Why ITR-1 isn't an option and ITR-2 is
The simplest Indian return, ITR-1 (Sahaj), is restricted to ordinarily resident individuals. A non-resident cannot use it, regardless of how small or simple the income is. That single rule trips up a lot of NRIs who file the easy form online, get it processed, and only later find the return was defective or the treaty rate was never applied.
For an NRI with interest, rent and dividend income — but no business or profession — the correct form is ITR-2. It has the schedules that ITR-1 lacks: a residential-status section that establishes you as a non-resident, a place to report income taxed at special or treaty rates, and the Schedule TR / FSI fields if any foreign tax credit is in play. It also lets you map each piece of income to the right head, so rent is taxed as house property (with its deduction) rather than lumped in as other income.
The practical consequence is simple: file on ITR-2 and the treaty rate and the house-property deduction have somewhere to live. File on the wrong form and they don't, and the refund you were owed quietly disappears.
The three income streams and how each is taxed
Each stream has its own default deduction at source and its own treaty position. Knowing which is which is what turns an over-withheld year into a refund.
| Income | Default TDS at source | What the return does |
|---|---|---|
| NRO interest / FD | 30% + cess (Section 195) | Claims your DTAA rate, refunds the gap |
| Indian rent | 30% under Section 195 on the gross | Taxes net of the 30% deduction (Section 24) |
| Indian dividends | ~20% + cess (Section 195) | Claims your DTAA rate (often 10-15%) |
On interest, the bank withholds a flat 30% (plus cess) under Section 195 unless you have already lodged a valid treaty claim with it. Most treaties cap interest far lower — commonly 10% to 15% — so a large slice of what was deducted is recoverable on the return.
On rent, the deduction at source is on the gross rent, but the tax you actually owe is computed after a flat 30% standard deduction on the net annual value — the rent after any municipal tax you paid (Section 24(a)) — and after any interest you pay on a home loan for that property. So the taxable rent is meaningfully smaller than the figure the tenant withheld against.
On dividends, Indian companies and mutual funds withhold under Section 195 — typically around 20% plus cess for a non-resident — and again the treaty usually brings the final rate down to 10% to 15%, with the excess refundable through the return.
Claiming the treaty rate instead of the 30% default
The lower rate in your country's treaty is not applied by the bank or company unless you have actively claimed it. To do that for the year, two documents matter: a Tax Residency Certificate from your country of residence, and a Form 10F filed on the Indian tax portal. Together they let you take the treaty rate (Section 90) on the return even where the deductor withheld at the full 30%.
If those were already given to the bank during the year, it may have withheld at the lower rate to begin with, and the return simply confirms the position. If they weren't — which is common — the return is where the treaty rate is claimed for the first time, and the gap between 30% and, say, 12.5% comes back as a refund.
Where you have also paid tax in your country of residence on the same income and want to set Indian tax against it (or claim credit the other way), that brings Form 67 and the foreign tax credit rules (Rule 128) into the picture. That is a larger topic and is covered on the dedicated foreign tax credit page below.
A worked example: Anjali's NRO interest and Bengaluru flat
Anjali lives in Dubai and is a non-resident for the year. Two things flow in from India: ₹8,00,000 of interest credited on her NRO fixed deposits, and ₹4,80,000 of rent (₹40,000 a month) from a flat she lets out in Bengaluru.
Her bank withheld 30% plus 4% cess on the interest — about ₹2,49,600 — under Section 195, because she never lodged a treaty claim with it. The India-UAE treaty caps interest at 12.5%, so on the return she claims that rate: ₹8,00,000 at 12.5% is ₹1,00,000 of Indian tax due on the interest. The difference of roughly ₹1,49,600 on the interest component is refundable.
The tenant deducted tax on the gross rent during the year. On the return, the rent is taxed as house-property income: ₹4,80,000 less the flat 30% standard deduction (Section 24(a)) of ₹1,44,000 — she pays no municipal tax on the flat, so the net annual value is the full rent — leaves ₹3,36,000 taxable, before any home-loan interest she pays on that flat. So the tax on the rent is computed on a base a third smaller than the amount withheld against.
Filed on ITR-2, with the treaty rate claimed on the interest and the house-property deduction taken on the rent, Anjali's correctly computed liability is far below what was deducted across the year, and the excess is refunded after the return is processed. Filed on the wrong form, none of that relief has anywhere to go.