A Complete Guide to NRI Taxation, DTAA Benefits and ITR Filing

All residents of India, including the NRIs, are taxed according to the provisions of the Income Tax (IT) Act. Their tax liability in India is determined by their residential status.

For NRIs, Income Tax Return (ITR) filing prevents them from facing penalties, helps them avail the refunds, and ensures compliance with the Indian tax law.

In this blog, we will look into the different resident statuses, how they are taxed and the ITR filing process for NRIs.

Understanding NRI Taxation in India

Assessment cycle 

There are two important years concerned with income tax filing: financial year and assessment year. Financial year refers to the period in which the income is earned, i.e., 1st April 2024 to 31st March 2025. Assessment Year is the year immediately following the financial year in which your income is assessed and taxed by the government. For the income earned during 1st April 2024 to 31st March 2025, the assessment year will be 2025-26. 

Residential status 

The number of days one spends in India determines their resident status in India. There are three different types of residential statuses for taxation, i.e., resident Indians, NRIs, and Resident but Not Ordinarily Resident (RNOR). 

The resident Indians are taxed both on their Indian and foreign income. The NRIs and RNOR pay taxes only on their Indian income. 

Resident status under the Income Tax Act is: ​

Source: Section 6 of the Income Tax Act of 1961. Access the full text here.

Which Income is Taxable for NRIs?

The table below lists different types of income sources for NRIs and indicates whether they are taxable in India or not.

Deductions & Exemptions Available for NRIs

Different sections are in place to categorise the purpose and impose deductions with conditions, respectively. In the table below, we discuss all the deductions and exemptions available to NRIs. 

Note that these exemptions are only applicable in the old tax regime. 

Explore the NRI Taxation Rules to ensure compliance and optimise tax savings.

DTAA (Double Taxation Avoidance Agreement) Benefits for NRIs

Understanding DTAA and How it Helps NRIs

The Double Taxation Avoidance Agreement (DTAA) is a tax treaty between India and another country to prevent NRIs from being taxed twice on the same income. It provides relief in cases where income is taxable in both the resident country (where the NRI lives) and the source country (India).

Benefits of DTAA for NRIs:

• Tax exemption: NRIs can claim full or partial tax exemption on income earned in one country, depending on the agreement.

• Tax credit: If an NRI has paid tax in one country, they can claim a tax credit in their resident country, reducing the overall tax liability.

• Lower withholding tax rates: Many DTAA agreements provide for a reduced rate of withholding tax (tax deducted at source) on dividends, interest, royalties, and other income types.

How to Claim Tax Credit or Tax Exemption Under DTAA

To claim benefits under DTAA, the following steps have to be taken by NRIs:

1. Determine tax residency: Confirm your residential status as per the Indian Income Tax Act. To check your residential status, you can use Belong’s residential status calculator. By answering a few simple questions, you get to know your residential status for taxation purposes.

2. Get a tax residency certificate (TRC): TRC issued from the country of your residence is necessary to avail of benefits under DTAA.

3. File Form 10F: This form furnishes basic information regarding the taxpayer and the DTAA that applies.

4. Supporting documents: Maintain supporting evidence of income and taxes paid in the foreign nation. 

DTAA Agreements with Major Countries

India has DTAA agreements with more than 85 countries. These agreements mention in detail the various kinds of income and exemptions from taxation available under each of them. Tax is deducted at source in India when NRIs redeem their investment, like redeeming their mutual fund units. The NRI can then claim the tax which is deducted while filing their returns.    

Step-by-Step Guide for NRIs to File Income Tax Returns (ITR)

Here is a checklist and step-by-step procedure for NRIs to file their Income Tax Return (ITR) in India. 

1. KYC Documents 

A PAN Card and a passport are mandatory for filing the income tax returns. Aadhaar card is an optional document. A passport is used to determine residency and calculate the number of days spent in India for residential status.

2. Income Tax Login Credentials

Get access to the income tax e-filing portal. If you have not registered previously, create an account using PAN as the username. Update your Indian address and foreign address in the portal 

3. Documents required 

• NRO bank account statement of the financial year (for interest earned and Form 16A for TDS deductions)

• Salary income (if earned from India, including Form 16 from the employer)

• Rental income (rental agreement and rent receipts) 

• Capital gains from the sale of property, PMS or stock market investments (receipts from the sale of these properties)

• Dividends and other income received from India 

• Section 80C investments (LIC, PPF, ELSS, NSC, etc.) 

