Which ITR Form Should an NRI File, and Does the New Tax Regime Apply by Default

For a Non-Resident Indian, the filing season now opens with two questions that did not exist a few years ago: which return form fits a cross-border income profile, and whether the new tax regime under Section 115BAC applies automatically. The Income Tax Department's "Return Applicable" guidance for Assessment Year 2026-27 answers the first, and Section 115BAC answers the second: since FY 2023-24 the new regime is the statutory default, and an NRI who wants the old regime's deductions must now opt out, not opt in.

This guide walks a US-based NRI through the practical mechanics for FY 2025-26: the correct residential status test under Section 6, the ITR-2 versus ITR-3 choice, how the default regime strips most deductions, how the India-US treaty allocates taxing rights, and how to move the money home afterwards. Every figure below traces to the Income Tax Department, the relevant statute on indiacode.nic.in, or the India-US Double Taxation Avoidance Agreement in force since 12 September 1991.

FEMA / DTAA Position

Residential status for tax is decided first, and it is decided only by physical presence, not by passport. Under Section 6 of the Income Tax Act 1961 an individual is resident if present in India for 182 days or more in the previous year, or for 60 days or more in the year together with 365 days or more across the preceding four years; anyone failing both limbs is a Non-Resident, per the Income Tax Department's own AY 2026-27 guidance. For an Indian citizen or person of Indian origin visiting India, the 60-day limb is relaxed, which is what keeps most genuine NRIs non-resident on a short home visit.

Residential status under the Income Tax Act and residential status under the Foreign Exchange Management Act 1999 are two separate determinations made under two separate laws, and they can diverge in the year of departure or return. FEMA residence turns on intent and the purpose of stay rather than a day count, which is why a person can be a tax resident for a given year while already holding non-resident bank accounts opened under FEMA. The DTAA does not decide residence for domestic filing; it allocates taxing rights once each country has applied its own residence rule.

Where the India-US treaty matters is the ceiling it places on India's tax on specific passive income of a US tax resident. Article 24 of the 1991 treaty then lets the United States, as the country of residence, grant a foreign tax credit for the Indian tax suffered, so the same rupee of income is not taxed twice at the full rate in both countries. Crucially, the treaty does not make Indian-source capital gains exempt: India retains the right to tax long-term capital gains, so a US-resident NRI still faces Indian tax at 12.5% on most long-term gains.

Tax Treatment in India

The form follows the income. The Income Tax Department's AY 2026-27 guidance states that a non-resident with income under any head other than business or profession, which covers salary, house property, capital gains and other sources, files ITR-2, while a non-resident with business or professional income, or who is otherwise not eligible for ITR-1, ITR-2 or ITR-4, files ITR-3. ITR-1 (Sahaj) is reserved for resident individuals, so the practical default for the salaried or rent-earning NRI is ITR-2.

Source: Income Tax Department, "Return Applicable" guidance, AY 2026-27 (incometax.gov.in).

Section 115BAC fixes the rate structure. Since FY 2023-24 the new regime is the default, and for FY 2025-26 it runs seven slabs: nil up to Rs 4 lakh, 5% from Rs 4 lakh to Rs 8 lakh, 10% to Rs 12 lakh, 15% to Rs 16 lakh, 20% to Rs 20 lakh, 25% to Rs 24 lakh and 30% above Rs 24 lakh. A 4% health and education cess sits on top of the tax plus any surcharge.

The default regime is cheaper on rate but far narrower on deductions, and this is where NRIs lose the most. Opting for the old regime preserves Chapter VI-A deductions, whereas the new regime restricts eligible deductions largely to Section 24(b) interest on a housing loan (for a let-out property) and the Section 80CCD(2) deduction for an employer's pension contribution. The additional Rs 50,000 NPS deduction under Section 80CCD(1B) is an old-regime benefit only and cannot be claimed in the new regime.

Source: Section 115BAC and Chapter VI-A, Income Tax Act 1961 (indiacode.nic.in); standard deduction per RATE_CONFIG FY 2025-26.

Two rate features bite harder on higher incomes and on NRIs specifically. Surcharge runs at 10% of base tax between Rs 50 lakh and Rs 1 crore of total income, 15% from Rs 1 crore to Rs 2 crore, and 25% from Rs 2 crore to Rs 5 crore; above Rs 5 crore the new regime caps surcharge at 25%, so the old regime's 37% top rate does not apply under Section 115BAC. Separately, the Section 87A rebate (Rs 60,000 in the new regime for total income up to Rs 12 lakh, Rs 12,500 in the old regime up to Rs 5 lakh) is available to resident individuals, so a Non-Resident generally cannot claim it and is taxed from the first rupee above the basic exemption. You can model the combined effect on the NRI income-tax calculator, and rent earners should cross-check the NRI rental-income tax calculator because 30% TDS can apply on rent paid to an NRI.

Tax is also collected at source before the NRI ever files. TDS on an NRI's Indian income is deducted under Section 195 at rates that often exceed the final liability, so the ITR-2 or ITR-3 return is frequently the only route to a refund of excess deduction. The return-filing deadline flows from Section 139(1), and a treaty rate can be applied at the TDS stage only where the NRI furnishes a Tax Residency Certificate and Form 10F.

