NRI Filing Guide: ITR 2 vs ITR 3 for Foreign Income and Indian Investments

Choosing the correct Income Tax Return (ITR) form is crucial for Non-Resident Indians (NRIs) who have foreign income and investments in India. The two primary forms for NRIs are ITR 2 and ITR 3, each suited to different income sources. ITR 2 is designed for NRIs who earn income through salary, capital gains, rental properties, or hold foreign assets, but do not have any business or professional income. In contrast, ITR 3 is mandatory for NRIs with income from business or profession in India, including those who are partners in firms or engage in freelancing or consultancy. Filing the wrong ITR form can lead to notices from the Income Tax Department, delays in processing, or even penalties. It is important to understand eligibility criteria, income types, and exclusions before selecting the appropriate form to ensure compliance under the Income Tax Act, 1961. TaxBuddy offers a user-friendly platform with expert support that simplifies this process for NRIs. With its help, taxpayers can easily determine the correct ITR form, avoid common errors, and complete filing seamlessly, saving valuable time and effort.

---

Table of Contents

• ITR Forms for NRI Tax Filing in FY 2024–25

• Who Should Use ITR 2 for Foreign Income?

• When Is ITR 3 Required for NRIs?

• ITR 2 vs ITR 3: Key Differences for NRI Taxpayers

• Income from Foreign Assets and Reporting in ITR

• Indian Investments: Which ITR Form Applies?

• Business Income in India: ITR 3 Applicability for NRIs

• Tax Filing Tips for NRIs with Dual Income Sources

• How TaxBuddy Helps NRIs File ITR Seamlessly

• Conclusion

• FAQs

---

ITR Forms for NRI Tax Filing in FY 2024–25

The Income Tax Department of India has defined specific Income Tax Return (ITR) forms for different categories of taxpayers to ensure that income is accurately reported and taxes are appropriately calculated. wer98033-1 (Sahaj) or ITR-4 (Sugam), even if their income appears simple. These forms are designed for residents who earn income from salary, house property, and other sources within India. NRIs, on the other hand, are required to file different forms based on their income sources and tax obligations in India.

ITR 2: For Income from Salary, Multiple House Properties, Capital Gains, and Foreign Assets/Income

ITR 2 is applicable for NRIs who have income from sources such as salary, multiple house properties, capital gains, and foreign assets or foreign income. This form is suitable for NRIs who:

• Earn salary income in India.

• Own more than one house property in India, including rental income.

• Have earned capital gains, including from the sale of property, shares, or mutual funds.

• Hold foreign assets or have income from foreign sources, such as interest, dividends, or salary from abroad.

NRIs must provide detailed disclosures in ITR 2 regarding their foreign assets and income. Specifically, they are required to fill out Schedule FA (Foreign Assets), which mandates the reporting of details related to foreign bank accounts, financial interests, and assets like property or investments held outside India. Additionally, Schedule FSI (Foreign Source Income) requires NRIs to report income earned outside India. This section helps ensure compliance with Indian tax regulations and reporting requirements for foreign income, which is subject to taxation depending on the tax treaties between India and the country of income origin.

ITR 3: For Income from Salary, House Property, Capital Gains, Foreign Assets/Income, and Business or Profession

ITR 3 is designed for NRIs who have income from salary, house property, capital gains, foreign assets/income, and also earn income through business or profession. This form is required for NRIs who:

• Earn income from salary, including from Indian employers or freelancing abroad.

• Own multiple house properties in India, receiving rental income or incurring losses.

• Have capital gains from the sale of shares, mutual funds, or real estate.

• Own foreign assets or receive foreign income.

• Are involved in a business or profession in India or abroad, or are partners in an Indian firm.

NRIs filing ITR 3 must also fill out Schedule FA and Schedule FSI to report foreign assets and foreign income. Moreover, they need to provide information regarding their business income, including profit and loss statements and balance sheets, where applicable. In addition to these disclosures, they are required to submit any relevant documents that support their income from business or profession in India, such as partnership deeds or tax audit reports.

Detailed Disclosures for NRIs

Both ITR 2 and ITR 3 require NRIs to disclose comprehensive details about their foreign income and assets. This is crucial for the Income Tax Department to assess the tax liabilities of NRIs correctly, especially considering India’s tax treaties with other countries that may impact the tax treatment of foreign income.

• Schedule FA (Foreign Assets): This section captures information about the NRI’s foreign assets, including bank accounts, property, investments, and other financial interests held abroad. This includes specifying the value of each asset, the country where the asset is located, and whether the asset was jointly held.
  

