Essential Guidelines for NRI Taxation

Essential Guidelines for NRI Taxation

For FY 2026-27 (AY 2027-28), an NRI is taxed in India only on income that accrues, arises or is deemed to arise in India — not on worldwide income. The four pressure points that determine whether you pay the right amount, too much, or attract a notice are: correctly establishing residential status under Section 6 of the Income-tax Act, 1961; identifying every stream of Indian-source income including the often-missed Section 9 deemed-accrual categories; applying Section 195 TDS mechanics correctly before any significant payment is made; and reconciling the Annual Information Statement (AIS) before filing ITR-2. Each is explained below with numbers, steps and specific forms.

Determining Residential Status Under Section 6 — Everything Flows From Here

Your Indian tax liability turns entirely on residential status, determined before any other computation. Three categories exist: Resident (R), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR).

The Day-Count Tests for Resident Status

Under Section 6(1), you are a Resident in any FY if either of the following is satisfied:

1. You are present in India for 182 days or more during the financial year, or
2. You are present in India for 60 days or more during the FY and for 365 days or more in the four immediately preceding financial years combined.

The 120-day carve-out you must know: If you are an Indian citizen or Person of Indian Origin (PIO/OCI) who visits India and your total Indian-source income (excluding foreign income) exceeds Rs. 15 lakh, Test 2's threshold of 60 days drops to 120 days. A Dubai-based NRI who earns Rs. 18 lakh in rent and dividends from Indian assets and spends 125 days in India in one visit is Resident under this rule — bringing their entire Indian income under scrutiny that a shorter stay would have avoided.

Citizens leaving for employment abroad are excluded from Test 2 entirely and rely only on the 182-day count.

RNOR: The Transitional Status

A person who qualifies as Resident under the above tests is nevertheless classified as RNOR if either of the following applies under Section 6(6):

• They have been non-resident in 9 of the 10 immediately preceding financial years, or
• Their total presence in India during the 7 immediately preceding financial years does not exceed 729 days.

RNOR status is significant: you pay Indian tax on Indian-source income and on business income controlled from India, but not on foreign income — the same exemption NRs enjoy. A professional returning from the US after 12 years typically benefits from two to three years of RNOR status before full Resident status kicks in.

Why Getting This Wrong Is Expensive

One day's miscounting shifts you from NR to Resident. If that happens, your Dubai salary, your US brokerage dividends and your UK rental income all become globally taxable in India. The Income Tax Department now cross-references AIS data — inward remittances, property registrations, equity trades — against declared status. Maintain passport stamps and boarding pass records for at least six years.

What Income Is Taxable for NRIs — and What Section 9 Catches That Surprises People

As an NR or RNOR, Indian tax applies only to income that:

• Accrues or arises in India (rent from an Indian flat, salary for services rendered in India)
• Is deemed to accrue or arise in India under Section 9
• Is received in India (maturity credited to an Indian bank account)

Section 9 Deemed-Accrual — The Provisions NRIs Most Frequently Miss

Section 9(1) extends India's taxing right to several income streams that seem to arise abroad:

• Salary for services rendered in India, even if paid by a foreign employer to an overseas account
• Business income attributable to a fixed place of business or operations in India
• Interest paid by an Indian resident, or by a non-resident for the purpose of a business carried on in India
• Royalty and Fees for Technical Services (FTS) payable by an Indian resident — Section 9(1)(vi) and (vii)

Many NRI IT consultants who invoice Indian clients from their Singapore entity believe that offshore invoicing cures Indian taxability. It does not — FTS paid by the Indian client is deemed to arise in India under Section 9(1)(vii) regardless of where the contract is executed or where payment is received.

What Is Not Taxable

• Income earned and received entirely outside India with no Indian operations
• Interest on NRE accounts — exempt under Section 10(4)(ii), conditional on maintaining NR status
• Interest on FCNR(B) deposits — exempt under Section 10(15)(iv)(fa) while NR status is maintained
• Foreign income of NRs and RNORs (subject to the RNOR limitation for business controlled in India)

NRO, NRE and FCNR Accounts — Tax Treatment Side by Side

Practical implication on TDS: NRO interest suffers TDS at 30% by default. If your country of residence has a DTAA with India that caps interest taxation (e.g., USA and UK cap it at 15%), you can get the lower rate applied at source — but only if you submit your Tax Residency Certificate (TRC) plus Form 10F to the bank before the interest is credited for the relevant quarter. Submitting after the fact means you receive a net-of-30% credit, file ITR, and wait for a refund that can take 12-18 months. Prevention is materially better.

