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Tax Planning

NRI Tax Guide India 2026: Why the ₹12 Lakh Zero-Tax Rule Does Not Apply to You

May 03, 2026•11 min read•PlanivestFin Research Team

TL;DR

  • Section 87A rebate — zero tax up to ₹12.75 lakh — is residents only. NRIs do not get it. Legal basis: Section 87A explicitly says "individual, being a resident in India"
  • NRI taxability in India: only income that accrues, arises, or is received in India
  • NRE FD interest: tax-free in India. NRO FD interest: taxable at slab rates with 31.2% TDS
  • Property sale TDS: 12.5% on total sale consideration — much higher than the 1% residents pay
  • LTCG on property: 12.5% flat without indexation (Finance Act 2025 removed indexation)
  • The DTAA between India and the US can reduce double taxation — most NRIs do not use it

The Assumption That Costs NRIs Money

India's Union Budget 2025 made a significant announcement: zero income tax for income up to ₹12 lakh under the New Tax Regime, with a rebate under Section 87A effectively making it ₹12.75 lakh after the standard deduction. Indian financial media covered this extensively. WhatsApp groups lit up. NRIs with Indian rental income, FD interest, or capital gains from property sales started recalculating.

Then came the fine print: Section 87A says "individual, being a resident in India." Four words that exclude every NRI from this benefit entirely.

An NRI with ₹12 lakh of Indian income does not pay ₹0 tax. They pay tax starting from the slab rate applicable above the basic exemption limit — ₹4 lakh under the New Regime — with no rebate available.

This is one of the most common and costly misunderstandings in NRI tax planning. This article covers how NRI taxation in India actually works, what you owe, what you do not, and what TDS rates apply before you even file a return.

How India Determines If You Are an NRI

Your residential status for a financial year is determined by physical presence in India, not by your passport, visa, or where you consider home. The rules are under Section 6(1) of the Income Tax Act.

You are a resident if you meet either of these conditions in a financial year:

  • You were in India for 182 days or more during the year, or
  • You were in India for 60 days in the current year AND 365 days in the preceding four years

If you meet neither condition, you are an NRI for that year.

Important exception for Indian citizens and OCIs visiting from abroad: The 60-day threshold is extended to 182 days. So an Indian passport holder living in the US who visits India for 100 days in a year remains an NRI — they would need to be in India for 182 days or more to become a resident.

The ₹15 lakh deemed resident rule: If your total Indian-sourced income exceeds ₹15 lakh and you do not pay tax in any other country, the residency threshold drops from 182 days to 120 days. This catches high-income NRIs who structure their affairs to avoid residency in any jurisdiction.

Your residential status is determined year by year. Someone who was a resident for 10 years and then moved abroad becomes an NRI from the year they stop meeting the conditions.

What Income NRIs Pay Tax On in India

NRIs are taxed in India only on income that accrues, arises, or is received in India. Your US salary, US investments, US rental income, and global assets are invisible to the Indian tax system as long as you are an NRI.

What is visible — and taxable — is everything India-sourced.

Rental income from Indian property is taxable at slab rates. A standard deduction of 30% of the net annual value is allowed for repairs and maintenance — the same deduction available to residents. If you have a home loan on the rental property, interest is deductible. But the rebate that would make the first ₹12.75 lakh tax-free for a resident does not apply. An NRI paying ₹60,000 rent per month earns ₹7,20,000 annual rental income — after the 30% deduction, taxable income is ₹5,04,000, and slab rates apply from the ₹4 lakh basic exemption.

FD interest depends entirely on the account type:

  • NRE (Non-Resident External) account FD interest: Completely exempt from Indian income tax. This is the single biggest tax advantage NRIs have that Indian residents do not. A resident cannot park money in an NRE account — this exemption is exclusive to NRIs.
  • NRO (Non-Resident Ordinary) account FD interest: Fully taxable at slab rates with a punishing TDS rate of 31.2% — 30% tax plus 4% cess. This is deducted at source before you even receive the interest.
  • FCNR (Foreign Currency Non-Resident) account interest: Also exempt, similar to NRE.

Capital gains on property sales follow different rules for NRIs than for residents:

  • LTCG (held over 24 months): 12.5% flat, without indexation. The Finance Act 2025 removed indexation benefits for property sales — this change affects both residents and NRIs equally. NRIs cannot claim the standard 30% deduction on long-term gains.
  • STCG (held under 24 months): Slab rates apply.

