Exempt Income for NRIs in India
What is still exempt under Section 10 · what was withdrawn on dividends and listed equity · recovering TDS deducted on exempt income · reporting exempt receipts correctly
Why the Exempt List Is Shorter Than Most NRIs Believe
The list of income exempt to a non-resident is shorter than it was, and considerably shorter than most NRIs believe. Two of the exemptions people rely on most heavily were withdrawn in the last decade, and advice circulating in expatriate communities has not caught up. Dividends from Indian companies are no longer exempt. The blanket exemption on long-term gains from listed shares no longer exists.
Getting this wrong runs in both directions. Some NRIs pay tax on interest that is genuinely exempt because their bank deducted it and nobody questioned the deduction. Others omit dividends and share gains from a return on the strength of an exemption that ended years ago, and receive a query because the department can already see the credits in the annual information statement.
N D Savla & Associates advises non-residents on what is and is not taxable in India from our Pune office. The analysis always starts with residential status, because several of these exemptions depend on status under exchange control law rather than under the Income Tax Act, and the two do not change on the same date.
What Income Is Exempt for a Non-Resident?
Exemption comes from two distinct places. Some receipts are exempt outright under Section 10 of the Income Tax Act, 1961. Separately, income arising and received outside India is simply outside the scope of Indian taxation for a non-resident, which is not an exemption at all but a question of scope.
The principal exemptions available to a non-resident are:
- Interest on a Non-Resident External account, exempt under Section 10(4)(ii) while the holder is a person resident outside India
- Interest on Foreign Currency Non-Resident deposits, exempt for a non-resident or a person not ordinarily resident
- Interest on specified notified savings certificates and bonds subscribed in convertible foreign exchange
- Agricultural income as defined under the Act, exempt regardless of residential status
- Gifts received from relatives as defined, and receipts on occasions recognised under the Act
- Proceeds of a life insurance policy meeting the prescribed conditions
- Amounts received on partition of a Hindu undivided family or as a share of profit from a firm already taxed
What Is No Longer Exempt?
Three changes have narrowed the position significantly, and each catches NRIs relying on older advice.
| Income | Former Position | Current Position |
|---|---|---|
| Dividends from Indian companies | Exempt in shareholder's hands | Taxable; tax deducted at source, treaty rate may apply |
| Long-term gains on listed equity | Exempt where securities transaction tax paid | Concessional rate above an annual threshold of gains |
| Interest on NRE account after return | Assumed to continue | Ceases on becoming resident under exchange control law |
| Income from foreign sources | Outside scope for non-residents | Unchanged; still outside scope while non-resident |
The second row matters most for anyone with an Indian equity portfolio. Gains are no longer exempt; they are concessionally taxed above a threshold, and the threshold has been revised more than once. The computation, including the treatment of the cost base for holdings acquired before the change, is dealt with in our note on capital gains.
Who Needs This Analysis?
Four groups get the most value from establishing the position properly.
NRIs With Both NRE and NRO Accounts
The distinction between the two accounts determines whether interest is exempt or fully taxable, and banks occasionally deduct on the wrong account. Where deduction has been made on NRE interest in error, it is recoverable, but only by filing and only if the error is identified.
NRIs Holding Indian Equity and Mutual Funds
This group is most exposed to outdated advice, because both dividends and long-term equity gains changed treatment within a few years of each other. Portfolios managed on the old assumptions typically under-report, and the department sees the transactions through reporting from the registrars and depositories regardless.
NRIs Planning a Permanent Return
Several exemptions are tied to being a person resident outside India under exchange control law, which changes on the date of return. Anyone relocating should map which exemptions end on arrival and which continue, since the two categories behave quite differently.
NRIs With Inherited or Agricultural Property in India
Inherited assets and agricultural land raise questions that are genuinely different from investment income. What is exempt on receipt, what becomes taxable on sale, and what qualifies as agricultural income under the statutory definition are three separate tests and are regularly conflated.
How Has the Exemption Framework Changed?
The exemptions available to non-residents were built as inducements when India needed foreign exchange, and they have been withdrawn as that need receded.
Exemption as Policy Instrument
With foreign exchange scarce and tightly controlled, exemptions on non-resident deposits and on specified foreign-exchange-denominated instruments were deliberate inducements to attract remittances. The concessional chapter for non-residents introduced in the early nineteen eighties belongs to the same policy: the objective was inflow, not revenue.
