Direct Tax Laws & International Taxation · Non Resident Taxation

Special Provisions for Non-Resident Indians (NRIs) in Income-tax

Updated 5 October 2026 · Fact-checked

The special provisions for NRIs tax investment income from foreign exchange assets at 20%, with no deductions, and long-term capital gains on them at 12.5%. Long-term gains can be exempt, in proportion, if the net consideration is reinvested in specified assets or savings certificates within six months. The NRI can also opt out by filing a declaration with the return.

Understand Special Provisions for Non-Resident Indians

A Non-Resident Indian (NRI) here means an individual who is a citizen of India or a person of Indian origin, and who is a non-resident for the tax year. A person of Indian origin is someone who, or whose parent or grandparent, was born in undivided India.

The law wants to encourage NRIs to bring convertible foreign exchange into India. So it gives a simple scheme for income from such investments. A foreign exchange asset is a specified asset bought with convertible foreign exchange. Specified assets are shares of an Indian company, debentures or deposits of an Indian public company, Central Government securities, and other assets the Government notifies.

Two kinds of income get special treatment. Investment income is income from a foreign exchange asset, such as interest. Long-term capital gain (LTCG) on transfer of a foreign exchange asset is also covered. Under the scheme, investment income is taxed at 20% and LTCG on a foreign exchange asset at 12.5%, plus surcharge as applicable and 4% cess. Dividends and interest are the usual items in questions.

The 12.5% rate applies only to LTCG on foreign exchange assets, not to all assets. LTCG on a specified asset bought with rupees is outside this scheme and follows the normal LTCG provisions. The main benefits of the scheme are the reinvestment exemption, no need to file a return when the income is covered by tax deducted at source, and the option to opt out.

The price of the concession is that you get limited deductions. No deduction is allowed for expenses or allowances against investment income, and no Chapter VI-A deduction is allowed from investment income. This no-deduction rule applies to investment income.

There are two relief valves. First, LTCG on a foreign exchange asset (which must be a long-term capital asset) can be fully or partly exempt if you invest the net consideration in any specified asset or savings certificates within six months of the transfer. The exemption is proportionate to the cost of the new asset divided by the net consideration. Second, the NRI can choose not to be governed by the chapter, and then normal provisions apply. If the NRI becomes resident later, a separate option lets the special scheme continue for the foreign exchange assets held.

Key rules to remember

Who is an NRI for this chapter: Individual + citizen of India or person of Indian origin + non-resident in the tax year; Foreign nationals, companies and firms are outside the scheme. Test residential status first.
Foreign exchange asset: Specified asset acquired or purchased with convertible foreign exchange; Specified assets: shares of an Indian company, debentures or deposits of an Indian public company, Central Government securities, other notified assets. The same asset bought with rupees is not a foreign exchange asset.
Tax on investment income: Tax = 20% × investment income, plus applicable surcharge and 4% cess; Investment income is taken gross, with no deductions.
Tax on LTCG on foreign exchange asset: Tax = 12.5% × taxable LTCG on foreign exchange asset, plus applicable surcharge and 4% cess; The 12.5% rate applies only to LTCG on foreign exchange assets, not to all assets. Taxable LTCG is after the reinvestment exemption.
No deductions: No expense or allowance deduction and no Chapter VI-A deduction against investment income; Gross investment income is taxed. This no-deduction rule is for investment income. It is a classic one-mark point.
Net consideration: Net consideration = Full value of consideration − expenditure on transfer; This is the base for the reinvestment test, not the gross sale price.
Reinvestment exemption: Exempt gain = LTCG × Cost of new asset ÷ Net consideration (full exemption if cost of new asset ≥ net consideration); The original asset must be a long-term capital asset. Invest the net consideration in any specified asset or savings certificates within 6 months of transfer.
Lock-in of new asset: If the new asset is transferred or converted into money within 3 years, the exempted gain is treated as short-term capital gain of that year; Be ready to state this as a consequence in case questions.
Return filing relief: No return needed if total income is only investment income or LTCG on foreign exchange assets and tax is deducted at source; Applies only when TDS covers the income. Any other income takes you out of this relief.
Option to opt out: Declaration with the return for the year → normal provisions apply for that year and later years; Opt out when normal rules give lower tax, for example when you have deductions or low income.
Option on becoming resident: Declaration with return for the year of becoming resident → special provisions continue for foreign exchange assets held; Continues until the assets are transferred or converted into money.

