The NRI Tax Notice Nobody Expects

The email arrives on a Tuesday, forwarded by a relative who checked the mailbox at the old address.

It is a notice from the Income Tax Department — a request for information, clarification, or payment.

The first reaction is often confusion: “But I’m an NRI. I moved abroad eleven years ago. Why is India asking me anything?”

The answer is important: non-resident status changes the scope of income India generally taxes; it does not eliminate Indian tax obligations altogether.

A person’s status must be determined separately for each tax year. For tax years beginning before 1 April 2026, the Income-tax Act, 1961 generally applies. For tax years beginning on or after 1 April 2026, the Income-tax Act, 2025 applies. The new Act does not retrospectively replace the law governing earlier tax years.

What NRI status actually means

A non-resident is generally taxed in India on income that is received, accrues, or is deemed to accrue or arise in India. The exact result can also depend on a Double Taxation Avoidance Agreement between India and the country where the person is tax resident.

This usually means that foreign salary, foreign investments, and foreign-bank interest are not automatically taxable in India merely because the individual is an Indian citizen or holds an Indian passport. However, the result depends on the person’s actual residential status, the source and place of accrual of the income, where services are performed, and any applicable treaty.

Income connected with India generally remains relevant. Common examples include:

• Rent from a flat or house in India.
• Interest on an NRO account or other taxable Indian deposit.
• Dividends from Indian companies.
• Salary for services performed in India.
• Business or professional income connected with India.
• Capital gains from Indian property, shares, securities, or other Indian assets.

Rental income from Indian property is generally taxable in India even if the owner lives abroad and the rent is paid into an overseas account. Capital gains from an Indian asset can also be taxable in India even when the seller is physically outside India at the time of the sale.

The final tax is not always determined by a single flat rate. It may depend on the head of income, the applicable special provision, the taxpayer’s chosen tax regime, the transaction date, surcharge and cess, and any available treaty relief.

Rent, dividends, and capital gains

Rent received by a non-resident from Indian property is generally taxable under the house-property provisions. The law may allow the standard deduction and other eligible adjustments while computing taxable income.

The phrase “30% TDS on rent” should be used carefully. A payment to a non-resident is generally governed by section 195 and the applicable rate, including surcharge, cess, and any treaty provisions. The 30% figure often associated with rental property is the standard deduction used in computing income from house property; it is not a universal TDS rate that every tenant or agent must deduct.

Dividends from Indian companies are generally taxable in India for a non-resident and may be subject to TDS. A lower rate may be available under a treaty if the relevant conditions are satisfied.

Capital gains from Indian property, shares, securities, or other Indian assets are generally taxable in India. The applicable treatment depends on factors such as:

• The nature of the asset.
• The date of acquisition and transfer.
• The holding period.
• Whether the asset is listed or unlisted.
• Whether securities-transaction-tax conditions are met.
• Whether a special capital-gains provision applies.
• Whether an exemption or treaty benefit is available.

There is no single capital-gains rate that applies to every Indian asset or every NRI transaction.

NRO, NRE, and FCNR accounts

The account type matters, but it is not the only relevant fact.

Interest on an NRO account is generally taxable in India. It may also be subject to TDS, subject to the applicable rate and any treaty relief.

Interest on an eligible NRE account is generally exempt under the statutory conditions. The exemption is linked to the FEMA and RBI requirements for maintaining the account; it is not a blanket exemption for every bank account held by someone who describes themselves as an NRI.

FCNR(B) deposits have their own FEMA and income-tax rules. Their treatment should be reviewed when the account holder’s residential status changes.

When a person becomes resident outside India, an ordinary resident savings account should generally be redesignated as an NRO account. When an NRI returns to India with an intention to stay for an uncertain period, an NRO account may be designated as a resident account under the RBI framework.

The consequences of leaving an old resident account unchanged can include banking and FEMA-compliance problems. Potential FEMA penalties can be substantial, but the amount depends on the nature of the contravention and the facts; it is not automatically calculated as a fixed multiple of the account balance.

Returning to India

Returning NRIs need to review both their bank accounts and their income-tax position.

An NRE account should generally be designated as a resident account or transferred to an RFC account when the account holder returns to India for employment or otherwise changes residential status under the applicable FEMA rules.

RBI directions also allow an FCNR(B) deposit, in specified circumstances and at the bank’s discretion, to continue until maturity at the contracted rate. However, the deposit is treated as a resident deposit from the date of return, and on maturity it is generally converted into a resident rupee deposit or an RFC account if the holder is eligible.

Bank-account treatment and income-tax treatment are related but separate questions. It is therefore too broad to say that all NRE or FCNR interest automatically becomes taxable the day a person returns to India.

A qualifying returning NRI may be able to continue certain Chapter XII-A benefits after becoming resident by filing the required declaration with the return. This continuation under section 115H applies to specified foreign-exchange assets and is not a universal exemption for every NRE or FCNR balance. The relevant asset, acquisition history, declaration, and tax year must be checked.

The filing exemption people half-remember

There are limited circumstances in which a non-resident may not need to file an Indian return even though tax has been deducted at source. The exemption is not a general rule that applies whenever an NRI receives investment income or long-term capital gains.

