Sunday, May 4, 2025

NRI Taxation Guide for AY 2026–27: ULIP Withdrawal, NRO Interest, Honorarium Income, and Property Sale

“As cross-border taxpayers, NRIs must align their Indian income tax compliance with evolving domestic laws and international reporting standards. Professional foresight ensures legal safety and financial efficiency.”

The tax regime applicable to Non-Resident Indians (NRIs) has undergone significant transformation, especially after Budget 2021 and subsequent amendments in Finance Act, 2025. Many NRIs who earlier escaped the tax radar due to minimal income in India must now revisit their compliance obligations, especially when dealing with Unit Linked Insurance Plans (ULIPs), NRO interest, professional income, and capital gains from Indian real estate.

In this article, we deep-dive into a real-world case study and evaluate the income tax treatment and compliance roadmap for an NRI (now a U.S. citizen) earning income in India during FY 2025–26 (AY 2026–27). This analysis will be of use to tax professionals, NRIs, and wealth advisors looking to structure tax-efficient Indian income streams.

Case Profile: Taxpayer Overview

ParticularsDetails
Residential Status (as per I.T. Act)Non-Resident (NRI) – outside India since 2005
CitizenshipU.S. Citizen
ITR Filing HistoryNot filed in recent years – no taxable income
FY 2025–26 Indian Income Sources1. ULIP withdrawal
2. NRO savings interest
3. Teaching honorarium
4. Planned property sale

 Step 1: Residential Status Evaluation – Section 6

As per Section 6 of the Income-tax Act, 1961, the individual qualifies as a Non-Resident for AY 2026–27 due to absence from India for more than 182 days.

Implication: Only income that accrues or arises in India, or is received in India, is taxable in India for NRIs. Global income is not taxable in India.

Step 2: Taxability of ULIP Withdrawal (₹5,00,000)

 Background:

  • ULIP issued after 1st February 2021.

  • Annual premium exceeds ₹2.5 lakhs.

  • Partial withdrawal made in April 2025: ₹5,00,000.

  • Capital gain element: ₹2,50,000.

Relevant Provisions:

Law / SectionApplicability
Section 10(10D), ProvisoExemption not available for ULIPs issued post-01.02.2021 with premium > ₹2.5L
Section 45(1B)Capital gains deemed to arise on such ULIP withdrawals
Section 112ALTCG over ₹1L on equity-oriented units taxed @10% without indexation
Section 194DATDS @5% on net gain (payout – total premiums), if exemption under 10(10D) not available

 Tax Computation:

DescriptionAmount (₹)
Withdrawal Amount5,00,000
Premium Paid (Assumed)2,50,000
Capital Gains (LTCG)2,50,000
Exempt LTCG u/s 112A1,00,000
Taxable LTCG1,50,000
Tax @10% u/s 112A15,000

 Compliance Notes:

  • Check whether Form 26AS reflects TDS u/s 194DA.

  • If TDS not deducted, advance tax is payable in instalments (refer below).

  • ULIP transactions to be declared under Schedule CG in ITR-2.

Step 3: Interest Income from NRO Account

Legal Framework:

Law / TreatyProvision
Section 9(1)(v)Interest from Indian bank account is deemed to accrue in India
Section 195TDS @30% (plus applicable cess) on NRO account interest
India–U.S. DTAA (Article 11)Interest taxed in source country (India) at max 15% if beneficial DTAA invoked

 Tax Compliance:

  • Verify TDS @30% under Form 26AS.

  • Include income under “Income from Other Sources” in the return.

  • Claim DTAA benefit in U.S. using Form 1116 (foreign tax credit).

  • For refund or tax computation, filing ITR in India is recommended even if income < ₹2.5L.

Step 4: Occasional Teaching Honorarium from Indian Institutions

 Assumptions:

  • Short-term online/visiting faculty.

  • Considered professional income.

Relevant Sections:

Law / SectionExplanation
Section 9(1)(ii)Income for services rendered in India – taxable in India
Section 194JTDS @10% if professional payment > ₹30,000/year

Compliance:

  • Declare under “Income from Profession” if recurring.

  • If one-off and < ₹50,000, may be shown as “Other Sources”.

  • If TDS deducted, verify Form 26AS.

  • Consider use of Presumptive Scheme (u/s 44ADA) if income > ₹50,000.

Step 5: Proposed Sale of Property in India (During FY 2025–26)

Key Considerations:

AspectDetails
Type of AssetImmovable property (assumed LTCG – held > 2 years)
Section 45Capital gain tax on transfer of capital asset
Section 195Buyer must deduct TDS – typically 20% + surcharge/cess on LTCG
Section 54 / 54ECExemptions available if new asset/bonds purchased
Section 13 of Income Tax RulesApply to AO for lower/NIL TDS certificate via Form 13

 Required Documents:

  • Copy of Sale Deed

  • Purchase Agreement & Cost Proof

  • Indexation Calculation using CII

  • Brokerage, stamp duty, and improvement invoices

  • PAN & NRI status proof

Note: TDS @20% is on full sale consideration unless Form 13 is obtained in advance.

 Advance Tax Liability for NRIs

When Is It Applicable?

  • As per Section 208, if total tax liability > ₹10,000 (after TDS), advance tax is mandatory.

  • For ULIP gains and professional income (not subject to TDS), advance tax must be paid quarterly.

 Due Dates for FY 2025–26:

Due DateMinimum % of Total Tax Payable
15th June 202515%
15th Sept 202545%
15th Dec 202575%
15th Mar 2026100%

TDS-covered income like NRO interest may not require advance tax.

ITR Filing for AY 2026–27 – Forms, Deadlines, Disclosures

ParticularsDetails
Return FormITR-2 (if no business) or ITR-3 (if teaching is significant)
Due Date (Original)31st July 2026
Due Date (Belated)31st December 2026
Income DisclosureULIP under Schedule CG, NRO interest under Other Sources, honorarium under Profession, capital gains under CG

Final Compliance Checklist for FY 2025–26

ItemAction Required
Confirm NRI Status✅ Based on Section 6
ULIP Capital Gains✅ Taxable under Section 45(1B), LTCG u/s 112A
NRO Interest✅ TDS u/s 195; disclose as “Other Income”
Honorarium Income✅ Declare as “Profession” or “Other Sources”
Property Sale✅ Apply Form 13, ensure TDS compliance u/s 195
Advance Tax✅ If liability > ₹10,000 (for ULIP/teaching)
ITR Filing✅ File ITR-2 or ITR-3 by 31st July 2026
Form 26AS & AIS Verification✅ Reconcile all TDS entries and reported incomes
DTAA Planning✅ Claim foreign tax credit in U.S. return via Form 1116

 Conclusion: Professionalism Is the Best Compliance Strategy

As NRIs increasingly engage with India through financial investments, real estate, or professional services, proactive tax planning is no longer optional. Starting with timely filing of returns, evaluating TDS positions, and leveraging exemptions, NRIs must align their Indian tax strategy with global disclosure requirements—particularly under FATCA and CRS.

For high-value transactions such as ULIP withdrawals and property sales, working with a professional tax advisor ensures not just accuracy, but also legal defensibility under Indian and international law.

“Avoiding taxation is risky; avoiding non-compliance is prudent.”

Author Note:
This article is based on the provisions of the Income Tax Act, 1961, Finance Act, 2025, and latest CBDT circulars and judicial pronouncements as of May 2025. This is meant for general guidance. For case-specific advice, please consult your Chartered Accountant or International Tax Advisor.