Section 9 Deemed Income: When NRIs Still Owe Indian Tax on Shares, Rent and Royalties

Being an NRI does not exempt you from Indian tax — it narrows the tax to income that is deemed to accrue or arise in India under s.9 of the Income Tax Act 1961. That deemed income includes capital gains on Indian shares and mutual fund units, dividends from Indian companies, rent from Indian property, royalties for patents and fees for technical services used in India. Every one of these is taxable in India even while you are a non-resident, and only a Double Taxation Avoidance Agreement (DTAA) can override the charge under s.90.

What s.9 Deems to Accrue or Arise in India

The principle: if the asset, source or service is in India, the income is taxable in India — your residential status only decides whether your other income (foreign salary, foreign gains) is also taxed. NRI status never shields India-sourced income.

Capital Gains on Indian Shares: The Most Common NRI Charge

When an NRI sells shares of an Indian company, the capital gain is deemed to accrue or arise in India because the shares are capital assets situated in India (s.9(1)(i), read with the Explanation). This is true whether the shares are listed on BSE/NSE or unlisted.

• Listed equity shares held >12 months: LTCG at 12.5% on the gain exceeding ₹1,25,000 (s.112A, post-23-July-2024).
• Listed equity shares held ≤12 months: STCG at 20% (s.111A).
• Unlisted shares: LTCG at 20% with indexation; STCG at slab rates.

Mutual fund units follow the same logic: units of an Indian mutual fund are assets situated in India, so the capital gain on sale is taxable in India — including for equity, debt and hybrid funds. There is no "offshore transaction" escape; the situs of the asset governs.

Worked Example: Divya's India-Sourced Year

Divya, an NRI in London, has the following India-sourced income in FY 2025-26:

Divya must file an Indian ITR (ITR-2), report each head, and claim credit for the TDS already deducted by the payer (royalty ₹30,000, FTS ₹20,000). Her London salary is not in this list — it is foreign income of an NRI and stays outside Indian tax.

If she had sold the shares at a loss (say ₹2,00,000 LTCG loss), the loss is India-sourced and can be carried forward and set off against future LTCG — another reason to file the return even in a loss year.

Rent and the 30% TDS Trap

Rent from an Indian property is taxable in India for an NRI, and the tenant must deduct TDS at 30% (plus surcharge and cess) under s.195 before paying the rent. If the tenant fails to deduct, the rent received is still taxable, and the NRI must pay advance tax. The TDS so deducted appears in the NRI's Form 26AS and is claimed as credit in the ITR — most NRI rental portfolios run at a lower effective slab rate than 30%, producing a refund.

Royalties and FTS: 10% Withholding

Royalties (s.9(1)(vi)) and fees for technical services (s.9(1)(vii)) payable by an Indian resident to an NRI are deemed to accrue in India. The payer deducts TDS at 10% under s.195 for NRIs (domestic rate), subject to a lower DTAA rate if the NRI provides a Tax Residency Certificate and Form 10F. The NRI files the ITR to report the income and claim the TDS credit.

When the DTAA Overrides s.9

Section 90 lets a DTAA override the domestic charge. Whether s.9 income is actually taxed in India depends on the treaty:

• Capital gains may be taxable only in the country of residence under some treaties — for example, an NRI resident in the UK who sells Indian listed shares may find the gain taxable only in the UK under the India-UK treaty's capital-gains article, rather than in India.
• Rent from immovable property is generally taxable in the country where the property sits, so the Indian charge survives the treaty.
• Royalties and FTS are usually subject to a cap (often 10–15%) in the source state — the treaty lowers the rate but rarely eliminates the charge.

The DTAA is a claim you must make with the TRC and Form 10F — it is not applied automatically.

Changed FY 2025-26: For FY 2025-26 the LTCG framework on listed shares applies at 12.5% above ₹1,25,000 (s.112A) and STCG at 20% (s.111A), per the Finance (No. 2) Act 2024 rates in force from 23 July 2024. The s.9 deeming provisions and the 10%/20% s.115A rates for non-residents continue unchanged.

FAQ

Q1: Does an NRI pay tax on capital gains from Indian shares?
Yes. Capital gains on Indian company shares are deemed to accrue or arise in India under s.9(1)(i), because the shares are assets situated in India. Listed equity: LTCG at 12.5% above ₹1,25,000 (s.112A), STCG at 20% (s.111A).

Q2: Are dividends from Indian companies taxable for an NRI?
Yes. Dividends paid by an Indian company are deemed to accrue or arise in India (s.9(1)(iv) read with s.8(a)) and are taxable at 20% for non-residents under s.115A.

Q3: I sold Indian mutual fund units as an NRI. Is the gain taxable?
Yes. Units of an Indian mutual fund are capital assets situated in India, so the gain is India-sourced under s.9(1)(i) and taxable in India. Equity funds follow the LTCG/STCG rates for listed shares; debt funds acquired after 1 April 2023 are taxed at slab rates.

Q4: How is rent from my Indian property taxed as an NRI?
The rent is taxable in India (property situated in India), and the tenant must deduct TDS at 30% under s.195. If the tenant does not deduct, you must pay advance tax; the rent remains taxable regardless.

Q5: What is the TDS on royalties paid to an NRI?
10% under s.195 (domestic rate for non-residents), subject to a lower DTAA rate if you provide a Tax Residency Certificate and Form 10F. The NRI claims the TDS credit in the Indian ITR.

Q6: Can a DTAA exempt my s.9 income?
Sometimes. Section 90 lets a treaty override the domestic charge — for example, capital gains on shares may be taxable only in your country of residence under the applicable treaty. Rent from Indian property generally remains taxable in India. Verify the specific article before relying on it.

Q7: Do I need to file an Indian ITR if my only India income is TDS-covered?
Yes, to claim the TDS credit and any refund. Filing also lets you carry forward India-sourced capital losses. Skipping the return forfeits the credit and invites a notice.

Use our NRI Residency Calculator to confirm your status, then map every India-sourced item through s.9 before you file.

Sources

• Section 9(1)(i), 9(1)(ii), 9(1)(iv), 9(1)(vi), 9(1)(vii), Income-tax Act 1961 — deemed income.
• Section 8(a), Income-tax Act 1961 — dividends deemed to accrue in India.
• Sections 111A, 112A, 112 and 115A, Income-tax Act 1961 — capital gains and NRI rates.
• Section 195, Income-tax Act 1961 — TDS on payments to non-residents.
• Section 90, Income-tax Act 1961 — treaty override.
• Finance (No. 2) Act 2024 — 12.5% LTCG / 20% STCG rates on listed shares.

NRI status is not a tax holiday for India-sourced income — s.9 is the line you cannot cross without a return. Book a consultation at harunraaj.com.

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