Understanding NRI Income Tax Rules

One thing that helped me was separating the topic into three questions:

1. What is my Indian tax residency?

You need to determine whether you're a resident, RNOR or Non-Resident for the relevant tax year.

2. What income do I have in India?

Examples include:

• Salary for services connected with India
• Rent from Indian property
• Interest from Indian bank accounts
• Dividends
• Capital gains from Indian assets
• Business or professional income arising in India

3. Do I have to file an ITR?

That depends on the applicable filing rules and your particular income and transactions.

The new Income Tax Act, 2025 doesn't mean that all the fundamental NRI rules suddenly disappeared. The Income Tax Department says the basic individual residency conditions have not changed under the new Act. It also says the 120-day rule for certain visiting Indian citizens/PIOs with Indian income above ₹15 lakh continues, with the specified modification.

The new Act applies to tax years beginning on or after April 1, 2026. Earlier tax years continue to be governed by the 1961 Act.

So I'd be careful with articles saying “new NRI tax rules completely change everything.”

My situation is slightly different because I live in Canada and mainly have an NRO account and one property in India.

The distinction between NRE and NRO accounts was important for me.

Interest on an NRO account is generally taxable in India, whereas interest on an eligible NRE account can qualify for an exemption subject to the applicable conditions. The Income Tax Department's current FAQ confirms that the NRE-interest exemption continues under the Income Tax Act, 2025, with eligibility linked to FEMA/RBI conditions.

Rental income is another separate issue. Owning property in India doesn't automatically mean the entire property value is taxed every year, but income generated from it can have Indian tax consequences.

I also had TDS deducted at a relatively high rate from some payments because I was an NRI. When I filed my return, the TDS credit was taken into account when calculating my final liability.

The other thing I would not ignore is DTAA. If you're also tax resident in another country, the treaty between India and that country may affect how income is taxed or how foreign tax credits are handled. The exact treatment depends on the income and the treaty provisions.

The first thing I learned was that NRI tax isn't determined simply by where your bank account is or where you hold a passport. You first need to determine your residential status under Indian income-tax rules for the relevant year.

For FY 2025-26, the Income Tax Department's guidance says the residence test is based on the rules under the Income Tax Act, 1961. The basic tests include the 182-day condition and, subject to the applicable rules, the 60-day plus 365-day test.

After determining that you're a non-resident, you then look at the income that is taxable in India.

In my case, that included:

• Interest from my NRO account
• Rental income from an Indian property
• Capital gains when I sold Indian investments

I initially thought TDS meant I didn't need to file an ITR. That wasn't a safe assumption. TDS is tax collected during the year; it doesn't automatically answer whether a return is required.

I also found that NRIs shouldn't assume they can use ITR-1. The Income Tax Department's current guidance specifically says ITR-1 isn't available to a non-resident.

For someone with house-property income, interest and capital gains but no business/professional income, ITR-2 is generally the form to look at.