NRI Income Tax: Residential Status and DTAA Explained

The most common confusion among NRIs is whether to file an Indian tax return at all. The short answer is: it depends on your residential status under the Income Tax Act and on what you earn or receive in India. The longer answer involves day-counting, DTAA treaties, the difference between an NRO and NRE bank account, and getting Form 67 filed in time so you do not pay tax twice on the same income.

This guide covers the essentials for NRIs filing for AY 2026-27 (FY 2025-26): how to determine residential status, what is taxable, the TDS regime on Indian income, DTAA relief, and the ITR filing process.

Step One: Determine Your Residential Status

The Income Tax Act has its own definition of residency that overrides immigration or citizenship status. Section 6 lays down the test.

You are a Resident in India in a financial year if either of these is satisfied:

• You are in India for 182 days or more during the financial year, OR
• You are in India for 60 days or more in the financial year AND 365 days or more during the 4 financial years immediately preceding.

The 60-day threshold becomes 182 days for:

• Indian citizens leaving India for employment abroad during the FY.
• Indian citizens or persons of Indian origin (PIO) visiting India during the FY, provided their total Indian income (other than from foreign sources) does not exceed Rs 15,00,000.

If the Indian income exceeds Rs 15,00,000, the threshold becomes 120 days along with the 365-day rule (rather than the relaxed 182). This is the post-2020 amendment that catches high-earning visiting NRIs.

If you are not a Resident, you are a Non-Resident (NR), commonly called NRI for tax purposes.

A separate sub-classification, Resident but Not Ordinarily Resident (RNOR), applies if you are a Resident but you have been a Non-Resident in 9 out of the previous 10 years, or have stayed in India for less than 730 days in the previous 7 years. RNOR taxation is closer to NRI taxation in scope.

A Quick Day-Count Example

Anita is an Indian citizen working in the US. In FY 2025-26:

• Days in India: 95 (visit in December-January).
• Indian income (rent and interest): Rs 8,50,000.
• Total Indian stay in the previous 4 financial years (FY 2021-22 to FY 2024-25): 350 days.

Apply the test:

• Not 182 days or more in FY 2025-26: first condition fails.
• 60 days or more in FY 2025-26 (yes, 95 days) AND 365 or more in last 4 years (no, only 350): second condition fails.

Anita is a Non-Resident for FY 2025-26.

Step Two: What Is Taxable for an NRI

An NRI is taxable in India only on:

1. Income received or deemed to be received in India.
2. Income that accrues or arises in India.

This includes:

• Salary paid for services rendered in India (rare for typical NRIs, common for short-stay assignees).
• Rental income from property situated in India (computed under Income from House Property head, with the standard 30% deduction and Section 24(b) interest deduction).
• Capital gains on transfer of Indian assets: shares of Indian companies, mutual funds, immovable property in India.
• Interest on NRO bank accounts and Indian fixed deposits (NRE/FCNR interest is exempt; see below).
• Interest on Indian bonds and debentures (RBI bonds, NRI Bonds, etc.).
• Dividends from Indian companies.
• Pension received in India for past services rendered in India.

Foreign income (salary in the country of residence, foreign rental income, foreign interest, etc.) is not taxed in India for an NRI. RNORs also do not pay Indian tax on foreign-source income unless it is from a business controlled or set up in India.

What counts as income arising in India, including business connection, royalty and fees for technical services, is governed by the Section 9 source rules for income arising in India.

NRE, NRO, FCNR Bank Accounts: The Tax Treatment

Three account types matter for NRI taxation:

• NRE: rupee account for foreign earnings; interest exempt under Section 10(4)(ii) while you are a non-resident; freely repatriable.
• NRO: rupee account for India-source income; interest taxable, TDS under Section 195 at 30% plus surcharge and cess.
• FCNR (B): foreign currency term deposit; interest exempt under Section 10(15)(iv)(fa) for non-residents and RNORs; freely repatriable.

For an NRI, the working rule is: keep Indian-source rupee income in NRO, foreign-source income in NRE / FCNR. Bank TDS on NRO interest is steep (30%); but if your DTAA treaty rate is lower (commonly 10% to 15%), you can claim a refund through ITR.

