What is foreign income?

Foreign income generally means Income that accrues or arises outside India from a source situated outside India. Common examples include:

• Salary for employment services performed outside India.
• Interest earned on a bank account maintained outside India.
• Rent from property situated outside India.
• Dividends from foreign companies.
• Capital gains from foreign shares or overseas property.
• Income from a business or profession carried on outside India.
• Foreign pension, retirement or social-security income.

The currency in which Income is paid does not determine whether it is foreign income. For example, rent from a property in India remains Indian-source income even if it is paid in US dollars or credited to an overseas account.

Residential status decides the scope of taxable income

Taxability in India is primarily determined by residential status for the relevant year. It is not determined merely by citizenship, passport, visa, NRI banking status or OCI card status.

Residential status must be determined separately for every year. The normal tests consider the number of days spent in India during the relevant year and earlier years. Special rules may apply to Indian citizens or persons of Indian origin visiting India, citizens leaving India for employment, crew members and Indian citizens who are not liable to tax in another country.

Applicable provisions under the two Income-tax Acts

When is a non-resident’s foreign income taxable in India?

Receipt in India versus remittance to India

The place where income is first received is important. A later transfer of money that was already received outside India is ordinarily a remittance of existing funds and not a second receipt of income.

For example, where foreign salary is first credited to an overseas bank account and is later transferred to an NRE account in India, the later transfer does not ordinarily make that salary taxable in India solely because of the remittance.

However, where the first receipt itself occurs in an Indian bank account, the income may fall within the scope of income received in India. The contractual payment terms, bank records and first point of receipt should therefore be reviewed.

What is income deemed to be received in India?

Deemed receipt is a limited statutory concept. It applies only where the Income-tax Act specifically treats an amount as received, even though there may not be an ordinary cash receipt.

Examples under section 7 include specified accretions or transferred balances in recognised provident funds and certain employer or government contributions to pension schemes.

A simple transfer of foreign money to India is not treated as a deemed receipt merely because the funds enter an Indian bank account.

What Income is deemed to accrue or arise in India?

Under section 9, income may be treated as arising in India even when part of the transaction or payment occurs outside India. Important examples include income arising directly or indirectly through:

• An asset or source of income situated in India.
• Property situated in India.
• A business connection or significant economic presence in India.
• Transfer of a capital asset situated in India.
• Salary for services rendered in India.
• Dividend paid by an Indian company.
• Interest payable by the Government or certain Indian residents.
• Royalty or fees for technical services connected with India, subject to statutory conditions and treaty provisions.
• Certain monetary gifts paid by an Indian resident to a non-resident, subject to the gift-tax exclusions under the Act.

Therefore, an income does not become foreign-source income merely because the amount is paid outside India.

Tax treatment of NRE, NRO and FCNR(B) accounts

Is an OCI cardholder automatically a non-resident?

No. OCI is an immigration and citizenship-related status. It is not an income-tax residential status.

An OCI cardholder may be:

• Resident and Ordinarily Resident;
• Resident but Not Ordinarily Resident; or
• Non-Resident,

depending on the applicable day-count tests and special residency provisions for that year.

Similarly, describing oneself as an NRI for banking or FEMA purposes does not automatically establish non-resident status under the Income-tax Act. FEMA residence and income-tax residence serve different purposes and may produce different results.

Income from property situated outside India

For a non-resident, rent or capital gains from property situated outside India are generally not taxable in India when the income accrues and is first received outside India.

However:

• The country where the property is located may tax the rent or capital gain.
• Income received directly in India may require further examination under section 5.
• The applicable tax treaty should be reviewed.
• Indian tax consequences can arise in unusual cases involving an Indian business connection, indirect transfer or another deeming provision.

Income and capital gains from property situated in India

Rent and capital gains from property situated in India are taxable in India for a non-resident because the property and source of income are located in India.

Rental income

Rental income is generally reported under the head “Income from House Property”. Eligible municipal taxes, the statutory deduction and permissible home-loan interest may be claimed subject to the applicable conditions.

Capital gains on sale of Indian property

• Property held for more than 24 months is generally treated as a long-term capital asset.
• Property held for 24 months or less is generally treated as a short-term capital asset.
• For transfers on or after 23 July 2024, long-term capital gains of a non-resident from property are generally taxable at 12.5% without indexation, plus applicable surcharge and cess.
• Short-term capital gains are generally taxable at the normal rates applicable to the taxpayer.
• The stamp-duty value may be substituted for the sale consideration where section 50C or the corresponding provision applies.
• Exemptions under sections such as 54 and 54EC may be available when the prescribed reinvestment conditions are satisfied.

TDS when an NRI sells Indian property

Where the seller is a non-resident, the buyer’s TDS obligation is generally governed by section 195. The one-per-cent TDS mechanism under section 194-IA applies to a resident transferor and should not be used merely because the transaction involves immovable property.

