Income Tax for NRI- Exemptions, Deductions and Allowances

Ramesh (name changed) is 68, retired in Dubai, and has been filing his Indian return for years using the resident senior citizen exemption limit, Rs 3 lakh instead of Rs 2.5 lakh. Small difference, he thought, and his rental income comfortably covers it either way. It took a scrutiny notice for him to learn that as an NRI, he was never entitled to that higher limit in the first place, regardless of his age.

This is one of the most repeated errors in NRI tax content, and it costs real money in exactly the wrong direction: it understates the tax actually owed, which surfaces as a problem only when the department notices, not before.

Must Read – Tax rates for NRI

The Exemption Limit Error That Costs You at the Worst Time

What Stays Genuinely Exempt

Income earned and received entirely outside India is not taxable in India for an NRI. Interest on your NRE account and FCNR account is fully exempt, no TDS, no reporting obligation on that interest specifically. If certain specified investment income is your only Indian income and TDS has already been deducted at the flat rate, you are not required to file a return at all, though filing remains optional and often worthwhile if excess TDS was withheld.

Under Section 115F, long-term capital gains on a foreign exchange asset, one bought using money genuinely remitted from abroad, can be fully or proportionately exempted if the net proceeds are reinvested within six months into shares of an Indian company, debentures or deposits with an Indian public company, Central Government securities, or specified savings certificates. This is narrow in scope but genuinely useful where it applies.

Must Read – How Can NRIs Save Tax In India?

Deductions: All Conditional on Choosing the Old Regime

This is the gap most NRI tax guides skip entirely, and it matters because the default changed. Since FY 2023-24, the new tax regime is the default unless you actively opt for the old one. The deductions below only apply under the old regime, so claiming them requires a deliberate election on your return, not silence.

Under the old regime, NRIs can claim: life insurance premiums for self, spouse or children under Section 80C, health insurance premiums for self, spouse, parents and dependent children under Section 80D, principal repayment on an Indian home loan including stamp duty and registration, up to Rs 2 lakh in home loan interest under Section 24 for a self-occupied property, interest on an Indian education loan under Section 80E with no upper cap, and donations to approved causes under Section 80G, subject to the giver’s own eligibility conditions covered in our gift tax guide.

Whether the old regime with these deductions beats the new regime’s lower rates depends entirely on how many of these you can actually use, and this is worth running as an actual comparison each year, not assuming last year’s answer still holds.

RNOR: The Transition Window, Correctly Defined

Returning to India does not make you a full resident overnight for tax purposes. You qualify as Resident but Not Ordinarily Resident, RNOR, if you meet either of two tests: you were a non-resident in at least 9 of the preceding 10 financial years, or your total physical presence in India across the preceding 7 financial years was 729 days or fewer, not “2 years”, the precise day count matters and gets tested year by year as the lookback window moves forward.

During RNOR status, which typically runs 2 to 3 financial years depending on how long you were abroad, foreign income stays outside the Indian tax net the same way it did as an NRI, while Indian-source income becomes taxable as a resident’s would be. Foreign currency deposits, held in an RFC account, remain exempt during this window as well.

Why This Mistake Survives So Long

Ramesh is not the exception. He is the pattern. This is a case of anchoring, where the first number someone encounters, in his case a resident-focused tax article that never mentioned NRI status at all, becomes the reference point every year after, even as the actual applicable rule sat elsewhere the whole time. Once Rs 3 lakh felt like “his” exemption limit, nothing in his annual filing routine ever prompted him to re-examine it. The number worked, in the narrow sense that his software accepted it and no immediate consequence followed, for years.

The lesson is not that Ramesh was careless. It is that a wrong assumption, applied consistently and without incident, feels indistinguishable from a correct one, right up until a notice arrives asking for the difference plus interest.

Frequently Asked Questions

Do NRIs get the higher senior citizen exemption limit?
No, regardless of age. The Rs 3 lakh and Rs 5 lakh senior and super senior citizen limits, and the Section 87A rebate, apply only to resident individuals.

Can I claim 80C and 80D deductions as an NRI?
Yes, but only under the old tax regime, which you must actively elect since the new regime is now the default and doesn’t allow most of these.

What is the RNOR day-count test exactly?
729 days or fewer of physical presence in India across the preceding 7 financial years, or non-resident status in 9 of the preceding 10 financial years. Either condition alone is sufficient.

Is my foreign salary taxable in India once I qualify as RNOR?
Generally no, foreign income stays outside the Indian tax net during RNOR status, the same as it did when you were a full NRI. Indian-source income is taxed as a resident’s would be.

Is interest on my NRE account really completely tax-free?
Yes, both NRE and FCNR interest are fully exempt from Indian tax, with no TDS deducted, for as long as your NRI or RNOR status holds.

A wrong number that has worked for years is not the same as a correct one. It is simply a mistake that has not been noticed yet.

Age changes many things about your finances. Your NRI exemption limit is not one of them.