For example, the special NRI provisions can apply where the individual’s total income consists only of qualifying investment income from specified foreign-exchange assets, long-term capital gains from those assets, or certain specified income covered by provisions such as section 115A — provided all statutory conditions are satisfied and the required tax has been deducted.

A return may still be necessary where the person has:

• Rental income.
• Business or professional income.
• Income not fully covered by TDS.
• A refund claim.
• Losses that the person wishes to carry forward.
• Multiple income categories.
• A filing obligation triggered by a specified transaction or statutory condition.

The correct question is not simply, “Was TDS deducted?” It is: “Does my entire income profile fall within a specific filing exemption for this tax year?”

An NRI should not assume that filing is unnecessary merely because a bank, company, tenant, or buyer deducted tax.

The 120-day rule

The 120-day rule is often described as a new change, but the underlying rule predates the Income-tax Act, 2025. The new Act retains the relevant framework.

For specified Indian citizens or persons of Indian origin visiting India, the ordinary residence tests can operate with a modified 120-day threshold where the person’s income, other than income from foreign sources, exceeds ₹15 lakh. The other statutory conditions also matter, including the 365-day look-back requirement. The rule does not apply automatically to every NRI or every visit to India.

The day-count calculation should include all relevant days of presence in India, including partial days where applicable. Travel records, passports, immigration data, and prior-year stays should be retained.

Deemed residence and zero-tax countries

There is also a deemed-resident rule for an Indian citizen whose income, other than income from foreign sources, exceeds ₹15 lakh and who is not liable to tax in any other country or territory by reason of domicile, residence, or a similar criterion. The number of days spent in India is not decisive for this specific rule.

This provision was introduced before the Income-tax Act, 2025 and was not created for the first time in 2026. The new Act retains the framework for tax years beginning on or after 1 April 2026.

Deemed residence should not be described as automatic full ordinary residence. The person’s resident but not ordinarily resident status must also be examined. An RNOR is generally subject to a narrower scope of foreign-income taxation than a resident and ordinarily resident, subject to the statutory rules.

Accordingly, an Indian citizen living in a country without a conventional personal income tax should not assume either of the following:

• “I am automatically a full Indian resident and all my worldwide income is taxable here.”
• “I can never become resident because I spend very little time in India.”

The answer depends on the statutory conditions, the person’s foreign tax position, Indian-source income, prior residence history, and RNOR classification.

Why notices can surface years later

Information reported by banks, companies, tenants, registrars, brokers, property purchasers, and other reporting entities can be matched with tax returns, TDS records, and other information available to the Department.

That means a mismatch involving rent, dividends, property sales, securities transactions, bank interest, or residential status may come to light even if the transaction took place years earlier.

A notice does not automatically mean that the Department is correct. It does mean that the taxpayer should identify:

• The tax year involved.
• The law applicable to that year.
• The income or transaction referred to.
• The residential status claimed.
• The TDS and advance-tax position.
• Whether the notice is genuine and digitally verifiable.
• The response deadline.

Ignoring a notice can be more damaging than the original filing mistake.

What good NRI tax planning covers

Correct filing is only the starting point. A coordinated NRI review should consider:

• Whether the person’s residential status has been calculated correctly for every relevant tax year.
• Whether ordinary resident accounts were redesignated when the person moved abroad.
• Whether NRE, NRO, FCNR, and RFC accounts reflect the person’s current FEMA status.
• Whether Indian rent, dividends, interest, and capital gains have been reported correctly.
• Whether TDS has been deducted at the correct rate.
• Whether a lower treaty rate is available.
• Whether a Tax Residency Certificate and other DTAA documents are available.
• Whether the person is eligible for a narrow return-filing exemption.
• Whether section 115H or another special provision applies after returning to India.
• Whether foreign-asset reporting is required based on the person’s residential classification and the applicable return form.

DTAA relief is not automatic. It normally requires the person to establish tax residence in the treaty country and satisfy the relevant procedural and substantive conditions.

The practical takeaway

Being an NRI does not mean India stops taxing you. It generally means that India focuses on income received, arising, or deemed to arise in India, while your exact tax position depends on residential status, income source, account type, transaction details, treaty provisions, and the tax year.

The Income-tax Act, 2025 has not made every NRI a full Indian tax resident, and it has not eliminated the special rules that existed under the earlier law. The 120-day rule and deemed-residence provision must be applied only when their specific conditions are met. Filing exemptions, NRE and FCNR exemptions, and returning-NRI benefits are also conditional rather than automatic.

If you receive a notice, or are unsure whether your income mix qualifies for an exemption, review the complete picture with an adviser familiar with both Indian income-tax law and FEMA. A forwarded message or a general rule about “NRI taxation” is not enough to determine your liability.

This article is for general information and is not a substitute for personalised tax, legal, or FEMA advice. The applicable law depends on the relevant tax year and the individual’s facts. Taxpayers should verify the current statute, rules, notifications, treaty provisions, and filing requirements before acting. Please consult your CA.