Section 218 · Special cases
Section 218 of the Income-tax Act, 2025 — NRI Option to Opt Out of the Special Concessional Tax Regime
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 218, Income-tax Act 2025
218. Where the total income of an assessee includes income of the nature referred
to in section 147(3), the aggregate of income-tax payable by the assessee shall
be the aggregate of income-tax computed on the income specified in column B of the
36. Sections 217 and 218 substituted by the Finance Act, 2026, w.e.f. 1-4-2026. Prior to their
substitution, sections 217 and 218 read as under :
“217. Benefit under Chapter to be available in certain cases even after assessee becomes resi-
dent.—Where a non-resident Indian in any tax year,—
(a) becomes assessable as a resident in India in respect of total income in a subsequent
year; and
(b) furnishes a declaration in writing to the Assessing Officer along with his return of
income under section 263 for the tax year for which he is so assessable, to the effect
that provisions of sections 212 to 218 shall continue to apply to him in relation to
the investment income derived from any foreign exchange asset referred to in section
212(e) other than shares in an Indian company,
then the provisions of sections 212 to 218 shall continue to apply in relation to such income
for that tax year and every subsequent tax year until the transfer or conversion (otherwise
than by transfer) of such assets into money.
218. Chapter not to apply if the assessee so chooses.—A non-resident Indian may choose not
to be governed by the provisions of sections 212 to 217 for any tax year by declaring it in his
return of income under section 263 for such tax year, and if he does so,—
(a) the provisions of sections 212 to 217 shall not apply to him for that tax year, and
(b) his total income for that tax year shall be computed and charged to tax according
to the other provisions of this Act.”
Table below at the rate specified in the corresponding entry in column C of the said
Table:
TABLE
Sl. No. Income Rate of income-tax payable
A B C
1. Income referred to in section 147(3) 15%
2. Total income as reduced by income referred Rates in force.]
to in Sl. No. (1)
Conversion of an Indian branch of foreign company into subsidiary Indian
company.
In plain language
What Section 218 actually says
A quick clarification first: despite some topic tags floating around online, Section 218 of the Income-tax Act, 2025 has nothing to do with IFSC or International Financial Services Centre units. Section 218 is the provision headed "Chapter not to apply if the assessee so chooses". It is the last section of the special code for Non-Resident Indians (NRIs) that runs from Section 212 to Section 218 (the successor to Chapter XII-A, Sections 115C to 115-I, of the old Income-tax Act, 1961).
In plain words, Section 218 gives a Non-Resident Indian the right to opt out of the concessional flat-rate NRI regime for any tax year and instead be taxed under the normal provisions of the Act. Its direct predecessor is Section 115-I of the Income-tax Act, 1961, and the wording and effect are substantially the same.
The exact effect of the section
- Who can use it: only a Non-Resident Indian (an individual who is a non-resident and is either an Indian citizen or a person of Indian origin), whose income for the year includes "investment income" or long-term capital gains from "foreign exchange assets".
- How to exercise it: by making a declaration to that effect in the return of income filed under Section 263 for that tax year.
- Result of opting out: Sections 212 to 217 will not apply for that year, and the NRI's total income is computed and charged to tax under the general provisions of the Act (normal slab rates, indexation where available, Chapter VIII deductions, etc.).
Why would anyone give up a concessional regime?
The NRI special regime (Sections 212-217) offers a flat 20% tax on investment income (interest and dividends from specified foreign-exchange-funded assets) and a flat rate on long-term capital gains on foreign exchange assets, but with a big catch: no deduction of any expenditure or allowance is allowed against that income, and generally no Chapter VIII-A deductions either. For some NRIs the normal route is cheaper. Section 218 exists precisely to let them choose the better outcome.
- Low total income: If your total income is within the basic exemption limit or the lower slabs, paying a flat 20% is wasteful. Opting out lets you use the slab rates and the rebate under Section 156 (the successor to 87A).
- Large deductions or losses: If you have deductible expenses, carry-forward losses, or want Chapter VIII-A benefits, the general regime may leave you better off.
- Only slab-rate income left: When your foreign-exchange investment income is small relative to other Indian income, mixing regimes may not help.
Key conditions and limits to remember
- Year-by-year choice: The election is for a single tax year only. It is not a permanent switch. You can opt out one year and stay in the regime the next.
- All-or-nothing for the year: If you opt out, the whole special code (212-217) stops applying for that year; you cannot pick the 20% rate on one asset and slab rates on another under this section.
- Must be declared in the return: The declaration is made in the ITR filed under Section 263. Filing on time matters, so make the choice consciously before filing.
- No effect on residential status: Section 218 changes how you are taxed, not whether you are a resident or non-resident.
How it interacts with related sections
- Section 214 (old 115E) sets the flat 20% on investment income and the concessional LTCG rate on foreign exchange assets — this is exactly what you surrender when you invoke Section 218.
- Section 215 (old 115F) gives a reinvestment-based capital gains exemption; if you opt out under 218, you fall back on the ordinary capital gains exemptions instead.