• Schedule FSI (Foreign Source Income): This section reports all income earned from foreign sources, such as salary, rental income, dividends, interest, or income from business activities abroad. NRIs must declare their total foreign income, which will be taxed according to Indian tax laws. If the NRI is eligible for a tax deduction under a double taxation avoidance agreement (DTAA), they can claim credit for taxes already paid in the foreign country.

Filing Requirements for NRIs in FY 2024-25

NRIs should ensure they have all necessary documents before filing their returns, including:

• PAN Card: A permanent account number is mandatory for NRIs filing tax returns in India.
  

• Aadhaar Card: While it is not mandatory for NRIs, linking Aadhaar to the PAN card helps in smoother filing.
  

• Form 16/16A: If the NRI has Indian income that is subject to TDS (Tax Deducted at Source), this form will be required to report income and TDS deductions.
  

• Form 26AS: This form provides a summary of taxes deducted on behalf of the taxpayer and is essential for ensuring accurate reporting of TDS and other tax credits.
  

• Foreign Income Details: Documentation such as salary certificates, foreign bank statements, foreign investment details, and rental income documentation from abroad.

Who Should Use ITR 2 for Foreign Income?

ITR 2 is the standard income tax return form designated for NRIs who do not have any business or professional income in India. It caters primarily to individuals whose income is derived from sources such as salary or pension, whether from Indian employers or foreign entities. NRIs receiving regular income from abroad or from Indian sources like pensions can use this form to declare such earnings.

This form is also suitable when the taxpayer has capital gains arising from transactions involving stocks, mutual funds, or immovable property. For example, if an NRI sells shares listed on Indian stock exchanges or redeems mutual fund units, the resultant capital gains must be reported in ITR 2. Similarly, gains from selling property located in India fall under this category.

NRIs owning more than one house property in India must also use ITR 2 to report rental income, property tax, or related deductions. This form accommodates income details from multiple properties, unlike simpler ITR forms.

A crucial aspect for NRIs is the mandatory disclosure of foreign assets and financial interests. These include foreign bank accounts, overseas investments, property held abroad, and any other foreign financial instruments. ITR 2 requires reporting such holdings under Schedule FA (Foreign Assets), along with details of income earned from these assets under Schedule FSI (Foreign Source Income).

Additionally, agricultural income exceeding ₹5,000 during the financial year must be declared in this form. Agricultural income in India, even if exempt from tax, needs to be disclosed for transparency and proper assessment.

Lastly, ITR 2 is also necessary for those classified as Resident but Not Ordinarily Resident (RNOR), who have overseas assets or income streams. The form captures these details and allows claiming applicable tax relief under Double Taxation Avoidance Agreements (DTAA) through Schedule TR (Tax Relief).

Using ITR 2 correctly ensures comprehensive reporting of all relevant income and assets, minimizing the risk of notices or penalties from the Income Tax Department.

When Is ITR 3 Required for NRIs?

Non-Resident Indians (NRIs) are required to file ITR 3 under certain circumstances where their income sources include business or professional activities in India. Below is an in-depth explanation of the various situations when ITR 3 becomes necessary for NRIs:

• Earn Income from Business or Profession in India (Non-Presumptive) NRIs who have income from business or profession in India must file ITR 3 if their income doesn’t fall under presumptive taxation schemes like Section 44AD, 44ADA, or 44AE. This applies to individuals involved in various professional fields or business ventures, such as consultants, traders, or service providers. The income must be reported in detail, including the profit and loss account and balance sheet, which are mandatory to accurately reflect the business’s performance and taxable income.
  

• Being a Partner in an Indian Firm Receiving Profit Share or Remuneration If an NRI is a partner in an Indian partnership firm and receives a share of profit or remuneration from the firm, they must file ITR 3. This is essential because the income received from the partnership, whether in the form of a share of profits or remuneration, must be included in the tax filings. NRIs should report the exact amounts received, along with any deductions or allowances, to ensure accurate taxation.
  

• Receive Professional Consultancy Income from Indian Clients NRIs offering professional consultancy services to Indian clients need to file ITR 3 if they are earning income through these services. Whether providing legal, financial, or management consultancy, the income from such services must be reported in ITR 3. The taxpayer must submit the details of the consultancy income, along with any related expenses, deductions, and taxable amounts. For NRIs, this ensures compliance with Indian tax laws, even when the services are provided remotely.
  

