Income Tax Filing for NRIs with NRO Interest Income: What You Need to Know for FY 2025-26

Non-Resident Indians (NRIs) with NRO interest income often face confusion regarding their Indian income tax filing obligations. For FY 2025-26, an NRI must file an Indian Income Tax Return (ITR) if their total Indian income exceeds INR 4,00,000, or if they wish to claim a refund of excess Tax Deducted at Source (TDS). Even if income is below this limit, filing is crucial to reclaim over-deducted TDS.

Understanding Mandatory Filing Requirements for NRIs

For Non-Resident Indians, understanding when and why to file an Indian Income Tax Return (ITR) is critical, especially when dealing with income from Non-Resident Ordinary (NRO) accounts. For the Financial Year (FY) 2025-26, specific conditions mandate filing:

• Income Exceeds Basic Exemption Limit: If your total Indian income surpasses the basic exemption limit of INR 4,00,000 under the new tax regime (Section 115BAC), filing an ITR is compulsory. It’s important to note that, unlike residents, NRIs are not eligible for the Section 87A rebate, meaning your tax liability begins once your income crosses this INR 4,00,000 threshold.
• Claiming Refund of Excess TDS: Interest income from NRO accounts is typically subject to TDS at a flat rate of approximately 31.2%. However, your actual tax liability, calculated based on applicable slab rates, is often much lower. If you have had excess TDS deducted and wish to claim a refund, filing an ITR is the only way to do so.
• Carrying Forward Capital Loss: Should you incur a capital loss in India that you wish to carry forward to future assessment years, filing an ITR is necessary to report and register this loss.
• Capital Gains from Indian Assets: If you have realised capital gains from the sale of Indian property or shares, an ITR must be filed to declare these gains and pay the appropriate tax.

The Impact of TDS on NRO Interest and How to Claim Refunds

Interest earned on NRO accounts is subject to TDS at a rate of around 31.2%. While this deduction happens automatically, it often results in a significant over-deduction compared to your actual tax liability. This is where filing an ITR becomes not just a compliance requirement, but a financial necessity.

Consider an NRI with INR 6,00,000 of NRO interest income and no other Indian income for FY 2025-26. The TDS deducted would be approximately INR 1,87,200. However, under the new tax regime (Section 115BAC), the actual tax liability would be calculated as follows:

• Income up to INR 4,00,000: Nil tax
• Income from INR 4,00,001 to INR 6,00,000 @ 5%: INR 10,000
• Health & education cess @ 4%: INR 400
• Total actual tax: INR 10,400

In this scenario, by filing an ITR, the NRI can claim a refund of INR 1,76,800 (INR 1,87,200 – INR 10,400). Without filing, this substantial amount would be forfeited.

Leveraging DTAA Benefits to Reduce TDS at Source

India has Double Taxation Avoidance Agreements (DTAAs) with many countries, which can significantly benefit NRIs. These agreements often specify a lower TDS rate on interest income (commonly 10-15%) than the standard 31.2% applied to NRO accounts. To avail this reduced TDS at source, you must provide your bank with:

• A Tax Residency Certificate (TRC) from your country of residence, confirming your tax residency status.
• Form 10F, a self-declaration form providing necessary details for DTAA application.

By submitting these documents, the TDS deducted by your bank will be lower, leading to more immediate cash flow and reducing the amount you need to claim as a refund later.

Practical Filing Notes for FY 2025-26

• Due Date: For most individual NRIs whose cases do not require an audit, the general due date for filing the income tax return for FY 2025-26 is 31 July 2026.
• ITR Form: NRIs typically use ITR-2. This form is suitable for individuals with income from interest, capital gains, and property. ITR-1 is generally not applicable to NRIs.
• Governing Law: The filing for FY 2025-26 is governed by the Income-tax Act, 1961. The new Income-tax Act, 2025, will only apply from FY 2026-27 onwards.
• Documentation: Ensure you retain Form 16A (TDS certificate) and interest statements. These documents are essential for reconciling your income and TDS details before filing your return.