How to solve Special Provisions for Non-Resident Indians questions

Use this order for any NRI question. It stops you from applying the special rates to the wrong person or the wrong income.

1Check the person. Is the assessee an individual, a citizen or person of Indian origin, and non-resident for the tax year? If not, the chapter does not apply.
2Identify each asset. Mark it as a foreign exchange asset only if it is a specified asset and was bought with convertible foreign exchange. Separate the rest.
3Classify each income as investment income, LTCG on a foreign exchange asset, or other income. Other income, including LTCG on rupee-bought assets, follows normal rules and rates.
4Compute the capital gain. Use net consideration, cost and the holding period. Check that the gain is long-term.
5Apply the reinvestment exemption. Test the six-month window from the date of transfer and that the new asset is a specified asset or savings certificates. Compute exempt gain = LTCG × cost of new asset ÷ net consideration.
6Compute tax. Take investment income gross, with no deductions, and apply 20%. Apply 12.5% to taxable LTCG on the foreign exchange asset. Add surcharge if applicable and 4% cess. Tax other income separately.
7Check the choice. If the NRI opts out, or if the question gives deductions or a lower-tax alternative, recompute under normal provisions and compare.
8State filing and TDS points: return exemption when only such income exists and TDS is deducted, and any lock-in consequence.

Quickest way: Three-bucket method

When to use it: Use it for numerical questions with several incomes, when time is short.

Make three buckets: (A) investment income, (B) LTCG on foreign exchange asset, (C) all other income including LTCG on other assets.
Put the gross investment income in A with no deductions. In B, reduce the LTCG by the reinvestment exemption using the proportion formula.
Multiply A by 20% and B by 12.5%. Tax C under the normal rates for the assessee. Add surcharge if applicable and 4% cess.
Spend the last minute on the one-line conclusion: no deductions, six-month reinvestment and three-year lock-in, or the opt-out option.

Common mistakes in Special Provisions for Non-Resident Indians

Applying the special provisions to a non-resident foreigner or to a company.
Students see 'non-resident' and stop reading the definition.
Fix: Check all three conditions: individual, citizen or person of Indian origin, and non-resident in the tax year.
Treating rupee-bought shares as a foreign exchange asset.
The words 'shares of an Indian company' look enough.
Fix: Check how the asset was acquired. Only assets bought with convertible foreign exchange qualify. Others follow the normal LTCG provisions.
Applying 20% to both investment income and LTCG.
Students remember one flat rate for the whole chapter.
Fix: Use 20% for investment income and 12.5% for LTCG on a foreign exchange asset. Compute them separately.
Deducting expenses or Chapter VI-A deductions from investment income.
Habit from normal computation of income from other sources.
Fix: Take investment income gross. Allow no expense, allowance or Chapter VI-A deduction against it.
Computing the reinvestment exemption on gross sale price or on the capital gain itself.
Mixing up gain and consideration.
Fix: Compare the cost of the new asset with net consideration. Exempt gain = LTCG × cost of new asset ÷ net consideration.
Ignoring the six-month window and three-year lock-in.
Students treat them as extra detail.
Fix: Check dates in every case. Reinvestment must be within six months of the transfer, so late reinvestment gets no exemption. Early transfer of the new asset makes the exempted gain short-term in that year.
Forgetting that the NRI can opt out, or that the option on becoming resident exists.
The chapter is learned as a fixed rate table.
Fix: Close every case with the choice: compare the tax under the special scheme with the tax under normal provisions, and mention the declaration with the return.

Worked examples

Example 1

Mr. Nair, a non-resident Indian, bought listed shares of an Indian company in 2021 with convertible foreign exchange. In the tax year 2026-27 he sold them for a net consideration of ₹10,00,000. Their cost was ₹6,00,000. Within four months he bought Central Government securities for ₹5,00,000. He also earned ₹1,20,000 interest on a foreign exchange asset. He has no other income. Compute his tax, ignoring surcharge. Use 20% for investment income and 12.5% for LTCG.