• Earn Commission, Brokerage, or Consultancy Income Not Eligible Under Presumptive Taxation If NRIs receive commission, brokerage, or consultancy income that does not fall under the scope of presumptive taxation (Sections 44AD/ADA/AE), they must file ITR 3. Presumptive taxation schemes allow businesses with lower turnover to declare a fixed percentage of income as taxable without detailed financial reporting. However, if the income is not eligible for these schemes (for example, higher commission-based income or income from certain professional services), the NRI must report the income and file ITR 3.
  

• ITR 3 Supports the Balance Sheet and Profit and Loss Account Schedules – Mandatory for Business Income One of the unique features of ITR 3 is that it allows for the inclusion of the Balance Sheet and Profit & Loss (P&L) account schedules, which are mandatory for NRIs reporting business income. These schedules provide a detailed overview of the financial performance and position of the business or profession. NRIs must fill out these sections to report their income accurately. The P&L account captures all income and expenses, while the balance sheet reflects the assets and liabilities of the business, ensuring that business profits are correctly reported for tax purposes.
  

• ITR 3 Is the Only Valid Form When Tax Audit Provisions Apply (Sections 44AB, 44AD/ADA/AE Exclusions) NRIs must file ITR 3 if their business is subject to tax audit provisions under Section 44AB or falls outside the scope of presumptive taxation schemes like Sections 44AD, 44ADA, or 44AE. These provisions require businesses to undergo a tax audit if their turnover exceeds specified limits or if they do not qualify for presumptive taxation. In such cases, ITR 3 is the only valid form that allows for the inclusion of audit reports, which help assess the authenticity of income and ensure proper tax compliance. The tax audit provisions also require additional reporting and compliance, including detailed financial statements and auditor’s certification.

ITR 2 vs ITR 3: Key Differences for NRI Taxpayers

Criteria	ITR 2	ITR 3
Business/Profession Income	Not allowed	Required
Capital Gains	Allowed	Allowed
Foreign Assets/Income	Required to disclose	Required to disclose
Partner in Firm	Not applicable	Mandatory
Balance Sheet Required?	No	Yes (if business income exists)
Ideal For	Salaried NRIs, Investors	NRIs with business, partnership, consultancy

Choosing the wrong form can lead to a defective return under Section 139(9).

Income from Foreign Assets and Reporting in ITR

When filing income tax returns, NRIs (Non-Resident Indians) must report their foreign assets and income in a detailed manner to ensure compliance with Indian tax laws. Both ITR 2 and ITR 3 require complete disclosure of foreign holdings in Schedule FA. This schedule mandates the reporting of various foreign assets, including:

• Foreign Bank Accounts: Any bank account held outside India must be disclosed, including the account number, the country of the bank, and maximum balance during the year. This ensures transparency and helps track any foreign income or interest earned.
  

• Shares in Overseas Companies: If an individual holds shares or equity in any foreign company, the details must be reported. This includes the number of shares, the country where the company is incorporated, and the value of the investment.
  

• Real Estate or Property Abroad: Ownership of property outside India must be disclosed in the tax return. This includes the location, the nature of the property, and the income (if any) derived from such properties, such as rental income.

• Trusts or Insurance Policies with Foreign Holdings: If the individual holds any foreign trust assets or foreign insurance policies, these need to be disclosed as part of Schedule FA. The information about the trust’s value or premiums paid will be reported here.
  

• Foreign Retirement Accounts or ESOPs: Many NRIs have foreign retirement accounts or Employee Stock Option Plans (ESOPs) that need to be reported in this section. Whether the income is taxable in India or not, it must be declared to avoid penalties.

Additionally, NRIs who have paid taxes abroad must also disclose this information through Schedule FSI (Foreign Source Income) and Schedule TR (Tax Relief) to claim relief under the Double Taxation Avoidance Agreement (DTAA). DTAA helps avoid the possibility of being taxed twice on the same income—once in the foreign country and once in India. Failing to report foreign assets and income, even if they are not taxable in India, can lead to penalties under the Black Money Act, highlighting the importance of full and accurate disclosure.

Indian Investments: Which ITR Form Applies?

NRIs often have investments in India, such as in mutual funds, fixed deposits, stocks, or property. Income generated from these investments, such as:

• Dividends: Earnings received from shares or mutual funds held in India.

• Capital Gains: Profits made from selling stocks, mutual funds, or real estate.

• Interest: Earnings from fixed deposits, savings accounts, or bonds.

• Rental Income: Income generated from renting out property in India.

For most NRIs, ITR 2 is sufficient to report such income, as it is designed for individuals who do not have business income but earn from investments. This includes income from interest, dividends, and capital gains. It is essential for NRIs to accurately report these incomes to avoid penalties or scrutiny.

