Separate two restrictions before applying a deduction
For a qualifying non-resident Indian using this statutory framework, section 213 of the Income-tax Act, 2025 prevents expenditure or allowances from reducing investment income. It separately restricts the income base against which Chapter VIII deductions can operate. A payment qualifying for a deduction in principle does not automatically reduce the NRI’s special investment-income component. This guide concerns tax year 2026–27, under the Act effective from 1 April 2026 and as amended by Finance Act, 2026. Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, sections 202 and 212–217.
Establish the person and foreign-exchange asset first
Section 212 limits this framework to a non-resident individual who is an Indian citizen or person of Indian origin. Investment income is income derived from a qualifying foreign-exchange asset: a specified asset acquired, purchased or subscribed to in convertible foreign exchange. The specified list includes Indian-company shares, qualifying non-private Indian-company debentures and deposits, Central Government securities and notified assets. A bank label, foreign address or remittance alone does not establish every condition. Keep residence, ownership, asset category and acquisition-funding evidence together.
Build a three-column income working
Use separate columns for qualifying investment income, the long-term capital gains described in section 212, and other income. Where gross total income consists only of the first two categories, section 213(2)(a) denies Chapter VIII deductions. In a mixed-income case, section 213(2)(b) removes those categories from gross total income for the deduction exercise. The remaining amount is a restricted base, not a new exemption. The special income still forms part of the total-income computation unless some independently applicable relief removes it.
Do not confuse an expense with a Chapter VIII deduction
Section 213(1) addresses computing investment income; section 213(2) addresses deductions from gross total income. A custodian bill cannot be moved into the other-income column merely because it cannot reduce the investment-income column. Equally, a personal qualifying payment is not an expense of earning investment income. Trace each claim to its own provision, claimant conditions, cap, payment evidence and permitted income base. For capital gains, use a separately completed lawful capital-gain computation; this article does not impose an invented gross-sale-proceeds tax base.
Apply the tax-regime and special-framework decisions independently
Section 202 has its own restrictions on exemptions and Chapter VIII deductions, subject to stated exceptions and its option rules. A mixed-income balance under section 213 does not override those restrictions. The illustrations involving permitted deductions assume a valid applicable regime choice and that the stated deduction already satisfies all independent eligibility and individual limits. Section 217 also addresses declarations concerning application of this special framework. Record that decision before using section 213; do not assume every NRI must use the same treatment. See the Department’s section 213 text alongside sections 202, 212 and 217 in the amended Act.
Close the computation before computing the tax
Reconcile gross total income, the special-income subtotal, the reduced deduction base, allowed deductions and total income. Preserve rejected claims with their reasons. Then apply the relevant charging and rate provisions, treaty analysis where applicable, surcharge, cess, withholding credits and rounding in a separate tax working. The examples calculate income and deduction restrictions only; their results are not final tax liabilities. Do not treat an income deduction as a rupee-for-rupee tax credit.
Applicable primary references
Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, sections 202 and 212–217 Income Tax Department: section 213, 2026 text
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Expense cannot reduce the qualifying receipt
Assume qualifying investment income ₹6,00,000 and related expenditure ₹40,000, with no independent relief. The investment-income amount remains ₹6,00,000. A net figure of ₹5,60,000 understates that component by ₹40,000 under section 213(1).
Illustrative example 2: Only special income is present
Gross total income is ₹12,00,000: qualifying investment income ₹8,00,000 plus already-computed qualifying long-term capital gains ₹4,00,000. A proposed Chapter VIII claim of ₹1,50,000 is denied under section 213(2)(a). The deduction is ₹0 and total income remains ₹12,00,000.
Illustrative example 3: Mixed income leaves a sufficient base
Gross total income ₹15,00,000 comprises investment income ₹5,00,000, qualifying long-term capital gains ₹3,00,000 and other income ₹7,00,000. An independently eligible deduction of ₹1,50,000 can fit within the reduced ₹7,00,000 base. On the stated regime and eligibility assumptions, total income is ₹13,50,000.
