases regardless of income: deposits above ₹1 crore in current accounts, foreign travel above ₹2 lakh, or TDS of ₹25,000 or more.