Show the solution

He is an NRI, and the shares are a foreign exchange asset because they were bought with convertible foreign exchange. The holding period is over 12 months, so the gain is long-term.
LTCG = ₹10,00,000 − ₹6,00,000 = ₹4,00,000.
He invested ₹5,00,000 in a specified asset within six months of the transfer. This is less than the net consideration, so the exemption is proportionate.
Exempt gain = ₹4,00,000 × ₹5,00,000 ÷ ₹10,00,000 = ₹2,00,000.
Taxable LTCG = ₹4,00,000 − ₹2,00,000 = ₹2,00,000.
Investment income of ₹1,20,000 is taken gross, with no deduction.
Tax on investment income = 20% × ₹1,20,000 = ₹24,000.
Tax on LTCG = 12.5% × ₹2,00,000 = ₹25,000.
Total tax = ₹24,000 + ₹25,000 = ₹49,000. Cess at 4% = ₹1,960.

Answer: Total tax liability is ₹50,960 (₹49,000 plus cess ₹1,960), before surcharge. His total income consists only of investment income and LTCG on a foreign exchange asset. If tax is deducted at source on it, he is exempt from filing a return.

Example 2

Mrs. Iyer, an NRI, held foreign exchange assets under the special provisions and has just returned to India with the intent to stay. She becomes resident in the tax year 2026-27. She also holds rupee-bought Indian shares. Advise what she can do about the foreign exchange assets and about the other shares.

Show the solution

Once she is resident, the NRI chapter does not apply to her by default, because she is no longer a non-resident.
But the law allows a continuation option. She can furnish a declaration in writing with the return of income for the year she becomes resident.
If she does so, the special provisions continue for her foreign exchange assets, and for income from them, in that year and later years.
The continuation lasts until the assets are transferred or converted into money.
The rupee-bought shares were never foreign exchange assets, so they follow the normal provisions.

Answer: She can keep the special treatment for her foreign exchange assets by furnishing the declaration with the return for the year she becomes resident. It applies until those assets are transferred or converted into money. The rupee-bought shares are taxed under normal provisions.

Exam tips

Start every answer with the three-part test of who an NRI is. Many students lose the first mark here.
Write 'no deductions' for investment income. It is a repeated one-mark point in case MCQs.
Keep the two rates apart: 20% on investment income, 12.5% on LTCG on a foreign exchange asset.
In reinvestment questions, always show the formula LTCG × cost of new asset ÷ net consideration, and state the six-month window and three-year lock-in.
Read how the asset was acquired. A scenario that mentions 'purchased in rupees' is a trap.
In short-answer questions, finish with the options: opt out by declaration, or continue after becoming resident. Examiners often give a mark for this.

Practice questions from Non Resident Taxation

Special Provisions for Non-Resident Indians in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Special Provisions for Non-Resident Indians: frequently asked questions

Who is an NRI for the special provisions?

An individual who is a citizen of India or a person of Indian origin and is non-resident in the tax year. A person of Indian origin is one who, or whose parent or grandparent, was born in undivided India.

What income is covered by the special provisions, and at what rates?

Investment income from a foreign exchange asset is taxed at 20%. Long-term capital gains on transfer of a foreign exchange asset are taxed at 12.5%. Surcharge as applicable and 4% cess are added. Other income of the NRI is taxed under the normal provisions.

How does the reinvestment exemption work?

If you invest the net consideration in any specified asset or savings certificates within six months of the transfer, the LTCG is exempt. If you invest less, the exempt gain is LTCG × cost of new asset ÷ net consideration. If the new asset is transferred or converted into money within three years, the exempted gain becomes short-term capital gain of that year.

Can an NRI choose not to follow these provisions?

Yes. The NRI can furnish a declaration with the return of income that the chapter should not apply. Normal provisions then apply, which helps when deductions or low income make normal taxation cheaper.

Does an NRI have to file a return?

Not if total income consists only of investment income or LTCG on foreign exchange assets and tax has been deducted at source on it. If there is any other income, the return rules apply normally.