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Net Investment Income Tax (NIIT)
In summary
Net Investment Income Tax is a US tax that can apply when you have investment income and your total income crosses a set limit. The tax rate is 3.8%.
The main points are:
- NIIT is charged at a 3.8% rate.
- Single-filer threshold is about Rs. 1.92 crore.
- Joint-filer threshold is about Rs. 2.40 crore.
- Interest, dividends, and capital gains can count.
- Salary is not net investment income.
- Form 8960 is used for calculation.
The rupee thresholds are approximate conversions as of October 2026. US law sets the actual thresholds in its home currency. NIIT applies to the lower of net investment income or income above the relevant threshold.
How does Net Investment Income Tax work?
NIIT is charged at 3.8%, but only on a certain part of your income. To calculate it, compare your net investment income with the amount by which your total income for NIIT purposes is above the applicable limit. The lower of these two amounts is taxed at 3.8%.
To understand this rule, you need two figures.
Net investment income means investment income covered by NIIT after certain allowed expenses.
Modified Adjusted Gross Income (MAGI) is a US tax measure based on your adjusted income, with specific changes required under US tax rules.
If your MAGI does not cross the applicable threshold, an individual generally does not pay NIIT even if they earned investment income.
What counts as net investment income?
Net investment income can include several types of money earned from investments.
The Internal Revenue Service (IRS) includes items such as:
- Interest: Taxable interest earned from investments.
- Dividends: Payments received from shares or funds.
- Capital gains: Profits from selling certain investments.
- Rental income: Income earned from certain rented property.
- Royalty income: Payments for certain rights or property.
- Certain annuity income: Income from some non-retirement annuities.
- Passive business income: Certain income from businesses where you do not actively take part.
Capital gains from selling shares, mutual funds, or other covered assets can therefore form part of net investment income.
What are the NIIT income limits?
The income limit depends on how you file your US tax return. The legal thresholds are fixed under US law and are not adjusted each year for inflation.
The table below gives approximate Indian currency equivalents using the exchange rate available on October 2026.
| Filing status | Approximate MAGI threshold (Rs.) |
| Single or head of household | Rs. 1.92 crore |
| Married filing jointly | Rs. 2.40 crore |
| Qualifying surviving spouse | Rs. 2.40 crore |
| Married filing separately | Rs. 1.20 crore |
These rupee amounts are only for easy understanding. Exchange rates change, while the statutory US thresholds remain fixed until the law changes.
Which income is not included in NIIT?
Several common types of income are not treated as net investment income.
The following table shows the basic difference:
| Income type | Usually included in NIIT? |
| Taxable interest | Yes |
| Dividends | Yes |
| Covered capital gains | Yes |
| Rental and royalty income | Often yes |
| Salary and wages | No |
| Social Security benefits | No |
| Unemployment compensation | No |
| Most self-employment income | No |
Certain tax-exempt interest and some retirement-plan distributions are also excluded from net investment income.
An important point is that excluded from NIIT does not always mean tax-free. Another US tax rule may still apply to the same income.
How do you calculate NIIT?
You calculate NIIT by comparing net investment income with the amount by which your MAGI exceeds the relevant threshold.
Consider an illustrative example.
Rahul, aged 38, lives in Bengaluru and is a US tax resident. Assume he files as a single taxpayer. For this example, his MAGI is Rs. 2.30 crore and his net investment income is Rs. 25 lakh.
The approximate single-filer threshold is Rs. 1.92 crore.
Income above threshold = Rs. 2.30 crore − Rs. 1.92 crore = Rs. 38 lakh
Rahul's net investment income is Rs. 25 lakh.
The lower amount is Rs. 25 lakh.
NIIT = Rs. 25 lakh × 3.8% = Rs. 95,000
Therefore, the illustrative NIIT is Rs. 95,000.
The rupee amounts are used only to make the example easier to understand. An actual US return must use the amounts and conversion rules required for US tax filing.
Who may have to pay NIIT?
US citizens and US tax residents can be subject to NIIT when they have net investment income and their MAGI crosses the relevant threshold.
The IRS generally does not apply NIIT to nonresident aliens. This distinction matters for Indian investors.
For example, simply living in India and owning US investments does not automatically make you liable for NIIT. Your US tax residency and other tax facts determine the position.
Domestic estates and trusts can also be subject to NIIT. Their calculation uses separate income rules and a threshold linked to the highest tax bracket for estates and trusts.
Does NIIT apply to Indian investors?
NIIT does not automatically apply to every Indian investor who owns US shares, funds, or other assets.
An Indian investor who is treated as a nonresident alien under US tax rules is generally outside NIIT. However, an Indian citizen who is also a US citizen or US tax resident can fall within NIIT rules if the income conditions are met.
Other US taxes or withholding rules can still apply even when NIIT does not. Therefore, do not use the NIIT exemption for nonresident aliens as proof that all US investment income is tax-free.
Can you reduce NIIT legally?
Certain tax-planning steps can reduce NIIT when they also reduce the amount used in its calculation.
For example, eligible investment losses can sometimes offset capital gains. This is often called tax-loss harvesting.
The timing of an investment sale can also change the tax year in which a gain arises. Certain retirement contributions may affect MAGI when US tax rules allow them.
These actions can have other tax effects. A decision should therefore be based on your full tax position rather than only on reducing NIIT.
Conclusion
Net Investment Income Tax (NIIT) depends on the income you earn from investments and your Modified Adjusted Gross Income (MAGI), not on the total size of your investment portfolio. Even a large portfolio may not create NIIT if the required income conditions are not met.
To understand whether NIIT applies, check whether you have income covered by NIIT and whether your MAGI is above the applicable threshold. If both conditions are met, the 3.8% tax is calculated on the lower of your net investment income or the amount by which your MAGI exceeds the threshold.
Last reviewed: October, 2026
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NIIT calculation and planning
Examples and exemptions
Can you avoid net investment income tax?
You cannot legally avoid NIIT when US tax rules require you to pay it. However, normal tax planning can sometimes reduce the amount due. Eligible investment losses may offset gains, and the timing of certain sales can affect the year in which income arises. You should consider all tax effects before changing an investment only to reduce NIIT.
How to calculate net investment?
For NIIT, the relevant figure is net investment income, not the total amount you invested. Start with covered income such as interest, dividends, capital gains, rent, and royalties. Then subtract expenses that US tax rules allow against that income. Form 8960 provides the detailed calculation because the deductions allowed can depend on the type of investment income.
What is an example of NIIT?
Suppose a single US taxpayer has MAGI of Rs. 2.10 crore and net investment income of Rs. 20 lakh. Using an approximate threshold of Rs. 1.92 crore, income above the threshold is Rs. 18 lakh. Because Rs. 18 lakh is lower than Rs. 20 lakh, NIIT is calculated on Rs. 18 lakh. At 3.8%, the illustrative NIIT is Rs. 68,400.
How much investment is exempted from income tax?
NIIT does not provide a fixed exemption based on how much money you invest. The rules look at income from investments and your MAGI instead. For example, investing Rs. 50 lakh does not by itself create a Rs. 50 lakh exemption or tax charge. Some types of income are excluded from NIIT, but other US taxes may still apply.
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