Income Tax Rules for NRIs in India: You Must Know in 2026

For many Indians working overseas, financial links with India rarely disappear. A house in Bengaluru generating rent, mutual funds purchased before moving abroad, or deposits maintained in Indian banks often continue to form part of an NRI’s financial life.

These connections also bring an important question: when exactly does an NRI have to pay tax in India?

The answer lies in the Income Tax Act, 1961, which clearly defines how taxation works for Non-Resident Indians. Unlike resident taxpayers, who are taxed on their global income, NRIs are taxed only on incomeearned in India or received in India. Income earned abroad for services rendered outside India usually remains outside the scope of Indian taxation.

However, the rules extend beyond that. Different types of income, such as property rent, capital gains from investments, or interest from bank deposits, are taxed under specific provisions. Understanding these rules helps NRIs remain compliant while also planning investments in a tax-efficient way.

What Income of NRIs Is Taxable in India

A common misunderstanding is that once someone becomes an NRI, they no longer have any tax obligations in India. In reality, taxation depends on where the income is generated, not where the individual resides. If the source of income is in India, it is generally taxable in India even if the taxpayer lives abroad.

For instance, rental income from a property located in India is taxed under the head “Income from House Property.” The same deductions available to residents apply here, including the standard deduction of 30% under Section 24 on the net annual value and deduction of interest paid on housing loans.

Capital gains from Indian investments also fall under Indian taxation. If an NRI sells listed equity shares or equity-oriented mutual funds after holding them for more than 12 months, the gains are treated as long-term capital gains under Section 112A. Following the changes announced in the Union Budget 2024, long-term capital gains from these assets are now tax-exempt up to ₹1.25 lakh in a financial year, and any gains above this threshold are taxed at 12.5% without indexation.

If the same equity investments are sold within 12 months, they are treated as short-term capital gains and taxed at 20%, as per the revised rules for specified financial assets.

Real estate transactions follow a different structure. When an NRI sells property in India after holding it for more than 24 months, the gain is treated as long-term and taxed at 20% with indexation benefits, while property sold within 24 months is taxed as short-term capital gains at the applicable income tax slab rates.

At the same time, income earned outside India, such as a salary paid by a foreign employer for services rendered abroad, is generally not taxable in India for NRIs, even if the funds are later transferred to an Indian bank account.

Tax Treatment of NRI Bank Accounts and Investments

NRIs are allowed to maintain three types of bank accounts in India: NRE (Non-Resident External), NRO (Non-Resident Ordinary), and FCNR (Foreign Currency Non-Resident) accounts. Each account has a different tax treatment under the Income Tax Act.

Interest earned on NRE and FCNR deposits is exempt from tax in India under Section 10(4) as long as the individual qualifies as a non-resident for tax purposes. This exemption makes these accounts one of the most tax-efficient ways for NRIs to hold foreign earnings in India.

However, interest earned on NRO accounts is fully taxable in India. Banks deduct TDS at 30% plus applicable surcharge and health and education cess before crediting the interest amount. If the NRI’s total taxable income in India is lower than the amount on which TDS has been deducted, the excess tax can be claimed as a refund while filing an income tax return.

NRIs can also invest in Indian equities, mutual funds, government securities, and bonds, usually through NRE or NRO accounts under FEMA regulations. Any capital gains generated from these investments are taxed according to the revised capital gains rules introduced in Budget 2024, which apply uniformly to resident and non-resident investors.

Deductions Available to NRIs

Although NRIs do not enjoy every deduction available to resident taxpayers, they are still eligible for several key tax benefits under the Income Tax Act.

Under Section 80C, NRIs can claim deductions up to ₹1.5 lakh for specific expenses and investments. This includes life insurance premiums paid for themselves, their spouse, or children, principal repayment of a home loan for property in India, and tuition fees paid to an educational institution in India for up to two children.

Health insurance premiums paid for family members qualify for deductions under Section 80D, subject to the same limits applicable to resident taxpayers. Interest paid on education loans for higher studies is eligible for deduction under Section 80E, which can be claimed for up to eight consecutive years starting from the year the interest payment begins.

Donations made to approved charitable institutions registered under the Income Tax Act may also qualify for deductions under Section 80G, depending on the nature of the organisation and the eligibility criteria defined in the law.

These provisions allow NRIs who maintain financial commitments in India to legitimately reduce their taxable income.

Avoiding Double Taxation Through DTAA

For NRIs living abroad, one major concern is paying tax on the same income in two different countries. To address this, India has signed Double Taxation Avoidance Agreements (DTAA) with more than 90 countries, including the United States, the United Kingdom, Singapore, Canada, and Australia.

Under these agreements, taxpayers can claim relief through either the exemption method or the tax credit method. In the exemption method, income is taxed only in one country while the other country provides an exemption. Under the tax credit method, the income may be taxed in both jurisdictions, but the taxpayer receives credit for the tax already paid in the other country.

To claim DTAA benefits, NRIs typically need to submit a Tax Residency Certificate (TRC) issued by the tax authority of the country where they currently reside, along with other supporting documents such as Form 10F.

Conclusion

Being an NRI changes how taxation works in India, but it does not eliminate tax obligations. Income generated within India from property, investments, or bank deposits continues to fall under the scope of the Income Tax Act, 1961, with specific rules governing capital gains, TDS, and deductions.

With the capital gains tax changes introduced in Budget 2024, staying informed has become even more important for NRIs who actively invest in India. Accurate tax planning not only prevents compliance issues but also helps optimise long-term investment returns.

For NRIs who manage assets or investments in India while living abroad, professional guidance can make a significant difference. Moneyvesta NRI Financial Advisory supports overseas Indians in navigating taxation rules, structuring investments efficiently, and ensuring compliance with India’s evolving financial regulations.