Form 15CA/CB for NRO repatriation: When repatriating funds from NRO to an overseas account, the remitting bank requires Form 15CA (self-declaration by remitter on the tax status of the remittance) and, for most transactions, Form 15CB (certificate from a practicing Chartered Accountant confirming applicable TDS has been deducted). Transactions specifically listed in Rule 37BB of the Income Tax Rules, 1962 are exempt from this pair.

Tax Rates and the New Regime for AY 2027-28

The new tax regime is the default for FY 2026-27. Unless you have business income requiring the old regime, most NRIs will compute tax under the new regime slabs. The slabs below reflect rates as per Finance Act 2025; verify any amendments under Finance Act 2026 before filing for AY 2027-28:

4% health and education cess applies on the tax computed. Surcharge applies on total income above Rs. 50 lakh at applicable rates.

The Section 87A Gap — A Material Difference Between NRIs and Residents

Resident individuals can claim a Section 87A rebate (as revised by Finance Act 2025) effectively making income up to Rs. 12 lakh tax-free under the new regime. NRIs are not eligible for this rebate. On Indian income of Rs. 10 lakh, a resident pays zero after the rebate; an NRI pays approximately Rs. 60,000 plus cess. This differential should be priced into decisions about repatriation timing, dividend extraction and maturity scheduling.

Special Flat Rates That Override Slabs

Certain incomes are taxed at statutory flat rates irrespective of total income:

• LTCG on listed equity and equity mutual funds (Section 112A): 12.5% on gains above Rs. 1.25 lakh per FY
• STCG on listed equity (Section 111A): 20%
• LTCG on immovable property (Section 112): 12.5% without indexation, or 20% with indexation — the indexation option remains available for properties acquired before 23 July 2024 (Finance Act 2024 amendment)
• Interest and investment income for NRIs under Section 115E: 20% on investment income from specified assets (foreign-currency-denominated bonds, shares acquired on non-repatriation basis), which can be beneficial compared to the 30% slab rate

Section 195 TDS — Obligations on Every Payer Before Remittance

Section 195 of the Income-tax Act is the payer's responsibility, not just the NRI's. Any person in India who makes a payment to an NRI that is chargeable to tax must deduct TDS at the applicable rate before remitting. The payer's obligation is strict — failure to deduct makes the payer an "assessee in default" liable for the full TDS amount plus 1.5% per month interest under Section 201(1A).

Typical default TDS rates under the Act (DTAA may reduce these):

• Rental income to NRI: 30%
• Fees for Technical Services / royalty: 10% under Section 115A
• NRO account interest: 30%
• LTCG on property sale: 20% (12.5% without indexation, applied on the full sale consideration absent a lower-deduction certificate)

Buying Property From an NRI: A Practical Checklist

If you are the buyer of property from an NRI seller, your obligations differ significantly from the 1% TDS under Section 194-IA that applies to resident sellers:

1. Obtain a TAN — Section 194-IA does not require TAN; Section 195 does
2. Deduct TDS on full sale consideration at capital-gains rates (or at the rate in a lower-deduction certificate if the seller has obtained one)
3. Deposit TDS via Form 26QB within 30 days of the month end in which deduction is made
4. Issue Form 16A to the NRI seller
5. If the seller provides a lower-deduction certificate (see below), deduct at the rate specified therein

Failure to follow this process exposes the buyer to the shortfall plus interest.

The Form 13 Lower-Deduction Certificate — File It Early

Without a lower-deduction certificate, TDS under Section 195 on a property sale defaults to a rate computed on the full sale consideration, not just the capital gains. On a Rs. 1,10,00,000 sale, this locks up Rs. 20-22 lakh with the tax department even though actual tax liability may be Rs. 6-7 lakh. The NRI gets this refund eventually — but the process takes 6-18 months.

