Determining your residential status for income tax in India is the first step for NRIs and OCIs. Income-tax law classifies individuals as Resident or Non-Resident (NRI) (with a subcategory "Not Ordinarily Resident"). Normally, an individual in India 182 days or more in a fiscal year (or 60 days plus 365 days in the preceding 4 years) is "resident"; otherwise, they are an NRI. (For high-income Indian citizens/PIOs, the 2020 tax law lowers the 60-day test to 120 days if annual Indian income exceeds ₹15 lakh, and even deems anyone not taxed abroad to be a resident.) An NRI's tax liability depends on status: a Resident is taxed on worldwide income, whereas a Non-Resident (NRI) is taxed only on Indian-sourced income; any foreign-earned income (earned and received abroad) is exempt. A Not Ordinarily Resident (e.g. a returning NRI) is taxed on Indian income and on any foreign income from a business controlled/established in India.

Taxable vs. Non-Taxable Income for NRIs

Under Indian tax law, all NRIs (non-residents) pay tax only on income received/receivable or accrued in India. For example, salary, rent, capital gains or interest on Indian assets count as Indian income and are taxable. In contrast, foreign-sourced income (such as salary or dividends earned and received outside India) is not taxed in India for NRIs. (This is why remitting foreign income into India does not create new tax liability.)

In practice:

• Indian-sourced income (always taxable) – e.g. rent from a property in India, capital gains from selling Indian property, interest on NRO bank accounts, dividends from Indian shares, and business income earned through an Indian branch.
• Foreign income (exempt for NRIs) – e.g. salary earned abroad, interest on overseas bank accounts, foreign investments, etc., as long as the NRI remains non-resident for tax.

Importantly, the time and place of receipt matter: if income arises abroad but is first received in India (e.g. foreign salary remitted), it could be treated as received in India and thus taxable. But if it was received outside India first, it remains exempt when later remitted. Note that if an NRI later becomes tax-resident in India, all such foreign income becomes taxable going forward.

NRI Banking Accounts (NRE, NRO, FCNR) and Taxation

NRIs commonly use special rupee and foreign currency accounts in India:

• NRE (Non-Resident External Rupee) Accounts: Rupee accounts funded by foreign currency remittances. Interest earned on NRE savings and fixed deposits is completely tax-free in India under Section 10(4) of the Income Tax Act. This exemption aims to attract NRI deposits. (However, eligibility requires the account-holder to be a "person resident outside India" under FEMA; if you become an Indian resident, the bank will re-designate the account and interest will lose exemption.) NRE accounts (and FCNR (B) accounts, which are foreign-currency FDs) are fully repatriable – you can send funds abroad freely.
• NRO (Non-Resident Ordinary) Accounts: Rupee accounts for income earned in India (rent, dividends, pension, interest). Interest on NRO accounts is taxable in India. In fact, banks must deduct TDS on NRO interest at the full NRI rate of 30% plus surcharge/cess. (No Section 10 exemption applies to NRO income.) Importantly, NRO funds are repatriable subject to limits: RBI permits remittance of up to USD 1 million per financial year (April–March) from NRO balances (along with other eligible assets). So, an NRI can send up to $1M (net of taxes) out of India per year via the NRO account, after paying applicable taxes on that income.

In summary, NRIs benefit from tax-free interest on NRE/FCNR accounts, while NRO interest is taxed at 30% (plus surcharge/cess). Repatriation rules are liberal for NRE/FCNR, but NRO repatriation is capped at $1M/year. (If you inadvertently lose NRI status, you must inform your bank to convert your NRE to a resident account, else the interest exemption can be disallowed.)

TDS and Filing Income Tax Returns

Indian law mandates Tax Deduction at Source (TDS) on certain payments to NRIs. For example, tenant/buyer paying rent or property purchase price to an NRI must deduct tax at 30% (plus 4% health and education cess), i.e. 31.2% (the exact rate can vary slightly by income level under surcharge rules). Similarly, banks deduct 30% on NRO interest. Salaries paid in India to NRIs are taxed at slabs, with normal TDS by the employer. Dividends and capital gains also have TDS provisions. As a practical tip, NRIs should ensure they obtain and quote an Indian PAN to avoid an even higher "no-PAN" TDS rate of 20% or higher on certain incomes.

