How HMRC Taxes Your Indian Income: NRE Interest, Rent, and the UK–India Treaty

The word "tax-free" on your NRE deposit is doing less work than you think. It is true — in India. Interest on a Non-Resident External account is exempt from Indian income tax, a status the RBI's own FAQ on non-resident accounts confirms plainly. But Indian law's opinion stops at the Indian border. The moment you become a UK tax resident, HMRC's rule takes over, and HMRC's rule is that UK residents pay tax on their worldwide income. Your NRE interest is, to HMRC, just foreign bank interest — taxable in full at your marginal rate. No exemption travels with it, and because India charged nothing, there is no Indian tax to credit against the UK bill. You pay the whole thing.

This is the single most expensive misconception in the UK–India corridor, so let's take it apart properly.

First, are you actually UK resident?

UK residence is decided by the statutory residence test, and the headline rule is simple: spend 183 or more days in the UK in a tax year and you are automatically resident. Below 183 days it gets more intricate — there are further automatic tests (a UK home, full-time UK work) and a "sufficient ties" test that weighs your days in the UK against connections like family, accommodation, and work. If you arrived or left partway through a year, split-year treatment may divide the year into resident and non-resident halves, and getting that boundary right is genuinely a job for an adviser, because everything below hangs on it. For most NRIs living and working in the UK on a Skilled Worker visa or ILR, though, there is no suspense: you are resident, and what follows applies to you.

Being resident means the arising basis — you are taxed on income as it arises, wherever in the world it arises. Fixed deposit interest in Pune, rent in Gurgaon, dividends in a demat account: all of it belongs on a UK tax return the year it's earned, whether or not a single rupee ever leaves India.

The NRE trap, with numbers

Run the arithmetic on a typical portfolio. Say you hold ₹50 lakh in NRE fixed deposits at 7.4% — about ₹3.7 lakh of interest a year, roughly £3,200 at ₹115 to the pound. India taxes it at zero. The UK taxes it at 20%, 40%, or 45% depending on your band.

The personal savings allowance softens this less than people hope: £1,000 of tax-free interest for basic-rate taxpayers, £500 for higher-rate, £0 for additional-rate — and it covers all your interest, UK and Indian combined. A higher-rate taxpayer (which most London tech and NHS salaries make you) with that ₹50 lakh deposit uses the full £500 allowance and then owes 40% on the remaining £2,700 or so: about £1,080 a year on interest they believed was tax-free — rising further from April 2027, when the Autumn Budget 2025's separate savings-income rates (22%, 42%, 47%) take effect. Note also that Indian interest arrives gross — no bank deducts UK tax for you — so nothing prompts you to declare it except your own knowledge that you must.

Indian mutual funds are a separate and nastier UK problem — most are non-reporting offshore funds whose gains HMRC taxes as income rather than capital gains — which our ISA versus Indian mutual funds guide covers in full. And if you're still deciding how to structure the Indian accounts themselves, start with the NRE vs NRO vs FCNR guide.

The remittance basis is gone. The FIG regime replaced it.

For decades the escape hatch was the remittance basis: non-domiciled residents could leave foreign income offshore and untaxed. That regime was abolished on 6 April 2025. Its replacement is narrower and time-boxed: the 4-year foreign income and gains (FIG) regime.

The mechanics, as HMRC states them: you are a qualifying new resident if you are within your first 4 tax years of UK residence following at least 10 consecutive tax years of non-UK residence. Claim the regime and your qualifying foreign income and gains — explicitly including foreign bank interest, overseas rental profits, and foreign dividends — are relieved from UK tax entirely, and you can bring the money to the UK freely, something the old remittance basis never allowed. There is a transitional rule: if your 4-year window began before April 2025 (broadly, arrivals from the 2022–23 tax year onward), you can claim for whatever remains of it.

The catch is the price. Claiming FIG for a year costs you your tax-free personal allowance and the capital gains annual exempt amount for that year, so the claim only pays if the foreign income relieved outweighs the allowances surrendered. The claim itself goes through the residence pages of your Self Assessment return — helpsheet HS266 walks through it — and whether to claim in a given year is a genuine optimisation problem worth an hour of professional time.