Tax Treatment Abroad

For a US-resident NRI the second layer of tax is in the United States, which taxes its residents and citizens on worldwide income. The treaty's job is to cap India's tax on cross-border passive income and then route relief through a credit, not to switch Indian tax off. The India-US DTAA ceilings, in force since 12 September 1991, are set out below.

Source: India-US DTAA, Articles 10, 11, 12 and 24 (effective 12 September 1991).

Article 10 sets the dividend ceiling at 15% only where the US recipient holds at least 10% of the voting stock in a direct parent-subsidiary relationship, and 25% in all other portfolio cases, so a retail NRI investor's Indian dividends face the 25% treaty cap rather than 15%. Fees for technical services under Article 12 carry a "make available" test, meaning the 15% rate bites only where the service transfers skill or knowledge the payer can reuse. These ceilings apply at India's deduction stage only when the Tax Residency Certificate and Form 10F are on record.

Relief against double taxation runs through Article 24: the United States, as the country of residence, allows a foreign tax credit for the Indian tax paid on the same income, subject to its own limitation rules. Because India's long-term capital gains rate is 12.5% and the gain is not exempt under the treaty, the US-resident NRI claims the 12.5% of Indian tax as a credit against the US liability on that gain rather than escaping Indian tax altogether. The mechanics of the US credit are governed by US domestic law, so the figure that is portable is the Indian tax actually paid, evidenced by the Indian return and Form 26AS.

Repatriation Mechanics

Once the Indian tax position is settled, moving money abroad is a FEMA and RBI exercise, governed by the type of account the funds sit in. An NRE account holds income earned abroad, is maintained in rupees, and both principal and interest are freely repatriable; interest on an NRE account is exempt from Indian tax only so long as the holder is a person resident outside India under FEMA 1999. An FCNR deposit holds the balance in foreign currency and is likewise fully repatriable, which shields the holder from rupee depreciation over the deposit term.

The NRO account is where Indian-source income such as rent, dividends and pension is received, and it is the one with a cap. Current income in an NRO account, such as rent net of tax, is freely repatriable, while the balance of other NRO funds is repatriable up to USD 1 million per financial year under the RBI's remittance-of-assets facility, after tax and on production of Form 15CA and a chartered accountant's Form 15CB. The USD 1 million ceiling runs by financial year, so timing a large transfer across the 31 March boundary can double the headroom.

Source: RBI remittance-of-assets facility and FEMA 1999 account rules (rbi.org.in).

The paperwork is non-negotiable above small thresholds. Form 15CA (a self-declaration) and Form 15CB (a chartered accountant's certificate) are required for most taxable remittances out of an NRO account, and the bank will not release the USD 1 million-limit transfer without them. You can size the net amount that lands abroad, after the 30% or treaty-rate TDS and the USD 1 million ceiling, on the NRI repatriation calculator before instructing the bank.

FAQ

Does the new tax regime apply to an NRI by default?

Yes. Section 115BAC has made the new regime the default since FY 2023-24, and it applies to a Non-Resident Indian automatically for FY 2025-26 unless the NRI opts for the old regime in the return. The default carries the seven slabs from nil up to Rs 4 lakh through to 30% above Rs 24 lakh, plus 4% cess.

Which ITR form should an NRI file?

Most NRIs file ITR-2, which covers salary, house property, capital gains and other-source income with no business income, per the Income Tax Department's AY 2026-27 guidance. An NRI with business or professional income, or who is not eligible for ITR-1, ITR-2 or ITR-4, files ITR-3. ITR-1 (Sahaj) is not available to non-residents.

Can an NRI claim Chapter VI-A deductions like Section 80C?

Only under the old regime. The new default regime restricts eligible deductions largely to Section 24(b) housing-loan interest on a let-out property and the Section 80CCD(2) employer pension contribution. Section 80C and the additional Rs 50,000 NPS deduction under Section 80CCD(1B) are NOT allowed in the new regime, so an NRI who wants them must opt out into the old regime in the return.

Are Indian capital gains exempt for a US-resident NRI under the DTAA?

No. India retains taxing rights over Indian-source capital gains, and a US-resident NRI faces Indian tax at 12.5% on most long-term gains. Article 24 of the 1991 India-US treaty then allows the United States to grant a foreign tax credit for that Indian tax, so the gain is not taxed twice at the full rate.

What rate of TDS applies to an NRI's Indian income?

TDS on an NRI's Indian income is deducted under Section 195, often at rates above the final liability, which is why filing ITR-2 or ITR-3 is usually the route to a refund. A lower treaty rate, such as the India-US ceilings of 15% on interest or 25% on portfolio dividends, applies at the deduction stage only where the NRI furnishes a Tax Residency Certificate and Form 10F.

How much can an NRI repatriate from an NRO account?

Current income such as post-tax rent is freely repatriable, while the balance of other NRO funds is repatriable up to USD 1 million per financial year under the RBI's remittance-of-assets facility. The transfer requires Form 15CA and the chartered accountant's Form 15CB, and the USD 1 million limit resets each financial year on 1 April.

Is the Section 87A rebate available to an NRI?

Generally no. The Section 87A rebate, Rs 60,000 in the new regime for total income up to Rs 12 lakh and Rs 12,500 in the old regime up to Rs 5 lakh, is available to resident individuals, so a Non-Resident is ordinarily taxed from the first rupee above the basic exemption without that rebate.