NRI Taxation & FEMA Basics

Two laws, not one: Income Tax and FEMA

NRIs deal with two separate legal systems. The Income Tax Act decides what tax you pay in India. FEMA (the Foreign Exchange Management Act), administered by the RBI, decides what you can do with money and accounts, which bank accounts you may hold, how much you can send abroad, and what investments are allowed. The two use different definitions of who is an NRI, which is the first thing that confuses people.

Getting both right matters: a tax-correct decision can breach FEMA, and vice versa. This guide covers the foundations of each so you know which questions to ask.

Residential status decides everything

Your Indian tax liability flows from your residential status for the year, tested by days spent in India:

• Resident: broadly, 182+ days in India in the year, or 60+ days in the year and 365+ over the preceding four years. Residents are taxed on worldwide income.
• Non-Resident (NRI): below those thresholds. NRIs are taxed only on income that arises or is received in India.
• RNOR (Resident but Not Ordinarily Resident): a transitional status, often for returning NRIs, with a middle-ground treatment that shelters most foreign income for a few years.

NRE, NRO and FCNR accounts

Under FEMA, an NRI cannot keep an ordinary resident savings account. Instead:

• NRE (Non-Resident External), for foreign earnings brought into India. Fully repatriable, and the interest is tax-free in India.
• NRO (Non-Resident Ordinary), for Indian income like rent, dividends or a pension. Interest is taxable, and repatriation is capped at USD 1 million per year with Forms 15CA/15CB.
• FCNR (Foreign Currency Non-Resident), a term deposit held in foreign currency, protecting against rupee movement, with tax-free interest.

Choosing the right account for the right money is a FEMA compliance issue as much as a convenience one. Indian-source income must generally route through an NRO account.

TDS and DTAA relief

NRIs face higher and broader TDS than residents. Indian income paid to an NRI is typically subject to TDS under Section 195, on rent, on interest, and heavily on property sales. The rates are steep and often applied on gross amounts, which is why NRIs so often file returns to claim refunds.

To prevent the same income being taxed twice, once abroad, once in India, India has Double Taxation Avoidance Agreements (DTAA) with most countries. A DTAA can reduce the Indian TDS rate or give you a credit in your home country. Claiming DTAA benefits usually needs a Tax Residency Certificate (TRC) from your country of residence and Form 10F. This is technical, and getting it right can save substantial tax.

Repatriation and staying compliant

Moving money out of India is a FEMA matter. From an NRO account, repatriation is generally limited to USD 1 million per financial year, supported by a CA-certified Form 15CB and the online Form 15CA. NRE and FCNR balances are freely repatriable. Getting these certificates right is essential, banks will not release funds without them.

Between residential status, account choice, DTAA claims, TDS refunds, and repatriation, NRI compliance is genuinely intricate, and mistakes are costly. Our team advises NRIs on the full picture, Indian returns, DTAA relief, 15CA/CB, and property transactions. book a free consultation for an NRI tax and FEMA review.

An NRI's annual compliance checklist

Each year, an NRI with Indian interests should confirm:

• Residential status for the year, based on days in India, it can change and it changes your tax.
• Correct accounts: NRE for foreign earnings, NRO for Indian income, under RBI FEMA rules.
• Indian-source income reported and any excess TDS reclaimed by filing on the income tax e-filing portal.
• DTAA relief claimed where applicable, with a Tax Residency Certificate and Form 10F.
• Repatriations supported by Forms 15CA/15CB and within the annual NRO limit.

NRI compliance rewards planning ahead of transactions rather than cleaning up afterward, a certificate obtained in advance, an account chosen correctly, a DTAA claim supported on time. Each is far cheaper as a plan than as a fix.