Even if tax is deducted, NRIs often should file an Income Tax Return (ITR) in India. Filing is mandatory if Indian taxable income exceeds the basic exemption (₹2.5 lakh per year under old rules, ₹4 lakh under the new tax regime). Returns must also be filed in special cases: for instance, any long-term or short-term capital gains (such as from shares or property), or if the NRI held large bank balances (e.g. deposits over ₹50 lakh in savings or ₹1 crore in current accounts) or if total TDS is ₹25,000 or more. Filing can be beneficial to claim refunds (if excess TDS was deducted) or to carry forward losses (e.g. from property). Even when not mandatory, filing ensures compliance and allows claiming credits under DTAAs (see below).

DTAA Benefits for NRIs/OCIs

India has signed Double Taxation Avoidance Agreements (DTAAs) with many countries. These treaties allocate taxing rights and protect taxpayers against being taxed twice on the same income. For an NRI who pays tax in a foreign country on an income also taxable in India, the DTAA lets them claim relief (usually in the form of a tax credit or exemption). For example, if an NRI earns dividends or interest in the USA and also pays Indian tax on it, the DTAA allows crediting the foreign tax against Indian tax.

Moreover, for certain payments from India, the DTAA may prescribe a lower TDS rate. In fact, Indian law allows NRIs to be taxed either under domestic law or under the DTAA – whichever is more beneficial. NRIs should thus take advantage of DTAAs: obtain a Tax Residency Certificate from the foreign tax authority, submit it along with Form 10F to the Indian tax department, and claim the treaty rate/relief. Many banks will then apply the lower treaty TDS rate on NRO interest or other income, preventing large excess deductions. (For example, an India-USA DTAA might allow only 15% withholding on interest, instead of 30%.) As noted by the Government, NRIs "would be well advised to take advantage of such [tax treaties] in tax planning for their investments in India".

Repatriation and Foreign Income

Repatriation: NRIs often move funds between India and abroad. Key rules: NRE/FCNR account balances are fully repatriable at any time. NRO rupee funds are repatriable up to USD 1 million per year after paying taxes. (Large transfers must follow RBI approval or AD bank procedures; RBI guidance confirms the $1M liberalized limit.) For sale proceeds of Indian property, the NRI must pay capital gains tax and then repatriate the net amount under the $1M rule. All remittances should be done through proper banking channels with required documentary compliance (Chartered Accountant certificate, PAN disclosures, etc.).

Taxation of Foreign Income: As an NRI (non-resident), your foreign income remains outside Indian tax even when repatriated back home. However, if you become a tax resident again, that foreign income (if accrued/received abroad and coming from a foreign source) becomes taxable in India (with limited exemptions for RNOR). Planning tip: many NRIs invest part of their wealth in India (mutual funds, stocks, real estate); be aware that only the India-generated returns on those investments are taxed by India. Dividend income from Indian stocks is fully taxable in India for NRIs (at 20% w.e.f. 2020), whereas foreign dividends remain outside India's jurisdiction.

Common Compliance Pitfalls and Planning Strategies

Pitfalls:

• Residency confusion: Overlooking the 120-day rule or Section 6(1A) can inadvertently make a high-income NRI a tax resident. Failing to update your status with banks (per FEMA) can invalidate NRE interest exemptions.
• Not claiming DTAA: Many NRIs forget to submit a Tax Residency Certificate (TRC) and Form 10F, causing higher taxes (e.g. 30% instead of treaty rate).
• Filing omissions: Some NRIs think they need not file ITR because of TDS, but failure to file when required (e.g. thresholds, capital gains) can attract penalties.
• Account misuse: Using an NRE account for rupee income (like rent) forfeits tax benefits and complicates repatriation. Similarly, repatriating NRO funds beyond limits without RBI approval is illegal.
• Ignoring tax updates: New taxes (e.g. 1% TDS on property sales, higher surcharge rates) can catch NRIs unawares.

Planning strategies:

• Use NRE/FCNR accounts: Park foreign income in NRE/FCNR to earn tax-free interest and allow easy repatriation.
• Invest tax-efficiently: Choose tax-friendly instruments (e.g. long-term capital assets with 20% after indexation, which benefit from DTAAs). Explore exemptions under sections like 115F (reinvestment of property sale proceeds).
• Claim all deductions: NRIs can claim deductions (80C, 80D, etc.) if they have Indian income (e.g. rent) and choose old tax regime.
• Offset losses: Carry forward capital losses (like from share sales) by filing return timely.
• Keep documents handy: Always maintain PAN, TRC, proof of residence abroad, and notify banks/authorities promptly on status changes.

By staying informed on OCI tax rules, international treaties, and Indian tax law updates, NRIs and OCIs can avoid pitfalls and optimize their tax position. When in doubt, professional advice is invaluable. Our Tax Vimarsh experts specialize in NRI taxation – contact us for personalized guidance on tax planning, filings, and compliance.