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Exempt Income for NRIs Under the Income Tax Act — NRE, FCNR & Other Exemptions

Exempt Income for NRIs Under the Income Tax Act — NRE, FCNR & Other Key Exemptions

Understand Which Categories of Income Are Completely Tax-Free for Non-Resident Indians in India

One of the most significant advantages for Non-Resident Indians (NRIs) is access to various categories of fully exempt income in India that reduce their overall tax liability. These exemptions are especially important because TDS is deducted at high rates on NRI income at source, making an understanding of what is tax-free essential for both accurate ITR filing and for claiming refunds. The most well-known exemption is on interest earned on NRE (Non-Resident External) accounts and FCNR (Foreign Currency Non-Resident) deposits, which is completely exempt under Section 10(4) of the Income Tax Act.

These exemptions are a core component of NRI tax planning and must be read alongside the special tax provisions under Chapter XII-A. Importantly, many of these exemptions apply only while the individual maintains their Non-Resident status under the IT Act — they cease or are modified when the NRI returns to India and transitions to Resident status.

Key Categories of Exempt Income for NRIs

NRE Account Interest — Section 10(4)(ii)

Interest earned on NRE savings accounts, NRE fixed deposits, and NRE recurring deposits is fully exempt from income tax in India for as long as the account holder maintains Non-Resident status under the IT Act. No TDS is deducted on NRE account interest.

FCNR(B) Deposit Interest — Section 10(4)(ii)

Interest on Foreign Currency Non-Resident (Bank) deposits — held in USD, GBP, EUR, AUD, CAD, JPY — is also fully exempt from tax in India for NRIs. FCNR deposits are free from exchange rate risk as they are maintained in foreign currency.

Life Insurance Maturity — Section 10(10D)

Maturity proceeds and death benefits from a life insurance policy are exempt under Section 10(10D), provided the annual premium does not exceed 10% of the sum assured (for policies issued after April 1, 2012). Policies with premiums exceeding this threshold are now subject to tax on maturity.

Gifts from Specified Relatives

Gifts received by NRIs from specified relatives (spouse, siblings, parents, parents-in-law, grandparents, etc.) are fully exempt from tax regardless of the amount received, under the proviso to Section 56(2)(x). Gifts from non-relatives exceeding ₹50,000 in aggregate are taxable.

Agriculture Income — Section 10(1)

Income from agriculture on land situated in India is exempt under Section 10(1), but it is included for rate purposes (rate uplift). However, income from agricultural land situated outside India does not qualify for this exemption and may be taxed based on residential status.

Long-Term Capital Gains — Section 54/54EC

NRIs selling a residential property in India can claim exemption on long-term capital gains under Section 54 (by reinvesting in another residential property in India within prescribed timelines) or under Section 54EC (by investing up to ₹50 lakh in NHAI/REC bonds within 6 months of sale).

Key Facts About NRI Income Exemptions

  • NRE account interest exemption applies only while the account holder is a Non-Resident under the IT Act — it ceases on becoming Resident
  • FCNR deposits can be converted to RFC (Resident Foreign Currency) accounts when returning to India, and interest during RNOR period is still exempt
  • The Section 10(10D) exemption on life insurance maturity is now subject to a ₹5 lakh annual premium cap for ULIPs issued after February 2021
  • Dividends from Indian companies are taxable in the hands of NRI shareholders at 20% (or at reduced DTAA rates with TRC)
  • Interest on NRO accounts is taxable at 30% TDS — unlike NRE accounts, NRO accounts do not carry a tax exemption
  • Section 54 exemption for NRIs requires purchase of only one residential house in India within 1 year before or 2 years after the sale (or construction within 3 years)

Frequently Asked Questions — Exempt Income for NRIs

Is the interest earned on NRE accounts truly tax-free in India for NRIs?
Yes. Interest on NRE savings accounts and NRE fixed deposits is completely exempt from income tax in India under Section 10(4)(ii) of the Income Tax Act, 1961, for as long as the account holder maintains Non-Resident status. No TDS is deducted on NRE account interest, and it need not be reported in the ITR as taxable income. However, the interest may be taxable in the NRI's country of residence depending on that country's tax laws — DTAA provisions may provide relief in such cases.
Is interest on FCNR deposits also exempt from tax?
Yes. Interest on FCNR(B) deposits is also fully exempt from income tax in India under Section 10(4). FCNR deposits are particularly useful for NRIs because they eliminate exchange rate risk — the deposit is maintained and repaid in the original foreign currency (USD, GBP, EUR, etc.). On returning to India, FCNR deposits can be converted to RFC (Resident Foreign Currency) accounts, and interest continues to be exempt during the RNOR period.
What happens to NRE account exemption when an NRI returns to India?
When an NRI returns to India and becomes Resident under the IT Act, NRE accounts must be re-designated as regular resident savings accounts or RFC accounts within a reasonable time. From the date of becoming Resident, interest on the re-designated account is no longer exempt under Section 10(4) and becomes taxable as regular income. However, during the RNOR (Not Ordinarily Resident) transitional period, the interest on FCNR deposits or RFC accounts may still qualify for exemption — a key reason why careful planning around the timing of returning to India is important.
Are dividends received from Indian companies exempt for NRIs?
No. Following the abolition of the Dividend Distribution Tax (DDT) from FY 2020-21, dividends from Indian companies are taxable in the hands of all investors — including NRIs — at the applicable tax rate. For NRIs, TDS is deducted at 20% on dividends from Indian companies. However, if the NRI's country of residence has a DTAA with India, a lower withholding tax rate (as low as 5–10%) may be available by submitting a Tax Residency Certificate and Form 10F to the dividend-paying company before the dividend is declared.
What gifts are tax-free for an NRI receiving money from abroad or from India?
Under Section 56(2)(x) of the IT Act, gifts received from "specified relatives" are fully exempt from tax regardless of the amount. Specified relatives include the spouse, siblings, siblings of spouse, parents, parents-in-law, lineal ascendants (grandparents), and lineal descendants (children, grandchildren). Gifts from non-relatives are exempt only up to ₹50,000 in aggregate per financial year; the amount above ₹50,000 is taxable as income from other sources. Gifts received on the occasion of marriage are fully exempt regardless of the donor relationship or amount.

Maximise Your NRI Tax Exemptions Legally

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