Liberalisation Without Withdrawal
Liberalisation increased both the number of Indians abroad and the volume of remittances, but the exemptions largely remained. The dividend regime shifted to a distribution tax collected from companies, which had the practical effect of making dividends exempt in shareholders' hands, non-residents included. Long-term gains on listed equity were exempted where the securities transaction tax had been paid.
A Broad Exemption Regime
For over a decade an NRI with an Indian portfolio faced an unusually favourable position: dividends exempt, long-term equity gains exempt, NRE interest exempt, and no obligation to report foreign assets. This is the period most of the folk advice circulating in expatriate communities dates from, which is why it is now so frequently wrong.
Systematic Withdrawal
The exemption on long-term gains from listed equity was withdrawn and replaced with a concessional rate above a threshold, with protection for gains accrued up to the date of the change. The dividend distribution tax was then abolished and dividends became taxable in the recipient's hands, with deduction at source on payments to non-residents. Reporting improved in parallel, so under-disclosure became visible rather than merely risky.
Narrower and More Specific
What remains exempt is principally deposit interest tied to non-resident status, agricultural income, and receipts falling within defined categories. Everything else is taxable, frequently at a concessional rate or with treaty relief, but taxable nonetheless.
How Should the Position Be Established?
The sequence below produces a defensible position for a filing year.
Fix Residential Status Under Both Frameworks
Determine status under the Income Tax Act and, separately, under the exchange control framework, since several exemptions depend on the latter.
List Every Indian Credit for the Year
Compile bank interest, dividends, redemptions, sale proceeds, rent and any other receipt, from statements rather than from memory.
Classify Each Receipt
Separate genuinely exempt income from income that is taxable at a concessional rate and income taxable at normal rates, testing each against the provision relied on.
Reconcile Against the Department's Data
Match the list against the annual information statement and the tax credit statement, since a credit visible to the department but absent from the return is what generates a query.
Check Deduction at Source on Exempt Income
Identify any tax deducted on income that is in fact exempt, and establish the recovery position.
Test Whether the Concessional Chapter Applies
Where investment income or long-term gains arise from specified foreign exchange assets, compare that treatment against normal computation.
Consider Treaty Relief on Taxable Items
For income taxable in India and abroad, establish whether a treaty reduces the Indian rate and what documentation is needed to claim it.
Report Exempt Income in the Return
Disclose exempt receipts in the schedule provided rather than omitting them, so the return accounts for every credit the department can see.
Step five recovers money more often than people expect. Where a bank has deducted on NRE interest, or a payer has deducted at the non-resident rate on income that is exempt, the deduction appears in Form 27Q and is recoverable through a return. Where the pattern is likely to repeat, a lower or nil deduction certificate prevents it recurring.
How Does Exemption Differ by Type of NRI?
The same rules produce quite different practical positions depending on how a person's Indian wealth is held.
Salaried NRIs in the Gulf
Many hold most Indian wealth in NRE deposits and remit regularly. Their position is often the simplest: deposit interest exempt, little or no other Indian income, and frequently no filing obligation at all. The one thing worth checking annually is that no bank has begun deducting on the NRE account after a KYC update reclassified the holder.
NRIs in Treaty Jurisdictions With Portfolios
Where an NRI holds Indian equity and mutual funds from a country with a comprehensive treaty, the analysis is more layered. Dividends and gains are taxable, so the question becomes which treaty rate applies and what documentation supports it, rather than whether an exemption exists.
NRIs With Inherited Indian Property
Inheritance itself is not taxed in India, so the receipt of inherited property is outside the charge. What follows is not: rental income is taxable, and a subsequent sale produces capital gains computed from the original owner's cost and holding period. Confusing the exempt receipt with the taxable consequences of holding and selling is common.
Seafarers and Individuals With Variable Status
Merchant navy personnel and others whose days in India fluctuate can move between statuses year to year. Because several exemptions attach to non-resident status, the position has to be re-established annually rather than carried forward, and a single year of extended presence in India can change the answer entirely.
Where the Analysis Commonly Goes Wrong
Four errors account for most of the corrective work.