TDS deducted by the buyer is not necessarily the final capital-gains tax. The seller may claim the available credit in the income-tax return. Where appropriate, the payer or recipient may use the statutory procedure for determining the taxable portion or obtaining a lower or nil deduction certificate.

Can a DTAA reduce the Indian tax?

Where India has a Double Taxation Avoidance Agreement with the taxpayer’s country of residence, the treaty provisions may be applied when they are more beneficial than the domestic Income-tax Act.

A non-resident claiming treaty relief generally needs:

• A valid Tax Residency Certificate from the foreign jurisdiction.
• The prescribed additional information or form.
• Evidence establishing beneficial ownership and treaty eligibility, where relevant.
• Documents supporting the nature, source and amount of income.

For Assessment Year 2026-27 under the 1961 Act, the prescribed information is generally furnished through Form 10F where required. Under the Income-tax Act, 2025 framework, the corresponding treaty-information form is Form 41 under the applicable rules.

A treaty generally allocates or limits taxing rights. It does not automatically make every item of income exempt.

Does a non-resident need to file an income-tax return?

A non-resident should examine the return-filing requirement where taxable income arises in India, tax is payable, a refund is being claimed, a loss is to be carried forward or another prescribed filing condition is satisfied.

For Assessment Year 2026-27:

• ITR-2 is generally used by a non-resident individual who does not have income from business or profession.
• ITR-3 is generally used where the non-resident has business or professional income.
• ITR-1 is not ordinarily available to a non-resident individual.

The return should report taxable Indian salary, house-property income, NRO interest, dividends, capital gains and other Indian-source income under the correct schedules.

The current ITR-2 guidance states that Schedule FA relating to foreign assets need not be completed by a non-resident or a resident but not ordinarily resident. However, taxable income must still be disclosed under the appropriate income schedule.

Documents an NRI should retain

• Passport and travel history for residential-status calculation.
• Foreign tax-residency certificate, where treaty relief is claimed.
• Foreign employment contract and salary slips.
• Overseas and Indian bank statements showing the first receipt and later remittance.
• NRE, NRO and FCNR(B) interest certificates.
• Form 16A and Form 26AS/AIS details for Indian TDS.
• Indian and foreign property purchase and sale documents.
• Rent agreements and municipal-tax records.
• Capital-gain computation and reinvestment documents.
• Form 10F or Form 41 and supporting DTAA documents, where applicable.

Practical examples

Example 1: Foreign salary remitted later to India

Rahul is a non-resident who works in Singapore. His salary is first credited to his Singapore bank account. He later transfers part of the savings to his NRE account in India.

Tax treatment: The salary is generally not taxable in India merely because the previously received funds are later remitted to the NRE account.

Example 2: Interest from an NRO fixed deposit

Meera is a non-resident and earns interest on an NRO fixed deposit in India.

Tax treatment: The interest is taxable in India and may be subject to TDS. DTAA relief may be considered where the conditions and documentation are satisfied.

Example 3: Rent from an Indian property credited abroad

Arjun owns a flat in Mumbai. His tenant deposits the rent into Arjun’s overseas bank account.

Tax treatment: The rent remains taxable in India because the property and source of income are situated in India. The overseas place of payment does not change the source.

Example 4: Foreign investment income credited directly in India

An NRI earns dividends from a foreign company, but the dividend is paid directly into an Indian bank account.

Tax treatment: The first-receipt rule may bring the income within the Indian tax scope. The payment arrangement, treaty position and banking trail should be reviewed before filing.

Common mistakes

• Assuming that every NRI is automatically a non-resident under the Income-tax Act.
• Assuming that an OCI cardholder cannot become an Indian tax resident.
• Treating a later remittance of foreign savings as fresh income.
• Assuming that all credits to an NRE account are exempt.
• Failing to report taxable NRO interest.
• Ignoring rent or capital gains from Indian property because the money was received abroad.
• Using section 194-IA and Form 26QB when purchasing property from an NRI seller.
• Claiming DTAA relief without a valid Tax Residency Certificate and prescribed information.
• Completing Schedule FA merely because the non-resident owns foreign assets.
• Failing to preserve documents proving the place of first receipt.

Key takeaways

Conclusion

Foreign income of a non-resident is not automatically taxable in India. The correct treatment depends on the taxpayer’s residential status, the source of income, the place of first receipt, statutory deemed-accrual provisions and any applicable tax treaty.

Bank-account labels such as NRE, NRO or FCNR(B) are relevant for the taxation of interest and FEMA compliance, but they do not by themselves determine the source or taxability of the underlying money. NRIs should maintain a clear banking trail and review Indian-source income, property transactions and treaty documentation before filing their return.

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