Apply for a certificate under Section 197 via Form 13 on the ITD e-filing portal:

1. Estimate LTCG and applicable tax, factoring in holding period, cost of acquisition, indexation option and any Section 54 / 54F reinvestment
2. Log in to the e-filing portal → Services → Request for Lower/Nil TDS Certificate → submit Form 13 with full computation
3. Attach the sale agreement draft, cost-of-acquisition documents, CII workings and Section 54 reinvestment plan if applicable
4. Follow up proactively with the Assessing Officer — the certificate is typically issued before the registration date if applied well in advance
5. Hand the certificate to the buyer before registration; they deduct at the certified rate, not the default rate

Claiming DTAA Benefits — The Documentation That Actually Unlocks Lower Tax

India has signed Comprehensive Double Taxation Avoidance Agreements (DTAAs) with over 90 countries. A DTAA either caps the rate at which India can tax a specific income in the hands of a non-resident, or allocates exclusive taxing rights to one country. The relief is never automatic — you must claim it with valid documentation, and the payer must have it before the income is paid or credited.

What the Documentation Package Must Contain (Section 90(4) + Rule 21AB)

1. Tax Residency Certificate (TRC): Issued by the tax authority of your country of residence (e.g., IRS for US residents, HMRC for UK residents, UAE Ministry of Finance for UAE residents). Must cover the relevant FY.
2. Form 10F: Filed on the Indian e-filing portal (or physically with the deductor). Declares your nationality, Tax Identification Number in the country of residence, period of residency and address.
3. Beneficial ownership declaration: Confirms that you are the economic owner of the income, not a conduit.

Key DTAA Rate Caps on Common NRI Income Streams

Rates are illustrative. Always verify the specific article of the applicable DTAA and any Protocol amendments.

Critical point on property gains: Nearly every DTAA — US, UK, UAE, Singapore — follows the OECD model Article 13 which allows India to tax gains from immovable property located in India. The DTAA does not exempt property gains; it gives the country of residence a right to also tax the gain and provide credit. You pay Indian tax on the property gain; you claim credit in your country of residence. Plan accordingly.

Worked Example: NRI Sells a Flat in Mumbai, FY 2026-27

Facts: Rajan, an NRI based in Dubai, purchased a flat in Mumbai in FY 2019-20 for Rs. 55,00,000. He sells it in December 2026 for Rs. 1,10,00,000. Holding period exceeds 24 months — Long-Term Capital Asset. Property was acquired before 23 July 2024, so both routes are available. No Section 54 reinvestment planned.

Route A — 12.5% Without Indexation

Route B — 20% With Indexation

Route B saves approximately Rs. 89,000 in this scenario using illustrative CII. Run both computations with the actual notified CII before filing; the result varies by original purchase price and CII progression.

The TDS problem without Form 13:

Without a lower-deduction certificate, the buyer deducts TDS at 20% of the full sale consideration:

> 20% × Rs. 1,10,00,000 = Rs. 22,00,000 deducted at source

Rajan's actual tax liability is approximately Rs. 6-7 lakh. He will get a refund of roughly Rs. 14-15 lakh — but this amount sits with the department until the ITR is filed and processed. A Form 13 application filed 6-8 weeks before registration eliminates this working-capital drain entirely.

AIS and TIS Reconciliation Before Filing for AY 2027-28

The Annual Information Statement (AIS) on the Income Tax e-filing portal has become one of the most powerful compliance tools the department holds. For NRIs, it aggregates data from:

• Sub-registrar offices (property purchases, sales and consideration values)
• Mutual fund houses (SIP redemptions, dividend payouts)
• Indian companies (dividend distributions with PAN linkage)
• Banks (NRO account interest credits, large deposits)
• Depositories — NSDL and CDSL (securities transactions, corporate actions)
• Foreign remittance data via SWIFT/AD bank reporting

Even if you have filed correctly in prior years and received no notices, the AIS exists and the department's risk-scoring runs it against your ITR automatically. A discrepancy between AIS and ITR is the primary trigger for faceless scrutiny notices issued to NR taxpayers.

Pre-filing reconciliation steps:

1. Log in to the e-filing portal → Services → Annual Information Statement (AIS)
2. Download both AIS (full detail) and TIS (Taxpayer Information Summary — aggregated view)
3. Compare every line item against your own records: bank statements, broker contract notes, property documents, dividend warrants
4. Where AIS shows an entry that is incorrect (wrong PAN attribution, duplicate reporting, inflated figure), raise a Feedback within the AIS portal — select "Information is incorrect" or "Information is duplicate" and provide a brief explanation
5. Keep screenshots or PDFs of all feedback submissions
6. Ensure every Indian income item in the AIS is captured in the correct schedule of your ITR-2: NRO interest in Schedule OS, capital gains in Schedule CG, rental income in Schedule HP

PAN-Aadhaar note: NRIs who are not Indian residents are currently exempt from mandatory Aadhaar-PAN linking per CBDT clarifications. Ensure your PAN is active and linked only where legally required. Do not allow your PAN to become inoperative — this would result in TDS being deducted at the higher rate of 20% under Section 206AA even where a lower rate otherwise applies.

