Indian Tax For NRI On Indian Income: How Each Head Is Actually Taxed

Vinod (name changed), a supply chain director in Frankfurt, sent me his Form 26AS last June with one line in the email. “Please explain why Rs 6.8 lakh has been deducted when I earned about Rs 19 lakh in India.”

He had assumed a single rate applied to everything. It does not.

His Indian income sat under four different heads. Rent taxed one way. NRO interest another. Equity gains a third. Dividends a fourth. Each head had its own TDS rate, and three of the four had taken more than his actual liability. Once we mapped it, his real tax was Rs 2.9 lakh. The rest came back.

First check your status – New Indian tax rules for NRI: residency and the 120-day rule

The rate card, head by head

Everything below assumes you are a non-resident for the year. Confirm that first, because the 120-day rule can quietly change the answer.

Surcharge sits on top of every one of these once income crosses Rs 50 lakh, and it is capped at 25% under the new regime.

Salary: the question is where you worked, not where you were paid

This trips up more people than any other head.

The test is where the services were rendered. If you are on the Frankfurt payroll and the work happens in Frankfurt, India has no claim, even if part of the money lands in your Indian account. If you spent six weeks on a project in Bengaluru, that slice of salary is Indian income regardless of which bank paid it.

A bonus paid into an Indian account for work done abroad follows the same logic. It is often deducted at source anyway, because the payroll system does not know better. You get it back by filing, supported by a tax residency certificate from your country and the relevant treaty article.

Interest: two accounts, two completely different outcomes

NRE and FCNR interest is exempt. Not “low tax”. Exempt. It is one of the few genuinely clean deals an NRI gets in India.

NRO interest is fully taxable, and the bank deducts 30% plus surcharge and cess before crediting a rupee. Not 10%, which is the resident rate you may remember.

Here is where treaties earn their keep. Several of India’s treaties cap interest withholding at 10% or 15%. Give the bank a valid TRC and Form 10F, and the deduction drops from around 31% to the treaty rate. On Rs 40 lakh of NRO deposits at 7%, that is roughly Rs 60,000 a year that stays in your account instead of waiting eighteen months for a refund.

Capital gains: the rates changed, and most pages have not caught up

If you read a page saying equity short term is 15% and long term is 10% above Rs 1 lakh, you are reading pre-July-2024 material. Those numbers are gone.

The current position: listed equity and equity mutual funds, short term 20%, long term 12.5% on gains above Rs 1.25 lakh a year. The holding period line is still 12 months. Budget 2026 left all of it alone.

Debt funds bought on or after 1 April 2023 have no long-term treatment at all. Gains are added to your income and taxed at slab, however long you held them. Indexation, for these units, no longer exists.

For property, gains on assets held over 24 months are long term at 12.5% plus surcharge and cess. Shorter than that and you are at slab rates.

Detail – NRI mutual fund taxation in India

The two rules that make an NRI’s tax bill worse than a resident’s

These two get missed constantly, and together they cost real money.

One. You cannot use the basic exemption limit against capital gains. A resident with only Rs 3 lakh of capital gains pays nothing, because gains are absorbed by the exemption limit. An NRI in the same position pays tax from the first rupee of gain. The exemption limit only shelters your other income.

Two. The Section 87A rebate is not available to non-residents. A resident with taxable income up to Rs 12 lakh under the new regime effectively pays nil. An NRI with the same Rs 12 lakh pays the full computed tax. Same income, same country, different bill.

Think of it like an airline loyalty programme where two people on the same flight in the same seat class get different baggage allowances. Nothing is being taken from you illegally. The rules were simply never written with you in the room.

What is genuinely outside the net

• NRE and FCNR interest. Exempt while your status holds.
• Inheritance. India has no estate duty. Receiving assets from a deceased relative is not taxable. What those assets earn afterwards is.
• Gifts from specified relatives. Parents, spouse, siblings, children and their spouses, grandparents, grandchildren. No limit. From anyone else, anything above Rs 50,000 in a year is fully taxable.
• Foreign income, while you are an NRI or RNOR. Your Dubai salary, your German pension contributions, your US brokerage. India does not reach them.

Why the TDS never feels like your money

There is a habit of mind that economists call mental accounting. We put money into separate mental buckets and treat identical rupees differently depending on which bucket they sit in.

Watch what NRIs do with TDS. A client will spend two weeks negotiating a bank to shave 0.15% off a home loan rate, worth maybe Rs 18,000 a year. The same client will leave Rs 3.9 lakh of excess TDS uncollected for two years because “that is tax, it is gone”.

It is not gone. It is a receivable. It is the single largest, safest, most certain rupee amount sitting in your Indian financial life, and it is earning you nothing.

The reason it feels different is that it left before you ever saw it. Salary deducted at source never lands in the account, so the brain never files it as yours. Woh paisa gaya nahi hai, sirf dikhta nahi hai.

Also read – How NRIs can legally save tax on Indian income

Questions NRIs keep asking about Indian income

My only Indian income is NRE interest. Do I need to file?
Exempt income does not create a filing obligation on its own. But if you have any TDS you want refunded, or Indian income above the basic exemption limit, you must file. More on when an NRI must file in India.

Can I claim 80C deductions?
Only under the old regime, which you must actively choose. The new regime is the default and it removes most deductions. NRIs are also barred from some entirely, including PPF contributions, which you cannot open as an NRI.

What rate applies to my dividends?
20% plus surcharge and cess under Section 195. Several treaties cut it to 10% or 15%. You need a TRC and Form 10F on file with the company or registrar before the record date, not after.

Is my Indian income taxed again in my country of residence?
It is reportable there if that country taxes worldwide income. You then claim credit for Indian tax paid under the treaty. Gulf residents generally have nothing further to pay. US, UK, Canada and Australia residents usually do.

I sold a flat and the buyer wants to deduct on the whole sale value. Is that right?
Under Section 195, yes, that is the default position, and it is why so many NRI sales stall. Apply for a Section 197 lower deduction certificate before signing anything. From 1 October 2026 the buyer no longer needs a TAN and can deposit using PAN, which removes one big friction point.

Does any of this change if I move back to India?
Considerably. For two to three years you are likely to be RNOR, which shelters your foreign income while your Indian income is taxed as usual. Read about RNOR status here.

Vinod got his Rs 3.9 lakh back. It took eleven months, one chartered accountant, and a Form 10F he could have filed in twenty minutes the previous April.

The tax was never the expensive part. The not knowing was.