NRIs Taxation (#3): How to Calculate Taxable Income of NRI

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This is part three of tax planning for non-resident Indians (NRIs). After determining residential status, the next part of NRIs taxation is determining the taxable income under Indian Income Act, 1961. Thus, this post is about how to determine the taxable income of NRI under the IT Act.

Calculating Taxable Income of NRI

1.Only Indian income taxable unlike taxation of global income in case of resident individuals
The major difference between the tax on the income of resident Indians and non-resident Indians is that a non-resident pays tax only on ‘Indian Income’ and his foreign income (income earned and received outside India) is totally exempt from income tax in India.

Indian income means income which accrues /arises (or deemed to accrue or arise) in India OR which is received (or deemed to be received in India) though it accrues/arises outside India and is taxable in the hands of non-resident.

Put simply, in order to qualify as ‘foreign income’, it should satisfy both the conditions: accrue or arise (or deemed to accrue or arise) outside India AND received (or deemed to be received) outside India.


2.Heads of Income
Like resident Indians, non-resident Indians are also required to calculate the taxable income separately under five different heads. These ‘heads of Income’ are

1. Income from Salary
2. Income from house property
3. Income from business / Profession
4. Income from Capital Gains
5. Income from Other sources


3. Exempt / Tax-free Income
In addition to incomes such as agricultural income, dividend income and specified capital gains (e.g. long term capital gains u/s 10(38) arising out of sale of equity shares on stock-exchange on which STT is paid and also LTCG on sale of mutual fund units) which are exempt in case of all tax payers, there are certain other incomes which are exempt only in the hands of NRIs. The two most common incomes exempt in the hands of NRIs are as follows:

a.) Interest income of NRIs from NRE accounts is exempt from income tax u/s 10(4) of IT Act, 1961.

b.) Interest payable by a scheduled bank on FCNR deposits is also exempt u/s 10(15) of IT Act, 1961.


4. Availability of various deductions (Tax Saving Options for NRIs)
NRIs are allowed following deductions under the IT Act, 1961:

a. Home Loan Interest Deduction u/s 24: NRIs are eligible to avail home loan interest deduction u/s 24(b) for the interest portion of the EMI paid towards the repayment of home loans. The deduction for principal part of the EMI is available u/s 80C.

b. Savings Deduction u/s 80C, 80CCC & 80CCD: Available. For details about various tax saving options and investment avenues available u/s 80C, see Section 80C Tax Saving Avenues. However, following investments are not allowed:

i.) NRIs not allowed to open a PPF account. An existing PPF account can be continued till maturity.

ii.) NRIs are also barred from investing in National Saving Certificates (NSC), Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits (POTD). Existing investments (i.e., those that were purchased before becoming an NRI) can be continued till maturity.

c. Health Insurance Premium Deduction u/s 80D
Non-residents Indians can also claim deduction under section 80D for premium paid on mediclaim / health insurance policy of self and family (Rs 15,000 / Rs 20,000 as the case may be) and another Rs 15,000 (Rs 20,000 if either of parents is a senior citizen) premium paid to insure the health of parents.

d. Other Deductions u/s 80
There are many other deductions available to resident Indians under section 80. Let’s see whether NRIs also qualify for these deductions:

i.) Deduction for medical treatment of disabled dependent u/s 80DD: Not available
ii). Deduction for medical treatment of certain specified ailments u/s 80DDB: Not available

iii). Deduction for interest paid on educational loan u/s 80E: Available

iv). Deduction u/s 80G for certain specified donations: Available

v). Deduction u/s 80U for a handicapped person: Not available

For details about the various deductions u/s 80D to 80U, you can see ‘Other Tax Deductions Available u/s 80’. And also understand various conditions & restrictions imposed under section 80 before availing these deductions.

In next part, I’ll discuss about how to calculate the tax on NRI income under Indian tax laws


Also Read:

1. NRIs tax planning – An introduction
2. How to determine the residential status
3. Residential status of returning NRIs