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Non-Resident Taxation Series | June 2026
The Income Tax Act 2025 has a dedicated chapter for Non-Resident Indians. Sections 212 to 217 give NRIs special flat rates on investment income, a capital gains rollover exemption, ITR filing relief, and the right to continue NRI benefits even after returning to India as a resident. This article explains every provision with worked examples.
Non-Resident Taxation Series – fiscalzenith.com
You are reading Article 6: NRI Special Provisions: Sections 212 to 217.
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | TDS on Non-Residents | DTAA – Section 159 | Representative Assesse and Agent | PE | ITR Filing
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | TDS on Non-Residents | DTAA – Section 159 | Representative Assesse and Agent | PE | ITR Filing
Table of Contents
- Who is an NRI Under These Provisions? Section 212(d)
- Foreign Exchange Asset and Specified Asset: Section 212(a) and (e)
- Tax Rates on NRI Investment Income: Section 214
- No Deductions on Investment Income: Section 213
- Capital Gains Rollover Exemption: Section 2156-month window, proportionate formula, 3-year clawback rule
- No ITR Filing Required: Section 216
- Continuing NRI Benefits After Becoming Resident: Section 217(1)
- Opting Out of NRI Provisions: Section 217(2)
- Practical Compliance Checklist
- Frequently Asked Questions
20%
Flat rate on investment income from foreign exchange assets for NRIs under Section 214. No expense deductions.
12.5%
Rate on long-term capital gains from specified foreign exchange assets under Section 214.
6 Months
Window to reinvest net sale consideration in a specified asset to claim capital gains rollover exemption under Section 215.
3 Years
Minimum holding period for the new asset after rollover. Selling within 3 years brings the exempted capital gain back to tax under Section 215(3).
Part IWho is an NRI Under These Provisions?
For the purposes of Sections 212 to 217, an NRI means an individual who is not a resident in India AND is either a citizen of India or a person of Indian origin (PIO) [Section 212(d)].
This is narrower than the general concept of non-resident. A German citizen living in Frankfurt who has no Indian origin is a non-resident in India, but is NOT an NRI for the purposes of these special sections. They are taxed under Section 207 or other general provisions.
PIO: A person of Indian origin is one whose parents or grandparents were citizens of undivided India. This is the standard definition used across the Act.
Part IIForeign Exchange Asset and Specified Asset
Foreign exchange asset [Section 212(a)]: Any specified asset acquired, purchased, or subscribed to in convertible foreign exchange.
Specified asset [Section 212(e)]: Includes shares in an Indian company, debentures of non-private Indian companies, deposits with non-private Indian companies, deposits with banking companies under the Banking Regulation Act, Central Government securities, and any other notified assets.
Example: An NRI remits USD 20,000 from their US bank account and buys shares of an Indian listed company. Those shares are a “foreign exchange asset” because they were acquired using convertible foreign exchange. Investment income from those shares and capital gains on selling them are covered by the special NRI provisions in Sections 213 to 216.
Part IIITax Rates on NRI Investment Income: Section 214
Corresponding to Section 115E of the 1961 Act.
| Nature of Income | Tax Rate |
|---|---|
| Investment income (income from a foreign exchange asset) | 20% |
| Long-term capital gains from a specified foreign exchange asset | 12.5% |
| All other income | Rates in force |
Part IVNo Deductions on Investment Income: Section 213
Corresponding to Section 115D of the 1961 Act.
Section 213(1): No deduction for any expenditure or allowance is permitted under any provision of the Act in computing investment income of an NRI.
Section 213(2)(a): If the gross total income of an NRI consists only of investment income and long-term capital gains from foreign exchange assets, no deduction is allowed under Chapter VIII (equivalent to Chapter VI-A: 80C to 80U type deductions).
Section 213(2)(b): Where the NRI also has other income beyond investment income and capital gains, Chapter VIII deductions apply only to the remaining gross total income after removing the investment income and long-term capital gains.
Part VCapital Gains Rollover Exemption: Section 215
Corresponding to Section 115F of the 1961 Act. This is the most taxpayer-friendly provision in the NRI chapter.
When an NRI transfers a foreign exchange asset and earns a long-term capital gain, and within 6 months of the transfer invests the “net consideration” in any specified asset:
Scenario A: If the cost of the new asset is at least equal to the net consideration, the entire capital gain is exempt from tax under Section 67.
Scenario B: If the cost of the new asset is less than the net consideration, a proportionate exemption applies:
Formula: Exempt gain (A) = Total gain (B) x Cost of new asset (C) / Net consideration (D)
“Net consideration” = full sale consideration minus expenditure incurred wholly and exclusively in connection with the transfer [Section 215(2)(b)].
“Net consideration” = full sale consideration minus expenditure incurred wholly and exclusively in connection with the transfer [Section 215(2)(b)].
Worked Example
Riya is an NRI. She sells shares in an Indian company (a foreign exchange asset) for Rs. 30 lakh. She bought them for Rs. 10 lakh. Transfer expenses = Rs. 50,000. Net consideration = Rs. 29,50,000. Long-term capital gain = Rs. 20,00,000.
She buys Government securities (a specified asset) within 6 months for Rs. 25 lakh.
Exempt gain = Rs. 20,00,000 x Rs. 25,00,000 / Rs. 29,50,000 = Rs. 16,94,915 (approx)
Taxable gain = Rs. 20,00,000 minus Rs. 16,94,915 = Rs. 3,05,085
Tax saving: Without rollover, tax = 12.5% x Rs. 20 lakh = Rs. 2,50,000. After rollover, tax = 12.5% x Rs. 3,05,085 = Rs. 38,135. Saving: over Rs. 2,11,000 by reinvesting in Government securities.