Illustrative example 4: The remaining base is smaller than the eligible payment
Gross total income ₹9,50,000 comprises investment income ₹6,00,000, qualifying long-term capital gains ₹2,50,000 and other income ₹1,00,000. Assume a deduction otherwise eligible for ₹1,50,000 and permitted against the remaining base. Section 213 limits the available base to ₹1,00,000; the resulting deduction cannot exceed ₹1,00,000 and total income is ₹8,50,000.
Illustrative example 5: Two kinds of claim remain separate
Qualifying investment income is ₹4,00,000, related expenses are ₹30,000 plus ₹5,000, and other income is ₹2,50,000. Assume an independently permitted Chapter VIII deduction of ₹50,000. Expenses of ₹35,000 do not reduce investment income; gross total income is ₹6,50,000 and total income after the separate ₹50,000 deduction is ₹6,00,000.
Illustrative example 6: Section 202 can still block the claim
Assume investment income ₹3,00,000 and other income ₹5,00,000. A proposed ₹1,20,000 deduction is one disallowed under the applicable section 202 regime and does not fall within an exception. Although section 213 leaves a ₹5,00,000 mixed-income base, the deduction remains ₹0. Total income on these facts is ₹8,00,000, not ₹6,80,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the tax year | Use the applicable Act and amendment version for the computation period. |
| 2 | Establish NRI eligibility | Residence analysis and citizenship or origin evidence. |
| 3 | Classify each asset | Specified-asset category and ownership documents. |
| 4 | Trace acquisition funding | Convertible-foreign-exchange trail linked to the asset. |
| 5 | Record framework choice | Applicable section 217 declaration analysis and return working. |
| 6 | Separate income components | Investment income, qualifying gains and other income reconciled to gross total income. |
| 7 | Identify related expenses | Expense ledger, source documents and section 213(1) adjustment. |
| 8 | Test the proposed deductions | Independent provision, regime, claimant, payment and cap evidence. |
| 9 | Calculate the restricted base | Section 213(2) subtotal and allowed-deduction bridge. |
| 10 | Complete the separate tax working | Rates, treaty position where relevant, cess, surcharge and withholding reconciliation. |
Sixteen practitioner FAQs
1. Does section 213 apply to every foreign resident?
No. Establish the section 212 person, asset and funding conditions and the applicable framework first.
2. Is any rupee investment a foreign-exchange asset?
No. The definition requires the specified-asset and convertible-foreign-exchange acquisition conditions.
3. Does an Indian-company share automatically qualify?
Its asset category is only one part of the test; verify the acquisition and claimant evidence too.
4. Can a qualifying investment receipt be reduced by custody expenses?
Section 213(1) bars expenditure or allowance in computing qualifying investment income under this framework.
5. Does the expense bar itself deny every personal deduction?
No. Personal Chapter VIII claims require the separate subsection (2) and regime tests.
6. What if only investment income and qualifying long-term gains exist?
Section 213(2)(a) denies Chapter VIII deductions in that case.
7. What changes when other income exists?
The specified special-income components are removed from the base used for Chapter VIII deductions.
8. Is that subtraction an exemption for investment income?
No. It restricts the deduction exercise rather than excluding the income from taxation.
9. Can a payment exceed the remaining base?
Do not allow it beyond the applicable base, and apply its own statutory limits as well.
10. Does section 213 override section 202 restrictions?
No. Test the chosen or applicable regime independently.
11. Do these examples promise a particular personal deduction?
No. Eligibility, individual limits and regime permission are explicit assumptions.
12. Can disallowed investment expenses be assigned to another income head?
Only a genuine independently deductible item can be claimed under its proper provision; relabelling is insufficient.
13. Are long-term capital gains the same as gross sale proceeds?
No. Carry a separately supported capital-gain computation into this working.
14. Does withholding prove the final deduction claim?
No. Withholding and computation of taxable income serve different functions.
15. Is section 217 irrelevant to the file?
No. Its declaration provisions can affect application of the special framework.
16. Why are no final tax amounts shown?
The issue is the income and deduction base. Final tax requires additional rate, treaty, surcharge, cess and credit checks.
Conclusion
Section 213 bars expenses against qualifying NRI investment income and removes specified income from the Chapter VIII deduction base. Check regime eligibility separately.