- Section 216 (old 115G) exempts an NRI from filing a return where only special income is earned and TDS is deducted — this convenience is lost if you opt out.
- Section 217 (old 115H) lets an NRI who becomes a resident keep the concessional treatment on certain foreign exchange assets — a separate continuation benefit, not the same as the annual opt-out.
Practical implications
Section 218 is a planning lever, not a compliance burden. Every year an eligible NRI should do a two-line comparison — tax under the flat NRI regime versus tax under normal slabs — and tick the opt-out box only if the normal route saves money. Because the choice resets annually, a good CA re-runs this comparison each filing season rather than assuming last year's answer still holds.
💡 Example
Worked example 1 — when opting out helps. Rahul, a US-based NRI, earns only ₹4,00,000 of investment income during 2026-27 from NRE-funded specified bonds, and has no other Indian income. Under the special regime (Section 214), tax is a flat 20% = ₹80,000 (plus cess), with no deductions and no rebate. If Rahul invokes Section 218 and is taxed under the normal regime, ₹4,00,000 is below the enhanced rebate threshold, so after the Section 156 rebate his tax can fall to nil. Opting out saves him roughly ₹80,000. He simply declares the choice in his ITR under Section 263.
Worked example 2 — when staying in the regime is better. Meera, an NRI, has ₹60,00,000 of investment income from foreign-exchange assets. Under Section 214 the flat 20% gives ₹12,00,000 (plus cess). Under normal slabs, the top part of ₹60,00,000 is taxed at 30%, producing a materially higher liability. Here Meera should not opt out — she keeps the flat 20% and does not file a Section 218 declaration.
A short story. Anil, an engineer in Dubai, had always let his Indian bank deduct TDS and never bothered to file, relying on the "no return needed" relief (Section 216). One year he sold shares at a loss and had large medical insurance premiums he could deduct. His CA in Jaipur ran the numbers, realised the normal regime plus deductions gave a refund, and simply ticked the Section 218 opt-out in Anil's return. Anil got money back instead of a flat 20% hit — proof that the humble "opt-out" clause can quietly be the most valuable line in an NRI's return.
| Feature | Stay in NRI regime (Sec 212-217) | Opt out under Section 218 |
|---|
| Tax on investment income | Flat 20% (Section 214) | Normal slab rates |
| Tax on LTCG on foreign exchange assets | Concessional flat rate (Section 214) | Normal capital gains rules |
| Deduction of expenses/allowances | Not allowed | Allowed as per general provisions |
| Chapter VIII-A deductions | Generally restricted | Available |
| Section 156 rebate (old 87A) | Not available on flat-rate income | Available if within threshold |
| Reinvestment exemption (Sec 215) | Available | Replaced by ordinary CG exemptions |
| Return-filing relief (Sec 216) | Available | Lost — return must be filed |
| How exercised | Default — no action needed | Declaration in ITR under Section 263 |
| Duration of choice | Continues by default | One tax year only; reset each year |
Related sections
Section 212 — Definitions for the NRI special regime (old 115C) Section 213 — No deduction of expenses against NRI investment income (old 115D) Section 214 — Flat 20% tax on investment income and LTCG on foreign exchange assets (old 115E) Section 215 — Capital gains exemption on reinvestment in specified assets (old 115F) Section 216 — NRI relief from filing a return where only special income is earned (old 115G) Section 217 — Continuation of concessional treatment when an NRI becomes resident (old 115H)
Frequently asked questions
Does Section 218 deal with IFSC or International Financial Services Centre units?
No. That is a mislabelling. Section 218 of the Income-tax Act, 2025 lets a Non-Resident Indian opt out of the special concessional tax regime (Sections 212-217) for a tax year. IFSC-related concessions sit in entirely different provisions of the Act.
What is the old-law equivalent of Section 218?
Section 218 corresponds to Section 115-I of the Income-tax Act, 1961. The language and effect are substantially the same — an NRI can elect not to be governed by the special Chapter and be taxed under the general provisions instead.
How do I actually exercise the opt-out?
You make a declaration to that effect in your return of income filed under Section 263 for that tax year. There is no separate form or advance application; the choice is expressed in the ITR itself.
Is the opt-out permanent once I make it?
No. The choice applies only to the single tax year for which it is declared. You can opt out one year and remain within the concessional regime the next, deciding afresh each filing season.
When is it worth opting out of the 20% NRI regime?
Typically when your total income is low enough to fall below or within the lower slabs (so the rebate and slab rates beat a flat 20%), or when you have significant deductible expenses, losses, or Chapter VIII-A deductions the special regime would deny.
If I opt out, do I lose the no-return-filing relief?
Yes. The relief under Section 216 (old 115G) that lets an NRI skip filing when only TDS-deducted special income is earned depends on being inside the special regime. Once you opt out under Section 218 you must file a normal return.
Can I opt out for only some of my foreign-exchange assets?
No. Section 218 is all-or-nothing for the year — if you invoke it, the entire special code (Sections 212 to 217) stops applying, and all your income is computed under the general provisions.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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