However, if an NRI has active business income in India, such as income from professional services or active trading, ITR 3 is the applicable form. This includes situations where:

• An NRI is involved in active stock trading or professional services like freelancing or consultancy.

• The NRI has rental income derived from properties that are part of a business.

In such cases, the NRI is considered to have business or professional income, and ITR 3 is designed to report such income. It also allows deductions for business-related expenses, which may not be possible in ITR 2. Thus, understanding the nature of the income is crucial in selecting the right ITR form.

Business Income in India: ITR 3 Applicability for NRIs

If an NRI is engaged in business activities, freelancing, or any professional services in India, ITR 3 is the mandatory form to use. Here are a few examples where ITR 3 applies:

• An NRI offering IT consulting to Indian startups: If an NRI works as a consultant for Indian businesses or startups, the income derived is professional income and must be reported under ITR 3. This includes both domestic and international clients if they are earning from Indian-based contracts.
  

• A Dubai-based NRI listed as a partner in a Mumbai law firm: Any income received by the NRI as a partner in an Indian partnership firm, such as a law firm, must be reported under ITR 3. In such cases, income earned from the firm is considered business income and requires proper reporting.
  

• An NRI owning an Indian proprietorship running an e-commerce store: If an NRI owns a business in India, such as an e-commerce store, it generates business income, and ITR 3 must be filed. This includes income from sales, expenses for the business, and potential audits under Indian tax laws.

ITR 3 is specifically designed for NRIs and residents with business or professional income, and it provides the flexibility to report various types of income, including income from business, freelance work, or partnership. It also requires the individual to report their income and expenses, which could lead to tax benefits or deductions.

Tax Filing Tips for NRIs with Dual Income Sources

When NRIs have dual income sources—both from India and abroad—filing tax returns can become complex. Here are some essential tips to ensure smooth tax filing:

• Check Residential Status under Section 6 Before Selecting the ITR Form: One of the most crucial aspects is confirming your residential status. If an NRI qualifies as a resident in India, they may be required to report global income. If the individual is a non-resident, only income earned in India will need to be reported. Make sure to review your residential status under Section 6 of the Income Tax Act to determine which form to file.
  

• Disclose All Foreign Assets and Income, Even if Exempt: Even if foreign income is not taxable in India (e.g., interest from foreign bank accounts), it must be disclosed to avoid penalties. The Schedule FA and Schedule FSI help in disclosing such information accurately.
  

• Avoid ITR-1 and ITR-4 Completely: NRIs with dual income sources should avoid filing ITR 1 or ITR 4, as these forms are intended for simpler returns and do not support the necessary disclosures for foreign income or business income. Using the correct ITR form (typically ITR 2 or ITR 3) is essential for compliance.
  

• Use DTAA Relief Provisions to Avoid Double Taxation: NRIs who earn income in both India and a foreign country can often claim relief under the Double Taxation Avoidance Agreement (DTAA). This prevents being taxed twice on the same income. Ensure that the relevant provisions are applied when filing your return.
  

• Verify TDS Credits under Form 26AS and AIS Before Filing: Before filing your return, ensure that all tax deductions at source (TDS) from Indian income are correctly reflected in Form 26AS and the Annual Information Statement (AIS). These documents provide a detailed record of all taxes already paid, helping avoid discrepancies or underreporting.
  

• Use Expert-Assisted Services if Unsure: Filing taxes for NRIs with dual income sources can be complicated. If unsure about the filing process, deductions, or DTAA claims, it’s advisable to seek expert-assisted services. Mistakes in NRI filings are scrutinized heavily and can lead to penalties.

How TaxBuddy Helps NRIs File ITR Seamlessly

TaxBuddy simplifies the complexity of cross-border tax filing. NRIs can:

• Use the app to determine the right ITR form.

• Get assistance in declaring foreign income under correct schedules.

• Access experts for DTAA relief, TDS mismatches, and audit queries.

• Track deductions, refunds, and e-verification in real time.

With tailored plans for NRIs, TaxBuddy ensures error-free and compliant filing, especially valuable when foreign disclosures and dual income sources are involved.