For the long-settled, the message is blunter: if you've been UK resident more than 4 years, there is no relief. The arising basis applies to everything, full stop.

Indian rent: taxed twice, credited once

Rent from Indian property is the cleaner story, because both countries tax it and the treaty sorts out the overlap. India taxes it as the source country — the property sits there — and the UK taxes it because you are resident. Relief comes as Foreign Tax Credit Relief: the UK reduces its tax on the rent by the Indian tax you actually paid, capped at whatever the UK itself charges on that income. You claim it on the foreign pages of your return, form SA106, with helpsheet HS263 covering the calculation — the UK's rough equivalent of the US Form 1116.

One trap: the UK computes your rental profit under its own rules, not India's. India's flat standard deduction on house property income doesn't exist in UK law, so the taxable figure on each return will differ even for the same flat and the same tenant.

Computing the rental profit HMRC's way

That divergence deserves its own numbers, because the UK rulebook for an overseas let is specific and none of it is intuitive from the Indian side.

Your first choice is between deducting actual expenses and claiming the £1,000 property allowance — a flat deduction against gross property income, no receipts required — but never both, as the property and trading allowance guidance sets out. For a Gurgaon flat renting at ₹35,000 a month (roughly £3,650 a year), genuine costs — society maintenance charges, repairs, the letting agent's commission, municipal taxes — usually clear £1,000 comfortably, so most landlords itemise. The allowance earns its keep at the other end of the scale: a modest flat with a family tenant and almost no costs.

The second rule stings higher-rate taxpayers. If the flat carries a home loan — SBI, HDFC, anyone — the interest is not deductible from the rent. The UK restricts finance costs on residential lets to a basic-rate credit: you compute the profit as if the loan did not exist, then knock 20% of the interest off your tax bill. Pay 40% tax on an interest-free fiction and get 20% of the real interest back — the gap is the cost of the rule, and it applies to an Indian mortgage on an Indian flat exactly as it does to a buy-to-let in Leeds. (From April 2027, property income moves to its own rate schedule — 22%, 42%, 47% — with the finance-cost credit at the 22% property basic rate.)

Third, losses. All your non-UK lets together form a single "overseas property business", walled off from any UK rental you own. A loss — common in early, interest-heavy years — carries forward against future overseas rental profits only; it never offsets your salary or UK rent. And if you have read about the furnished holiday lettings regime and its friendlier treatment, put it aside: it never extended to property outside the UK and EEA, and it was abolished from April 2025 in any case.

Selling the Mumbai flat: capital gains, the UK way

A sale while you are UK resident brings the entire gain into HMRC's net — and entire means measured from your original purchase. There is no rebasing of Indian assets when you become UK resident: a flat bought in 2012 and sold in 2026 is taxed on fourteen years of growth, not the slice since you landed at Heathrow.

The computation runs in sterling, and that detail moves real money. You convert the purchase cost at the exchange rate on the purchase date and the proceeds at the rate on sale — so the rupee's long slide against the pound is baked into the answer, and your sterling gain can differ sharply from the rupee gain your Indian CA computes. After the annual exempt amount of £3,000, residential property gains are taxed at 18% or 24% — 24% for anyone whose income reaches the higher-rate band, which is most of this article's readers. Private residence relief exists in principle, but a flat that has been let to tenants for a decade will not qualify for much of it, if any.

India taxes the same sale — long-term gains on property currently run at 12.5% without indexation for non-residents — and Foreign Tax Credit Relief sets that Indian tax against the UK bill, capped at the UK tax on the gain. Watch the withholding, though: the buyer of an NRI's property must deduct TDS on the sale, often at a rate that overshoots the final Indian liability, and HMRC credits only the Indian tax you finally, properly owed — the excess comes back from India via an Indian return, not from HMRC. If you are still inside the 4-year FIG window, a qualifying claim can relieve the foreign gain entirely, which makes the timing of a planned sale one of the most valuable levers a newly arrived NRI holds. And once the sale completes, moving the proceeds out runs through its own compliance pipeline — our guide to repatriating money from India covers the CA certificates and the $1 million route.