• Home loan interest certificates, medical insurance premiums and education loan interest receipts

• Real estate taxation documents like property sale agreement, Form 16B (if TDS deducted by buyer), lower TDS certificate (if applied under Section 197 to reduce liability), and capital gains calculations 

• Details of foreign assets (if classified as a resident,) like bank accounts held, foreign salary or business income, or income from foreign stocks, mutual funds or real estate. 

4. Tax Filing Process for NRIs 

• Get all the documents as applicable for you from the documents above 

• Log in to the Income Tax portal and select the relevant form applicable (ITR-2 or ITR-3 is usually applicable for NRIs)

• Check for any discrepancies in Form 26s (TDS) or Annual Information Statement (AIS), or Taxpayer Information Summary (TIS) 

• Submit the return before the due date (31st July 2025) to avoid any penalties

• E-verify your ITR using Aadhaar OTP, net banking, ora  digital signature certificate for digital signing

Common Mistakes to Avoid

• Selecting the wrong ITR form.

• Missing out on declaring capital gains or rental income.

• Incorrect claims for DTAA benefits without proper documentation.

• Failing to verify the ITR within 30 days of filing.

Additional Tips:

• If taxes are deducted in both India and a foreign country, use Form 67 to claim DTAA relief.

• File your ITR before the deadline, usually 31st July of the assessment year.

• Keep a copy of your filed return and acknowledgement for future reference.

Penalties & Late Filing Charges for NRIs

NRIs have to file their Income Tax Return (ITR) in India if they receive taxable income. Failure to file timely or underreporting income will incur a penalty and interest under the Income Tax Act. A detailed analysis follows:

1. Penalties for delayed filing of ITR

As per Section 234F:

• ₹5,000 in case of filing of ITR after the due date (generally 31st July) but on or before 31st December.

• For individuals having an income of less than ₹5 lakh, the fee for late filing is ₹1,000.

2. Charges of interest for delay in tax payment

• Section 234A – Interest for Delay in Furnishing of ITR

        Interest at 1% a month  is levied on the pending tax amount from the due         date until the date of filing.

• Section 234B – Interest for Default in/Short Falling of Advance Tax

        Here, if the advance tax payment made is not up to 90% of the total tax         due, interest of 1% per month is levied on the default amount from the         due date to the actual date of payment.

• Section 234C – Interest for Deferral of Advance Tax

        In this case of default in paying advance tax instalments, the same 1%         per month interest is levied on the delayed payment.

3. Penalty for failure to report foreign assets

NRIs who are categorised as a resident according to their resident status have to report their foreign assets and foreign income in their ITR. This failure can result in:

• Prosecution under the Black Money Act: 7 years of imprisonment for wilful non-disclosure.

• Penalty: Fine of ₹10 lakh on undisclosed foreign assets.

How to Avoid These Penalties

1. File in time before 31st July or apply for an extension if needed.

2. Pay advance tax every quarter so as not to pay interest under Sections 234B and 234C.

3. Correctly report all foreign earnings and assets, especially if you are categorised as a resident.

Important ITR Filing Dates for NRIs

NRIs (Non-Resident Indians) must file their Income Tax Returns (ITR) if they possess taxable income in India. It is important to know the deadlines to avoid penalties and interest payments.

1. Filing NRI Tax Return Due Dates

Normal ITR Filing: 31st July of the assessment year (For the financial year 2024-25, the due date will be 31st July 2025).

Tax Audit Cases: If your income needs a tax audit (e.g., business income above a limit), the timeline is up to 31st October of the assessment year.

2. Extension Options

The Income Tax Department does not usually offer extensions for individuals. The government extends the deadline in unexpected circumstances, such as system failures or a pandemic. 

Tips to Avoid Late Fees and Penalties

• Mark the 31st of July deadline in your calendar to remain compliant.

• Make advance tax payments if due to save on interest charges.

• Have all necessary documents, such as Form 16, bank statements, and investment proof, ready for hassle-free filing.

• Utilise the e-filing portal or recognised tax websites for easy submission.

Filing taxes on time helps NRIs avoid penalties and stay compliant with Indian laws. In addition, NRIs should track tax filing deadlines, report income accurately, and use deductions. To make tax filing smooth and stress-free, you should seek expert advice when needed.