TDS on NRI Income

Tax Rate Chart

TDS Rates on NRI Income

Applicable under Section 195 (plus surcharge and 4% cess) for AY 2026-27

Interest on NRO Account / FD

Section 195; DTAA may allow lower rate via ITR refund

30%

Rent Paid to NRI Landlord

Section 195; tenant must obtain TAN and file Form 27Q

30%

Short-Term Capital Gains (Property Sale)

Deducted on the full sale value in practice; apply Form 13 for lower deduction

30%

Long-Term Capital Gains (Property Sale)

Rate for transfers from 23 Jul 2024; apply Form 13 for lower deduction

12.5%

Sale of Listed Shares : LTCG (Section 112A)

On gain above Rs 1.25 lakh

12.5%

Dividend from Indian Company

Section 195; DTAA may reduce effective rate

20%

NRE / FCNR Account Interest

Exempt under Section 10(4)(ii) (NRE) and 10(15)(iv)(fa) (FCNR); no TDS

0%

Source: Section 195 and Part II of First Schedule, Finance Act; Sections 10(4)(ii), 10(15)(iv)(fa), Income Tax Act 1961

The TDS rates for NRIs are higher than for residents because the bank or payer cannot easily verify the NRI's tax position.

The cleanest way to reduce excess TDS on a property sale or large transaction is to apply for a Lower Deduction Certificate (Form 13) from the Assessing Officer before the transaction. This authorises the buyer or payer to deduct TDS at the actual tax rate after computing gain or applicable DTAA rate.

DTAA: Avoiding Double Taxation

India has DTAA treaties with around 90 countries, including the US, UK, UAE, Singapore, Australia, Canada, and Saudi Arabia. The treaty allows you to either:

• Pay tax only in one country (exemption method), or
• Get credit for tax paid abroad against Indian tax (credit method).

For most income types (interest, royalty, technical fees, capital gains), the treaty allows India to tax at a rate often lower than the domestic 30%. For example, the India-US DTAA typically caps interest tax in India at 15%.

How to Claim DTAA Relief

1. Obtain a Tax Residency Certificate (TRC) from the country of residence. This is a one-page document confirming you are a tax resident.
2. Submit Form 10F to the Indian payer or in your ITR. Form 10F is now mandatorily filed online on incometax.gov.in/iec/foportal/.
3. File Form 67 if you are a resident (for example a returning NRI) claiming foreign tax credit (FTC) for tax paid abroad. It must be filed on or before the end of the assessment year for a return under Section 139(1) or 139(4) (31 March 2027 for AY 2026-27).
4. Quote the relevant article of the DTAA in the ITR Schedule TR (Tax Relief).

Form 67 is the form most often missed. Rule 128 of the Income-tax Rules allows FTC only if Form 67 is filed by the end of the relevant assessment year (as amended by Notification 100/2022). Some ITAT rulings treat late filing as a procedural lapse, but the safe practice is to file Form 67 along with the return.

Which ITR Form an NRI Files

ITR 1 (Sahaj) is not available to NRIs. The most common form is ITR 2.

Filing Threshold and Refund Cases

NRIs must file an Indian ITR if any of the following:

• Total Indian income (before Chapter VI-A deductions) exceeds the basic exemption limit: Rs 4,00,000 under the new regime or Rs 2,50,000 under the old regime for AY 2026-27.
• TDS has been deducted and you want to claim a refund.
• You have capital gains in India, even if total income is below the threshold (the basic exemption limit for residents is not available to NRIs against capital gains under Sections 111A and 112).
• You are claiming a benefit under the DTAA.

For most NRIs whose only Indian income is interest on NRO and rental from a flat, filing the ITR is the only way to recover excess TDS, since the bank deducts at 30% but the actual tax may be lower.

For what that filing costs and the documents you need to claim the refund, see our note on NRI ITR filing charges and process, which covers fees for ITR-2 and ITR-3 and the late filing rules.

Sale of Property by an NRI

The sale of immovable property by an NRI is the most procedurally complex transaction. The key steps:

1. Calculate capital gain. Long-term (held more than 24 months) is taxed at 12.5% under the post-July 2024 regime, generally without indexation; short-term is taxed at slab rates.
2. TDS by buyer. The buyer must deduct TDS under Section 195 at 12.5% (LTCG, transfers from 23 July 2024) or 30% (STCG), plus surcharge and cess. Without a lower deduction certificate, buyers deduct on the full sale value, not the gain. For a Rs 1 crore sale of a long-term property, that is Rs 12.5 lakh before surcharge and cess, deposited and reported in the TDS return (Form 27Q up to 31 March 2026, Form 144 from 1 April 2026).
3. Lower Deduction Certificate (Form 13). Apply to the Assessing Officer to authorise TDS at the actual tax rate (computed on the gain). This avoids tying up cash in TDS.
4. Capital gains exemption. Sections 54, 54F and 54EC are available to NRIs subject to the same conditions as residents. See our capital gains exemption guide.
5. Repatriation. Sale proceeds can be repatriated up to USD 1 million per FY through the NRO account, subject to filing Forms 145 and 146 (Form 145 replaced Form 15CA and Form 146 replaced Form 15CB from April 1, 2026; Form 146 requires a CA certificate).
6. ITR filing. File ITR 2, claim refund of excess TDS, report the sale in Schedule CG.