Capital gains on listed equity shares and equity mutual funds:

  • STCG (held under 12 months): 20%
  • LTCG above ₹1.25 lakh (held over 12 months): 12.5%

These rates are the same as for residents. The difference is that NRIs have TDS deducted upfront at these rates by the broker or fund house.

The Section 87A Issue — In Detail

A resident individual with ₹12 lakh taxable income under the New Regime calculates tax as follows: tax on ₹12 lakh at applicable slabs is ₹60,000. Section 87A provides a rebate of ₹60,000. Net tax payable: ₹0.

An NRI with ₹12 lakh Indian income under the New Regime: same slab calculation produces ₹60,000 tax. But Section 87A is not available. Net tax payable: ₹60,000. Difference: ₹60,000.

This is not a marginal difference. At ₹20 lakh of Indian income, the resident pays significantly less because the first ₹12.75 lakh effectively carries no tax burden. The NRI pays full slab rates on every rupee above ₹4 lakh.

One benefit NRIs do keep: the standard deduction of ₹75,000 under the New Regime applies if an NRI has salary income from an Indian employer. This is uncommon but relevant for NRIs on deputation, those with Indian-company secondment arrangements, or those who returned to India mid-year and had a partial employment period.

TDS Rates That Hit NRIs Before They File

The Indian tax system often collects from NRIs at source — meaning the payer deducts tax before the NRI receives anything. Understanding these TDS rates matters because they affect your cash flow and require claiming refunds if the actual tax liability is lower.

Property sale TDS — the most expensive surprise:

When an NRI sells Indian property, the buyer is required to deduct TDS at 12.5% on the total sale consideration — not on the gain, but on the entire sale price. If you sell a flat for ₹80 lakh, the buyer deducts ₹10 lakh as TDS before transferring the balance.

Residents pay TDS at 1% on property sales. NRIs pay at 12.5%. This is a massive cash flow difference on a high-value transaction.

If your actual LTCG tax liability is lower than the TDS deducted — for example, if the property was purchased decades ago and the gain after any available deductions is modest — you file an Indian return and claim a refund of excess TDS. The refund process works but takes time.

For large property sales, applying for a Lower Deduction Certificate (LDC) from the Income Tax Department before the transaction allows TDS to be deducted at a lower rate matching your actual tax liability. This requires advance planning — applying after the sale is too late.

NRO FD interest TDS:

31.2% is deducted by the bank before crediting interest to your NRO account. If you have ₹50 lakh in an NRO FD at 7%, you earn ₹3.5 lakh interest. The bank deducts ₹1.09 lakh as TDS. You receive ₹2.41 lakh.

If your total Indian income falls in a lower slab — say 20% instead of 30% — you can claim a partial refund when filing.

Dividend TDS:

20% TDS applies on dividends from Indian companies and mutual funds. This can be reduced if the India-US Double Tax Avoidance Agreement (DTAA) rate is lower — typically 15% for US tax residents. Claiming the DTAA benefit requires filing Form 10F with the Indian income tax department and providing your US tax residency certificate.

Rental income TDS:

If rent is paid by a company or entity, TDS of 31.2% applies. For individual tenants paying rent to an NRI, the rules follow standard TDS provisions. Many tenants of NRI-owned property are unaware of their obligation to deduct TDS — this can create compliance issues for the NRI landlord when the income shows up in AIS without corresponding TDS credits.

What NRIs Have That Residents Do Not

The tax picture for NRIs is not entirely worse. Two benefits are exclusive to NRIs:

NRE and FCNR account interest is completely tax-free in India. For an Indian resident, all FD interest — whether in a savings account, recurring deposit, or fixed deposit — is taxable at slab rates. For an NRI, parking money in an NRE FD earning 7-8% generates completely tax-free income in India. This is a structural advantage that residents cannot access.

Global income protection. As an NRI, your US salary, US stock options, US rental income, US investments, and every other non-India source is not taxable in India at all. Indian residents must declare and pay tax on their global income. NRIs pay Indian tax only on India-sourced income.

These two combined mean that a high-earning NRI with a clean account structure — salary abroad, savings in NRE account, limited direct India investment — can have very minimal Indian tax obligations despite having significant wealth.

The India-US DTAA — Most NRIs Leave Money on the Table

The Double Tax Avoidance Agreement between India and the United States ensures that the same income is not taxed in both countries. Most US-based NRIs know it exists. Far fewer actually use it.