Conclusion

Filing income tax in India as an NRI demands precision and clarity, especially while choosing between ITR 2 and ITR 3. While ITR 2 suits salaried NRIs or those with investment income, ITR 3 is essential for those with business or professional earnings. Ensuring proper disclosures and selecting the correct form helps avoid penalties and notices. If you’re looking for accurate, expert-backed filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options? TaxBuddy offers flexible plans catering to different needs. Taxpayers can choose to file their ITR themselves using the easy-to-navigate self-filing platform, which guides users step-by-step through the process. For those who prefer professional support, expert-assisted plans are available, where experienced tax professionals review and file the return on behalf of the user. This dual option is especially helpful for NRIs who may have complex income sources, allowing them to pick a plan that suits their confidence and filing requirements.

Q2. Which is the best site to file ITR?

TaxBuddy is widely regarded as one of the best platforms for filing income tax returns, especially for NRIs and individuals with foreign income. Its user-friendly interface simplifies the complex tax filing process, while the availability of expert assistance ensures accuracy and compliance. The platform supports detailed disclosure requirements like foreign asset reporting and DTAA benefits, making it a reliable choice for taxpayers seeking a seamless experience with professional backup.

Q3. Where to file an income tax return? Income tax returns can be filed directly on the official government portal at incometax.gov.in, which is secure and free but may require familiarity with tax laws. Alternatively, taxpayers can use authorised intermediaries like TaxBuddy, which are recognised by the government to file returns electronically. TaxBuddy offers additional benefits such as guided filing, error checks, reminders, and customer support, making the filing process easier and reducing the risk of mistakes.

Q4. Can NRIs use ITR-1 or ITR-4? No, NRIs are not eligible to file their returns using ITR-1 (Sahaj) or ITR-4 (Sugam). These forms are meant for resident individuals with simple income profiles. Since NRIs typically have foreign income or investments, and possibly business income, they must use ITR-2 or ITR-3 depending on their income sources. Filing using an incorrect form can lead to rejection or notices from the tax department.

Q5. What income types must NRIs disclose in India? NRIs must disclose all income that accrues or arises in India, such as salary from Indian employers, rental income from Indian properties, capital gains from Indian securities, and business income in India. Additionally, foreign income and assets must be reported if they become taxable in India due to residential status or other provisions. Proper disclosure includes foreign bank accounts, investments, and any overseas property holdings. Failure to report such income or assets can result in penalties.

Q6. Is business income from India taxable for NRIs? Yes, any income earned from a business or profession carried out in India by an NRI is taxable in India. This includes profits from partnerships, proprietorships, or freelance professional services rendered to Indian clients. Such income must be reported under ITR 3, and depending on the scale of business, the taxpayer may also be subject to tax audit requirements.

Q7. What if an NRI files ITR 2 instead of ITR 3? If an NRI with business or professional income files ITR 2 instead of ITR 3, the return may be treated as defective under Section 139(9) of the Income Tax Act. The taxpayer will receive a notice to rectify the mistake by filing the correct form within a stipulated period. Failure to do so can delay refund processing or lead to penalties.

Q8. How does DTAA help NRIs in filing? The Double Taxation Avoidance Agreement (DTAA) between India and various countries helps NRIs avoid paying tax twice on the same income. Under DTAA, NRIs can claim credit for taxes paid in their country of residence against taxes payable in India or, in some cases, claim exemptions. Proper use of DTAA provisions requires accurate disclosure of foreign income and taxes paid, which is facilitated by schedules in ITR 2 and ITR 3.

Q9. Can NRIs claim refund of TDS deducted in India? Yes, NRIs can claim refunds for excess Tax Deducted at Source (TDS) deducted on their Indian income, provided they file the correct ITR form and submit valid bank account details. Filing a timely and accurate return is essential to initiate refund processing, which is credited electronically to the bank account mentioned in the return.

Q10. Are mutual fund redemptions taxable for NRIs? Yes, capital gains from mutual fund redemptions are taxable in India for NRIs. The tax rate depends on the type of mutual fund and the holding period—short-term or long-term. Such gains must be reported in the income tax return, typically under capital gains, with TDS often deducted by the fund house at source.

Q11. Do NRIs need to e-verify their return? Yes, e-verification of the ITR is mandatory to complete the filing process. NRIs cannot use Aadhaar OTP for verification, but can verify using net banking, bank account OTP, digital signature certificate (DSC), or by sending a signed physical copy of ITR-V to the Centralised Processing Centre (CPC) within 120 days of filing.

Q12. Is TaxBuddy a government-authorised platform? Yes, TaxBuddy is an authorised E-Return Intermediary (ERI) recognised by the Government of India. It complies with all regulatory requirements for the secure and timely filing of income tax returns. Trusted by over a million users, TaxBuddy offers a reliable and expert-driven platform for both resident and non-resident taxpayers.