The 3-Year Clawback Rule: Section 215(3)
If the new asset is transferred or converted to money within 3 years of acquisition, the capital gain originally exempted reverts to being taxable as a long-term capital gain in the year of such transfer or conversion. Hold the new asset for at least 3 years to keep the exemption permanently.
Part VINo ITR Filing Required: Section 216
Corresponding to Section 115G of the 1961 Act.
An NRI is not required to file a return of income under Section 263(1) if:
- Total income consists only of investment income, or long-term capital gains from foreign exchange assets, or both, AND
- Tax has been deducted at source under Chapter XIX-B from such income
However: If excess TDS was deducted and the NRI is due a refund, they must file an ITR to claim it. The exemption from filing does not prevent voluntary filing. A refund can only be claimed through an ITR.
Part VIIContinuing NRI Benefits After Becoming Resident: Section 217(1)
Corresponding to Section 115H of the 1961 Act.
Where an NRI becomes assessable as a resident and makes a declaration to the Assessing Officer in the ITR, the provisions of Sections 212 to 216 continue to apply in relation to investment income from foreign exchange assets (other than shares in Indian companies) for that year and every subsequent year until the asset is transferred or converted to money.
Practical meaning: If Meera was an NRI, held Government securities and NRO deposits acquired in foreign currency, and became a resident in FY 2025-26, she can still use the 20% flat rate and the Section 215 rollover exemption on those assets even as a resident, by filing the declaration with her ITR. The assets keep their NRI tax treatment permanently until sold.
Shares excluded: The continuation benefit does not apply to shares of Indian companies. Once Meera becomes a resident, capital gains on those shares are computed under the normal capital gains provisions, not the NRI rate of 12.5% under Section 214.
Part VIIIOpting Out of NRI Provisions: Section 217(2)
Corresponding to Section 115I of the 1961 Act.
An NRI may choose NOT to be governed by Sections 212 to 216 for any particular tax year by declaring so in the return of income under Section 263. In that case, Sections 212 to 216 do not apply for that year and total income is computed under the normal provisions of the Act.
This is useful when normal provisions give a better result, for example when the NRI has substantial losses from other sources that can be set off against investment income, or when normal slab rates are lower than the flat 20% on a particular income composition. The decision is annual and can differ year to year.
Finance Act 2026 note: The Finance Act 2026 substituted the original Sections 217 and 218 of the Income Tax Act 2025 with a new Section 217. The continuation benefit (old Section 217) and the opt-out right (old Section 218) are now sub-sections (1) and (2) of the same Section 217 respectively.
If you are an NRI who recently invested in Indian shares using foreign currency remittance
- Keep documentation of the foreign currency source: SWIFT transfer records, foreign bank statements, RBI approval if required. This establishes the asset as a “foreign exchange asset” entitling you to Section 214 rates.
- Investment income (dividends, interest) from these assets is taxable at 20% flat. No expenses can be set off.
If you are an NRI planning to sell Indian shares with a large capital gain
- Check Section 215 before selling. If you can reinvest the net consideration in Government securities, Indian company debentures, or other specified assets within 6 months, you can exempt most or all of the gain.
- Hold the new asset for at least 3 years to keep the exemption intact under Section 215(3).
If you are returning to India permanently
- In your first ITR as a resident, file a declaration to invoke Section 217(1) to continue NRI tax treatment on your foreign exchange assets (except shares).
- Do not include NRE or FCNR(B) interest as taxable income while you are RNOR. These remain exempt until you become a full resident (ROR).
If your total India income as an NRI is only investment income and LTCGs with adequate TDS
- You are not required to file an ITR under Section 216. But check whether excess TDS was deducted. If TDS rate was higher than 20% (e.g., 30% on NRO interest), file to claim the refund.
Wrapping Up
The NRI provisions in Sections 212 to 217 are among the most taxpayer-friendly in the entire Income Tax Act. They offer flat low rates, rollover relief, and filing exemptions. But they are available only to those who actively invoke them through proper documentation and timely declarations.
Know your rights under Sections 212 to 217, file the Section 217(1) declaration when you become resident, evaluate the Section 215 rollover before any major capital asset sale, and use the annual opt-out under Section 217(2) when normal provisions give a better outcome.
Frequently Asked Questions
Yes, provided you are not a resident in India. Section 212(d) defines NRI as an individual who is not resident AND is either a citizen of India or a person of Indian origin. A PIO who is non-resident qualifies. You can invest in specified assets using convertible foreign exchange and claim the special rates under Section 214, the rollover exemption under Section 215, and the ITR filing exemption under Section 216.
Deposits with non-private Indian companies (including certain banks) are a specified asset under Section 212(e). NRO fixed deposits in a scheduled bank are deposits with a banking company under the Banking Regulation Act, which qualifies as a specified asset. If you reinvested the net consideration within 6 months in an NRO fixed deposit at a qualifying bank, Section 215 applies and the capital gain is fully or proportionately exempt. Keep records of the timing and amounts to support the exemption claim.
Since you filed the Section 217(1) declaration, the NRI provisions continue to apply to your foreign exchange assets (including Government securities) even though you are now a resident. The capital gains from selling those Government securities will be computed at 12.5% under Section 214, not under the normal capital gains provisions. The NRI treatment continues until you transfer or convert the asset to money, regardless of how long you remain resident.
Disclaimer: For informational and educational purposes only. Based on the Income Tax Act 2025 (30 of 2025), Income Tax Rules 2026, and provisions as amended by the Finance Act 2026, current as of June 2026. Does not constitute legal or tax advice.