Treating NRO Interest as Exempt
The exemption attaches to the NRE account, not to the fact that the holder is a non-resident. Interest credited to an NRO account is taxable in full, and where Indian income has been routed into an NRE account the position needs correcting rather than relying on the account label.
Relying on the Withdrawn Dividend Exemption
NRIs holding Indian shares for many years frequently still treat dividends as exempt. They are not, tax is deducted at source on them, and the deduction is visible. Where a treaty offers a lower rate, the relief has to be claimed with supporting documentation rather than assumed.
Assuming Exemptions Survive a Return to India
Exemptions tied to exchange control non-residence end on the date of return, not at the end of a tax year and not when income tax status changes. This produces a period during which people continue to treat interest as exempt when it has already become taxable.
Ignoring the Concessional Chapter Altogether
Where the concessional provisions for non-residents apply, they can produce a materially better outcome than the ordinary computation on the same income. They are frequently overlooked because they sit outside the sections a generalist preparer works with daily. Their scope is set out in our note on the special provisions for non-residents.
Why Choose N D Savla & Associates?
This is an area where precision saves money in both directions.
Both Residence Tests Applied Separately
We establish status under exchange control law and under the Income Tax Act independently, because the exemptions split across the two. Advice that treats them as one test gets at least one category wrong.
Every Credit Classified, Not Sampled
We work from complete bank and demat statements rather than a summary, and classify each receipt against the provision relied on. The receipts most often misclassified are small and recurring, which is exactly why a summary misses them.
Deduction on Exempt Income Pursued
Where tax has been deducted on income that is exempt, we quantify it, recover it through the return and put a certificate in place to stop it recurring. Most NRIs never notice this deduction because it never appears as a bill.
Treaty Positions Documented Properly
For income that is taxable, we establish whether treaty relief applies and assemble the documentation before the claim is made, rather than defending it afterwards.
Carried Through to the Return
The classification feeds directly into the return of income filed on the income tax portal, with exempt receipts disclosed rather than omitted. Our office at Baner, Pune serves non-resident clients across time zones.
Frequently Asked Questions on Exempt Income for NRIs
Is interest on an NRE account exempt from Indian income tax?
Yes, for a person who is a non-resident under the exchange control framework. Section 10(4)(ii) exempts interest on money standing to the credit of a Non-Resident External account. The exemption follows exchange control residence rather than income tax residence, which is why it ceases on the day a returning NRI becomes resident under exchange control law, even though they may remain not ordinarily resident for income tax for a further two or three years.
Are dividends from Indian companies still exempt for NRIs?
No. Dividends were exempt in the hands of shareholders while dividend distribution tax was levied on the company. That regime was withdrawn and dividends became taxable in the hands of the recipient, with tax deducted at source on payments to non-residents. A treaty may reduce the rate, but the income is no longer exempt. This is one of the most common outdated assumptions we correct.
Is long-term capital gain on listed shares exempt for an NRI?
It is not exempt, though a threshold applies. The blanket exemption for long-term gains on listed equity was withdrawn and replaced with a concessional rate applying above a specified annual threshold of gains, with gains up to that threshold effectively untaxed. The threshold has been revised, so the figure applicable to the relevant year should be confirmed rather than carried forward from an earlier return.
Does exempt income still have to be reported in the return?
Yes, where a return is being filed. Exempt income is reported in the schedule provided for it rather than included in taxable income. Reporting it matters because the department already sees most of these credits through the annual information statement, and an unexplained credit is far more likely to generate a query than a credit disclosed as exempt.
Is agricultural income from Indian land exempt for a non-resident?
Agricultural income as defined under the Act is exempt regardless of the residential status of the recipient, so a non-resident owning agricultural land in India is not taxed on genuine agricultural income from it. The definition is narrower than most people assume, and receipts from land that do not meet the statutory tests are not agricultural income merely because the land is rural.
Not Sure What Is Actually Taxable?
Half the exemptions NRIs rely on no longer exist. Speak to our Pune team.
- 📞 +91 98219 32683 | +91 97650 00966
- 💬 WhatsApp +91 98190 00511
- ✉ info@ndsavla.in
- 📍 Baner Business Bay, S No 52, Pashan–Sus Rd, behind Audi, Baner, Pune 411045
- 🕐 Monday–Saturday | 10:00 AM – 7:00 PM