Do NRIs Pay Tax in India on Foreign Income?

“Synopsis”

Do NRIs pay tax in India on foreign income? The answer lies in the individual’s residential status under Indian income tax laws. In most cases, NRIs are taxed only on income earned or received in India, while foreign income remains exempt. However, the scenario changes when an NRI returns and becomes a Resident and Ordinarily Resident (ROR), making global income fully taxable. This blog helps you understand when income becomes taxable, when foreign assets must be disclosed, and how NRIs can plan their taxes smartly.

Do NRIs Pay Tax in India on Foreign Income?

Understanding Residential Status First

Indian income tax is not based on citizenship but on residential status, which is determined each financial year. The three possible statuses are:

• NRI (Non-Resident Indian)

• RNOR (Resident but Not Ordinarily Resident)

• ROR (Resident and Ordinarily Resident)

If you qualify as an NRI, only your Indian-sourced income is taxable. This includes salary received in India, rental income from Indian property, capital gains from Indian assets, interest from NRO accounts, and dividends from Indian companies.

However, once you become an ROR, your global income is also taxable in India, including salary abroad, rental income from overseas properties, and dividends from foreign investments.

What Income Is Taxable for NRIs?

As long as you retain NRI status, you’re taxed only on:

• Income arising or received in India

• Capital gains from Indian shares or property

• Interest on Indian fixed deposits or savings accounts

• Dividends from Indian companies

• Income from Indian businesses or consultancy

All this is subject to Tax Deducted at Source (TDS), and you must file an NRI tax return in India if your total Indian income exceeds the basic exemption limit (₹2.5 lakh for FY 2024–25).

Foreign Income: When Is It Taxable in India?

Foreign income is not taxable in India for individuals classified as NRIs or RNORs. You are free from Indian tax obligations on:

• Foreign salaries

• Overseas business income

• Rent from foreign properties

• Interest and capital gains from global investments

• Foreign pensions

This global income becomes taxable only when you qualify as a Resident and Ordinarily Resident (ROR).

RNOR Status: A Temporary Tax Shield

If you’ve returned to India after being an NRI, you may qualify as RNOR for up to 2–3 years. This transitional status provides partial relief:

• You are taxed only on Indian income and income derived from Indian businesses.

• Foreign income remains tax-exempt, even if credited to Indian accounts.

• You are not required to disclose overseas assets in your Indian tax return.

This helps in smoother tax planning as you gradually transition back into the Indian tax system.

ROR Status: Full Tax and Disclosure Obligations

Once you become a Resident and Ordinarily Resident, your entire global income becomes taxable in India, and full compliance is mandatory:

• Report all foreign assets in Schedule FA of your Income Tax Return

• Disclose foreign bank accounts, properties, stocks, mutual funds, and even crypto assets

• Pay Indian tax on all foreign income, even if it is already taxed abroad (though DTAA can provide relief)

• Non-disclosure can lead to penalties under the Black Money Act

Foreign Asset Reporting: Schedule FA

When you’re classified as an ROR, you must file Schedule FA (Foreign Assets) along with your ITR. You are required to disclose:

• Foreign bank accounts (even if dormant)

• Foreign real estate

• Directorships in overseas companies

• Equity investments and mutual funds abroad

• Foreign pension and retirement accounts

• Crypto and digital assets held overseas

Failure to report these accurately could lead to scrutiny, fines, and even prosecution under the Black Money (Undisclosed Foreign Income and Assets) Act, 2015.

DTAA Relief for Double Taxation

India has signed Double Taxation Avoidance Agreements (DTAA) with 90+ countries, including the USA, UK, UAE, and Canada. This allows eligible taxpayers to:

• Avoid paying tax twice on the same income

• Claim a foreign tax credit in India for taxes already paid abroad

• Plan their taxes efficiently as per the treaty provisions

DTAA becomes especially crucial when an NRI transitions to ROR and starts receiving income from both countries.

FEMA and NRI Banking Compliance

Apart from tax rules, NRIs must comply with FEMA (Foreign Exchange Management Act) and RBI guidelines:

• Convert resident savings accounts to NRO/NRE accounts upon becoming NRI

• Repatriate funds as per RBI limits

• Use NRE accounts for foreign income and NRO accounts for Indian income

• Maintain clear documentation to support remittances

Conclusion

In summary, NRIs do not pay tax in India on their foreign income, as long as they maintain non-resident or RNOR status. However, once you become an ROR, all global income becomes taxable, and detailed foreign asset disclosures are mandatory.

For NRIs returning to India, it is crucial to plan your residency status, repatriation, and investments to avoid unnecessary tax and compliance burdens. Knowing the rules around residential status, foreign income reporting, and using DTAA provisions can go a long way in protecting your wealth and staying compliant with Indian laws.