Common Mistakes and Pitfalls to Avoid

1. Miscounting days and claiming NR status you cannot defend. AIS now captures inward remittances, property registrations and equity trading activity. If the data pattern suggests India-based activity inconsistent with the claimed NR status, a notice follows. Count every day. Departure and arrival days are both counted as days in India per standard practice.

2. Treating all NRO income as tax-exempt because it is in an "NRO" account. The account type governs repatriation rules under FEMA — it has nothing to do with income tax exemption. Interest credited to an NRO account is fully taxable.

3. Missing the ITR filing due date. For AY 2027-28, the non-audit due date is 31 July 2027 and the tax audit due date is 31 October 2027. These are the same as for residents. Late filing after the due date attracts a penalty of Rs. 5,000 under Section 234F (Rs. 1,000 if total income does not exceed Rs. 5 lakh), plus interest under Sections 234A (on tax due), 234B and 234C (advance tax shortfall).

4. Skipping Form 10F and then disputing TDS. If TRC + Form 10F are not submitted to the payer before income is credited, the payer is legally required to deduct at Act rates. The NRI can claim credit in the ITR and obtain a refund, but the liquidity cost on a large interest or rental credit is real.

5. Ignoring FEMA compliance as a separate track. Transferring funds between NRE and NRO accounts, repatriating beyond permissible limits or using an NRO account for business receipts can constitute FEMA violations. Filing a correct ITR does not cure a FEMA breach — the RBI's Enforcement Directorate administers FEMA independently.

6. Assuming the UAE DTAA means zero Indian tax. The India-UAE DTAA provides rate caps on interest (12.5%) and dividends (10%), but does not exempt Indian-source income. Capital gains on Indian property are taxable in India regardless of where the seller lives.

7. Not reporting Indian assets in Schedule FA when returning. Once you transition from RNOR to full Resident, Schedule FA in ITR-2 requires disclosure of all foreign assets, foreign bank accounts, overseas income and beneficial interests held outside India — including NRE account balances post-return (which were exempt while you were NR but now require disclosure). This is a foreign asset disclosure obligation, separate from taxability.

Key Takeaways

• Residential status under Section 6 is the foundation. One day's miscounting between NR and Resident status can bring your global income into Indian tax. Maintain travel records for six years and apply the 120-day rule if your Indian income exceeds Rs. 15 lakh.
• Section 9 taxes more than just rent. Interest paid by Indian residents, FTS and royalty paid by Indian parties, and salary for India-rendered services are all taxable in India for NRIs — even if invoiced from or paid to offshore accounts.
• NRO interest is fully taxable; NRE and FCNR(B) interest are exempt only while NR status is maintained. Submit TRC + Form 10F to the bank before interest is credited to activate DTAA rates at source.
• The Section 87A rebate is not available to NRIs. At moderate Indian income levels (Rs. 8-12 lakh), this creates a Rs. 40,000-60,000 additional tax burden compared to a resident taxpayer with identical Indian income.
• Form 13 is the most valuable compliance step for NRIs selling Indian property. Applied 6-8 weeks before registration, it converts a TDS of Rs. 20 lakh on a Rs. 1 crore sale into a TDS that matches actual liability — freeing up Rs. 13-15 lakh that would otherwise sit in a refund queue for over a year.
• DTAA benefits never apply automatically. TRC + Form 10F must reach the payer before income is credited. The documentation requirement is a condition precedent, not a post-filing formality.
• Reconcile AIS against your ITR before submission. Every property transaction, mutual fund redemption, NRO interest credit and dividend is visible to the department. An unexplained gap is a faceless notice waiting to happen.

This article reflects the law as understood for FY 2026-27 / AY 2027-28 based on legislation and notifications current to May 2026. CII for FY 2026-27 and any CBDT notifications issued after this date should be verified directly on the Income Tax portal before preparing computations or filing returns.