Dividends from the demat account

Dividends from Indian shares are foreign dividends to HMRC, and the UK's dividend regime is meaner than its savings one. The dividend allowance is £500 — down from £5,000 in 2017 — and above it dividends are taxed at 10.75%, 35.75%, or 39.35% by band, the ordinary and upper rates having risen two points from April 2026 under the Autumn Budget 2025 changes.

India takes its cut first: dividends paid to a non-resident suffer withholding at 20% under Section 115A, plus cess, deducted before the money reaches your account. But here is the trap in the credit: the UK–India convention's dividend article caps the Indian tax the UK will recognise at 10% for a portfolio shareholder (15% only for certain property-income vehicles), and Foreign Tax Credit Relief admits only tax the treaty actually allows. For a higher-rate taxpayer the arithmetic lands as a UK top-up bigger than most people expect: on ₹4 lakh of dividends (about £3,500 at ₹115 to the pound), the first £500 is covered by the allowance, the balance is taxed at 35.75% — roughly £1,073 — and the creditable Indian tax is only the treaty's 10%, about £350, leaving a bit over £700 payable to HMRC. The excess India withheld above the treaty rate is recoverable only by filing an Indian return, not from HMRC. For a basic-rate taxpayer the cap bites the other way: the UK charges only 10.75%, so that is all the credit you can use, and the surplus Indian tax is not refundable in the UK.

What the UK–India treaty actually does

The 1993 UK–India Double Taxation Convention allocates taxing rights between the two countries. Three parts matter most here. Under Article 12, India may tax interest paid to a UK resident at no more than 15% of the gross amount — relevant to NRO interest, where India's domestic TDS rate runs higher, though remember it does nothing for NRE interest since India charges nothing to reduce. Article 4's tie-breaker resolves the awkward case of being resident in both countries at once, through a cascade that starts with where your permanent home is. And to claim any treaty rate on the Indian side, India requires a Tax Residency Certificate from HMRC plus an electronically filed Form 10F — the paperwork our DTAA guide for NRIs walks through step by step.

Sterling, records, and the limits of the credit

Three mechanical points decide whether the theory above survives contact with an actual tax return.

Everything goes on the return in pounds. Foreign income is converted at the exchange rate when it arose, and HMRC publishes monthly and average exchange rates you can lean on. For a year of monthly rent and quarterly interest credits, a consistent, documented approach — the same published rate series, applied the same way — matters more than decimal-point precision; what invites trouble is switching methods year to year to flatter the answer.

The credit is computed income by income. Foreign Tax Credit Relief caps at the UK tax on that item, calculated source by source per helpsheet HS263 — you cannot pool surplus Indian tax on your dividends against UK tax on your rent. And only tax India was entitled to charge is admissible: if your bank withheld 31.2% on NRO interest where the treaty caps India at 15%, HMRC credits 15%, and the excess is recoverable only by filing an Indian return. There is also a quieter alternative — deducting the foreign tax from the income instead of crediting it — occasionally useful when there is no UK tax on that source for a credit to absorb, though for most people the credit wins.

Keep the paper. Indian bank interest certificates, Form 26AS and the AIS from the Indian e-filing portal, rent receipts and agent statements, the purchase deed and sale deed with dates for any disposal — these are the documents that turn a challenged FTCR claim into a five-minute reply rather than an enquiry. HMRC already receives your Indian account balances under the Common Reporting Standard; your records are how you make sure their data and your return tell the same story.

Telling HMRC: Self Assessment is not optional

Foreign income is normally reported through a Self Assessment tax return — PAYE on your salary does not cover it. If you've never filed, you must register by 5 October after the end of the tax year in which the income arose; the online return and payment are then due by 31 January following. For Indian interest and rent, that means the SA106 foreign pages alongside your main return. Miss the deadlines and penalties accrue automatically, before HMRC even looks at the numbers.

If there are past years to fix

If you've just realised NRE interest or Indian rent has gone undeclared for years, don't simply start filing correctly and hope. HMRC receives Indian financial account data automatically under the Common Reporting Standard, and offshore non-compliance carries harsher penalties than the domestic kind. The Worldwide Disclosure Facility exists precisely for this: you notify HMRC, then have 90 days to make a full disclosure and settle tax, interest, and penalties. Coming forward voluntarily materially improves the penalty position — but how you frame the disclosure, how many years it reaches back, and whether your behaviour reads as careless or deliberate are questions to answer with a UK tax adviser at your side, not alone at midnight with a gov.uk tab open.