Common DTAA benefits that US-based NRIs can claim:

  • Reduced TDS rate of 15% instead of 20% on dividends from Indian companies (requires Form 10F and Tax Residency Certificate)
  • Reduced tax on NRO FD interest for US residents, subject to specific DTAA provisions
  • Credits for Indian taxes paid against US tax liability, preventing double taxation on India-sourced income that the US also taxes

The process requires obtaining a Tax Residency Certificate from the US IRS (or the relevant authority confirming US tax residency), submitting Form 10F to the Indian income tax department, and ensuring your bank or mutual fund has this on record before deducting TDS.

This is not complex. It is paperwork. Most NRIs skip it and pay a higher rate than they legally need to.

Filing Indian Returns as an NRI — When It Is Required

NRIs are required to file an Indian income tax return if:

  • Total India-sourced income exceeds the basic exemption limit (₹4 lakh under New Regime, ₹2.5 lakh under Old Regime)
  • You have capital gains from Indian assets, regardless of the amount
  • You want to claim a refund of TDS deducted in excess of your actual liability
  • You have assets or financial interests in India that require disclosure

The filing deadline for NRIs is July 31, 2026 for AY 2026-27 — the same as for resident individuals.

The most common reason NRIs file even when not strictly required: claiming refund of excess TDS on NRO FD interest or property sale proceeds. The refund process works through the standard Indian income tax refund mechanism and is credited to the NRO account.

Practical Planning Points

If you have Indian rental income, structure it with a proper rental agreement and ensure your tenant deducts TDS if required. Filing returns with rental income also lets you claim interest deduction on any home loan and maintenance deduction.

If you are planning to sell Indian property, apply for a Lower Deduction Certificate at least 60 days before the transaction. The 12.5% TDS on the full sale consideration is a significant cash flow hit that can be reduced through advance planning.

If you have NRO FDs generating interest, evaluate whether the post-TDS, post-Indian-tax return justifies the account structure. NRE FDs are almost always better if you can repatriate the principal — the tax-free interest is a genuine advantage.

If you receive Indian dividends or have Indian mutual fund holdings, explore the DTAA benefit on dividends. The paperwork is manageable and the saving is real.

Use the PlanivestFin Wealth Calculator to model different India investment scenarios alongside your NPS contributions if you are an NRI maintaining Indian retirement investments. The NPS vs PPF 2026 guide covers whether NPS still makes sense for NRIs given the withdrawal rules.

Frequently Asked Questions

Does the ₹12.75 lakh zero-tax threshold apply to NRIs?

No. Section 87A of the Income Tax Act explicitly restricts the rebate to "individual, being a resident in India." An NRI with ₹12.75 lakh of Indian income pays full slab rates starting from ₹4 lakh with no rebate available.

Is NRE FD interest taxable in India?

No. Interest on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is completely exempt from Indian income tax. This is one of the significant tax advantages exclusive to NRIs that Indian residents cannot access.

What TDS rate applies when I sell Indian property as an NRI?

12.5% TDS on the total sale consideration — not on the capital gain. This is far higher than the 1% TDS applicable when a resident sells property. If your actual tax liability after applying LTCG rates is lower than the TDS deducted, file an Indian return and claim the refund. Consider applying for a Lower Deduction Certificate before a large property transaction.

My NRO FD has 31.2% TDS deducted. Can I get some back?

Yes, if your total Indian income falls in a lower slab or you can claim DTAA benefits. File an Indian income tax return, declare the NRO FD interest, calculate your actual tax liability, and claim the refund. The excess TDS is refunded to your NRO account. Also explore filing Form 10F to claim DTAA reduced rates on future interest.

Do I need to file an Indian return if all my income is abroad?

If you have no India-sourced income at all, no Indian assets, and no TDS to claim back — technically no. But most NRIs with any Indian connection — bank accounts, rental property, mutual funds, inherited assets — have some Indian income that crosses the filing threshold or requires TDS refund.

Last reviewed: May 2026 — PlanivestFin Research Team

Disclaimer: This article is for informational purposes only and does not constitute tax advice. NRI taxation involves complex residency determination, DTAA provisions, and individual circumstances. Consult a chartered accountant or SEBI-registered advisor familiar with both Indian and your country of residence tax laws before making decisions.