Income Tax in India for NRIs vs abroad: What you must know

A year ago, Raj moved to London, eager to begin his new job. Like many non-resident Indians (NRIs), he focused on settling in, exploring the city, and supporting his family back in India. However, as his rental income from Mumbai and interest from Indian savings began to accumulate, Raj started to question the tax implications of his income both in India and abroad.

If you find yourself in a similar situation, it's important to know the rules for income tax in India for NRIs. Getting the basics right can help you avoid unnecessary tax liabilities and ensure compliance with tax regulations.

Keep reading for an income tax guide and learn the key differences in how India and your country of residence tax your earnings. 

What do the rules for income tax in India for NRIs say?
 

As per the Income Tax Act, 1961, if you are an NRI, only your income earned or received in India is taxable in India. This includes –

1. Rental income from own property in India
2. Capital gains from any property or assets in India—real estate, shares, or mutual funds—that you sell in India
3. Interest you earn on savings accounts, fixed deposits (FDs), or other interest-bearing accounts in India is also taxable

However, the tax treatment of interest on savings accounts varies depending on the type of account you hold.

1. The interest earned on a non-resident ordinary (NRO) account is subject to tax deduction at source (TDS), which you must report when filing your tax return
2. The interest earned on a non-resident external (NRE) account is completely tax-free in India. This account allows you to deposit your foreign earnings and repatriate the funds freely

The tax benefits on NRE accounts make them a preferred choice for many NRIs.

However, income earned abroad, such as salary or business income from your country of residence, will not be taxed in India as long as you maintain your NRI status. Understanding this distinction in the rules for income tax in India for NRIs helps you manage your finances effectively, ensuring you’re only paying taxes where necessary.

IDFC FIRST Bank NRI Banking services can help you efficiently manage these types of incomes. With the NRO and NRE accounts, you can handle your rental income and interest tax-compliantly.

How do India and foreign countries charge tax on NRI income differently?
 

While India taxes income earned within its borders, foreign countries often have a broader tax system where your global income might be taxed. Here’s a simple comparison of the rules for income tax in India for NRIs with those in many countries where they live –

1. India’s taxation system

India follows a system where only income earned in India is taxed for NRIs. The tax rate is progressive. This means the more you earn, the higher the percentage of tax you pay. For example, taxation on NRO accounts and rental income will depend on the income tax slabs.

2. Taxation abroad

Income tax is usually based on your global income in countries like the UK or the US. This means if you live in the UK, for example, your income from both the UK and India could be taxed in the UK, depending on your total earnings. Like India, these countries have progressive tax rates, where the tax percentage increases with income.

So, if you're an NRI earning income both in India and abroad, you should be aware that each country will tax your income according to its own rules. This difference can often lead to confusion, which is where Double Tax Avoidance Agreements (DTAA) come in. If you are unsure, speaking with a tax professional in both India and your country of residence can be a wise step.

Understanding double taxation and DTAA
 

One common concern for NRIs like Raj is double taxation—paying tax on the same income in both India and the country of residence. Fortunately, India has agreements with over 90 countries. DTAAs offer several mechanisms, such as tax credits or exemptions, to reduce tax liability significantly.

These agreements under rules for income tax in India for NRIs allow Raj, for example, to claim tax relief for the taxes he pays on rental income in India when he files his taxes in the UK. It prevents him from being taxed twice on the same income.

IDFC FIRST Bank assists NRIs by providing NRO and NRE accounts to manage their income and help with tips for filing tax returns. The relationship managers can effectively guide you through using these rules for income tax in India for NRIs. They will ensure you make the most of the available tax credits and avoid double taxation.

Residency status and how it determines income tax in India for NRIs
 

Your tax residency status determines how your income is taxed in India. If you qualify as a resident under Indian tax laws, your global income can be taxed in India. If you’re considered an NRI, only your income earned within India is subject to Indian tax.

India’s tax laws classify individuals based on the number of days they spend in India during the year. You are a resident of India if you have stayed in the country for a specific number of days. If you do not meet these conditions, you are treated as an NRI for Indian tax purposes.

Residency checklist for NRIs
 

• Did you spend less than 182 days in India this year?
• Did you spend less than 60 days in India this year and less than 365 days in the last four years?

If you answer “yes” to these, you are likely an NRI for tax purposes.

Stay compliant and optimise your finances
 

Understanding how your income is taxed—both in India and abroad—is key to smart financial planning. By knowing the rules for income tax in India for NRIs, you can ensure you’re only paying taxes where necessary and avoiding double taxation.

If you’re managing income through Indian savings accounts or investments, IDFC FIRST Bank NRI Banking solutions can help optimise your tax situation. Discover how these services can help you maximise your financial potential while ensuring compliance.