Taxation of Indian and Overseas Income for NRIs, Returning Indians and Foreign Citizens

Cross-border movement of individuals has made income-tax planning more complex, especially when income is earned in more than one country. Assessees who move out of India, settle abroad, or return to India after several years often continue to hold assets both in India and overseas. This naturally leads to doubts about where such income should be taxed and how to avoid double taxation.

This article explains, in a simplified and structured manner, how Indian tax law, read with Double Taxation Avoidance Agreements (“DTAAs”) and the UN Model Convention, determines the taxation of income earned in India and outside India by:

  • An Indian citizen or foreign citizen who is a Non-Resident earning income from India, and
  • An Indian citizen returning to India or a foreign citizen becoming resident in India with overseas investments.

The focus is on:

  1. Understanding the role of residential status.
  2. Determining where specific categories of income are taxed (India vs foreign jurisdiction).
  3. How Foreign Tax Credit (FTC) under DTAAs helps prevent double taxation.

Step 1: Residential Status – The Foundation of Taxability

Before examining whether a particular income is taxable in India or overseas, the first and most crucial step is to ascertain the assessee’s residential status under the Income Tax Act 1961.

Broadly, under the Income Tax Act 1961:

  • A resident is generally taxable in India on global income (subject to DTAA relief).
  • A non-resident is taxable in India only on income that:
    • accrues or arises in India, or
    • is deemed to accrue or arise in India, or
    • is received in India.

Once the residential status is clear, the next step is to identify:

  • The nature of income (salary, interest, dividend, rent, capital gains, etc.), and
  • The source or location of such income (India vs foreign country).

These two parameters together determine where and how the income will be taxed, and whether DTAA benefits can be claimed.

Scenario 1: NRI or Foreign Citizen Earning Income from India

1.1 Basic Tax Rule for Non-Residents and Foreign Citizens

When an individual becomes a Non-Resident under the Income Tax Act 1961—whether an Indian citizen who moved abroad or a foreign citizen staying overseas—they may still hold:

  • Bank deposits in India
  • Listed shares or unlisted equity
  • Mutual fund units
  • Immovable property generating rent
  • Other Indian financial assets

In such a case, the law is clear:

Any income that accrues, arises, or is deemed to accrue or arise in India is taxable in India, irrespective of the assessee’s residential status.

1.2 Typical Categories of Income Taxable in India for Non-Residents

For an NRI or foreign citizen who is a tax resident of another country, the following incomes from India are normally taxable in India:

  • Rental income from property located in India
  • Capital gains on transfer of Indian assets, such as:
    • Sale of a flat located in Mumbai
    • Sale of shares of an Indian company
    • Sale of units of Indian mutual funds
  • Interest on:
    • Bank deposits held with Indian banks
    • Debentures or bonds issued by Indian companies
  • Dividends from Indian companies, subject to applicable provisions

This is based on the principle that India, as the source country, has the right to tax income generated within its territory.

1.3 Taxation in the Foreign Country of Residence

Simultaneously, because the assessee is treated as a tax resident in the foreign country (for example, the United States, United Kingdom, Canada, etc.), that country may levy tax on the assessee’s worldwide income, including:

  • Income generated in India (rent, dividends, interest, capital gains, etc.)
  • Income from employment or business carried on outside India
  • Income from foreign investments

This creates the possibility that the same item of income, such as rent from an Indian property, may be taxed in:

  1. India (as source country), and