Common Mistakes NRIs Make

• Not filing ITR despite having Indian income. Even if TDS has been fully deducted, ITR is needed to claim refund of excess TDS or DTAA-based reduction.
• Treating NRE interest as taxable. It is exempt under Section 10(4)(ii). No tax to pay and no need to report it as taxable income.
• Skipping Form 67. Residents claiming foreign tax credit risk denial if Form 67 is not filed by the end of the assessment year.
• Filing ITR 1 by mistake. ITR 1 is not for NRIs. Use ITR 2 or ITR 3.
• Not getting a Tax Residency Certificate. DTAA benefits require a TRC from the country of residence. Apply early; some countries take weeks.
• Forgetting TDS on rent. Tenants paying any amount of rent to an NRI landlord must deduct TDS at 30% plus surcharge and cess under Section 195, obtain a TAN and file the quarterly TDS return (Form 27Q, or Form 144 from 1 April 2026). Section 194-IB, with its Rs 50,000 a month threshold, applies only to resident landlords.

Where Tax Garden Helps

NRI taxation looks straightforward in summary but has more procedural traps than any other category of filer. Tax Garden's tax compliance services handle NRI ITRs end to end: residential status determination, NRO/NRE reconciliation, DTAA relief via Form 67, ITR 2 filing, capital gains computation on property sales, and Lower Deduction Certificate applications. Our team has filed NRI returns for residents of the US, UAE, UK, Singapore and Australia.

For related reading, see our capital gains exemption guide and the old vs new regime comparison.

Frequently Asked Questions

I visited India for 130 days and my Indian income is over Rs 15 lakh. Am I still an NRI?

Possibly not. For an Indian citizen or person of Indian origin visiting India whose Indian income exceeds Rs 15 lakh, you become resident if you stay 120 days or more in the year and 365 days or more in the previous four years. Such a person is usually treated as Resident but Not Ordinarily Resident, so foreign income generally stays outside Indian tax.

Do NRIs get the Section 87A rebate?

No. The Section 87A rebate is available only to resident individuals. An NRI with Indian income such as rent or NRO interest pays tax at the applicable slab rates without the rebate, though the basic exemption limit of the chosen regime still applies to normal income, which is Rs 4 lakh under the new regime for AY 2026-27.

Does a tenant need to deduct TDS on rent paid to an NRI landlord?

Yes, for any amount of rent. Section 195 applies to all rent paid to a non-resident, so the tenant must obtain a TAN, deduct TDS at 30% plus surcharge and cess (or a lower rate under a certificate), deposit it and file the quarterly TDS return (Form 27Q for payments up to 31 March 2026, Form 144 for payments from 1 April 2026). The Section 194-IB route for rent above Rs 50,000 a month is only for resident landlords.

How can an NRI get back the 30% TDS deducted on NRO interest?

File ITR 2 in India reporting the NRO interest and claiming the TDS credit. If your total Indian income is below the taxable limit, or a tax treaty caps tax on interest at a lower rate such as 15% under the India-US treaty, the excess TDS is refunded. To claim the treaty rate, keep a Tax Residency Certificate and file Form 10F online.

Can an NRI claim Section 54 or 54EC exemption on selling a house in India?

Yes. NRIs can claim Section 54 by buying or building a residential house in India within the prescribed time, or invest up to Rs 50 lakh in specified bonds under Section 54EC within 6 months of the sale. The new house must be in India. A Section 197 certificate can factor in the planned exemption to reduce TDS.

Sources

This guide is verified against Section 6, Section 9, Section 10(4)(ii), Sections 90/90A/91, Section 195 and Rule 128 of the Income Tax Act 1961 and Income Tax Rules 1962, the FEMA framework for NRI bank accounts published by the Reserve Bank of India, and the model DTAA articles. Practitioner cross-checks from ClearTax, Tax2Win, IndiaFilings and CAClubIndia were reviewed. Always validate the current TDS rate and DTAA rate against the relevant treaty article and the latest CBDT notifications before filing.