The clean version of this corridor is entirely manageable: know your residence status, declare the Indian income, claim the credits and — if you're newly arrived — the FIG relief you're entitled to. What's expensive is the word "tax-free" trusted one border too far.

Frequently asked questions

Will HMRC actually find out about my Indian accounts?

Assume yes. India reports financial account information to the UK automatically under the Common Reporting Standard — balances, interest, dividends, and gross proceeds flow to HMRC without you filing anything. HMRC runs this data against Self Assessment records and sends "nudge letters" to residents whose returns show no foreign income where the data says there should be some. The question is not whether HMRC can see the accounts; it is whether your return matches what they already hold — and if past years don't, the Worldwide Disclosure Facility is the route back.

Do I owe UK tax if the money never leaves India?

Yes. The arising basis taxes income when it arises, not when it moves — NRE interest credited in Pune is taxable in the UK that year even if you never remit a rupee. The old remittance basis, which did let non-doms park foreign income offshore untaxed, was abolished on 6 April 2025. The only modern exception is the 4-year FIG regime for qualifying new residents, and it relieves the income outright — remitted or not — rather than conditioning anything on where the money sits.

Is my PPF interest taxable in the UK too?

Almost certainly, and by the same logic as NRE interest: the PPF's exemption is Indian domestic law, and no equivalent exists in UK law, so HMRC's default is to treat the interest as foreign savings income taxable as it accrues. The precise timing treatment of a PPF account has attracted debate among advisers, so if the balance is large, take advice rather than guessing — but the safe planning assumption is that "tax-free in India" buys you nothing in the UK, here as everywhere else in this article.

Does the 4-year FIG regime cover capital gains as well as income?

Yes — the regime relieves qualifying foreign income and gains, so a sale of Indian property or shares inside your first 4 qualifying tax years can escape UK tax entirely if you claim. The price is the same: you surrender your personal allowance and the CGT annual exempt amount for each year you claim. For a newly arrived NRI sitting on a large unrealised Indian gain, selling inside the window versus in year five can be the single biggest tax decision of the move — worth modelling properly, not deciding by default.

What exchange rate should I use for Indian income?

Convert income at the rate when it arose, using a consistent, documented source — HMRC's own published monthly and average rates are the natural choice, and using an annual average across a year of steady interest and rent is generally accepted practice. What matters is consistency: pick a published series, apply it the same way every year, and keep a note of what you used. The rupee moved enough in recent years that method-shopping between spot and average rates to shave the answer is both visible and unwise.

My Indian flat makes a loss under UK rules — can I use it against my salary?

No. Overseas lets form their own ring-fenced "overseas property business", and its losses carry forward only against future overseas rental profits. They never reach your salary, your UK rental income, or your capital gains. This matters because UK computational rules — especially the finance-cost restriction on mortgage interest — can turn an Indian-books profit into a UK-books loss or vice versa, so compute the UK figure properly before assuming you know which side of zero you are on.

The buyer withheld heavy TDS when I sold my Indian flat. Can I credit all of it in the UK?

No — HMRC credits the Indian tax you finally owed, not what was withheld. TDS on an NRI's property sale is deducted from the sale consideration at rates that routinely overshoot the true liability on the gain; the excess is recovered by filing an Indian return and claiming the refund from India. Claim FTCR only for the final Indian tax, keep the Indian assessment as evidence, and remember the sale proceeds themselves sit inside FEMA's repatriation rules — a separate compliance track from the tax.

My Indian interest fits inside the personal savings allowance. Do I still need to file?

If you are already in Self Assessment — and most people with foreign income are — the interest goes on your return regardless, even where the allowance reduces the tax on it to nil. Whether a small amount of foreign interest by itself obliges you to register is narrower and fact-dependent, so run HMRC's online "check if you need to send a tax return" tool rather than assuming. The cheap mistake is omission that later looks like concealment; declaring income that turns out to be covered by an allowance costs you nothing.