By "no compulsion in religion" [Surah Baqarah in the Quran], it doesn't mean Islam gives the freedom of choice of religion and says "it's okay if you are a polytheist or atheist". This is weird and wrong because Islam came to remove polytheism and shirk (worshiping anything other than Allah) and not with freedom of choice. And if Islam allows freedom of choice, why is there Jihad legislated and Islamic Shariah? By no compulsion, it means as Ansari explained, one cannot be compelled to accept Islam in heart. Because, the control of hearts is with God and no one can guide a person's heart but Allah. Because, Allah guides whomever he wills not whom "we will". That is what "no compulsion in Religion" means. Moreover, this verse was revealed with reference to the People of the Book and Magians who are not compelled to embrace Islam if they pay Jizyah (poll tax required from non-Muslims living in an Islamic state) regularly.
And the proof that this verse (2:256) is specific to the Ahlul Kitaab is what Abu Dawood and Ibn Abu Haatim and Nasaa’ee and Ibn Hibbaan and Ibn Jareer have narrated from the hadeeth of Ibn ‘Abbaas (radiyAllaahu anhu), that there was a woman, and every time she bore a child, the child died. So she made an oath binding upon herself that if one of her sons were to live, then she would make him a Jew. So when the Jewish tribe of Banee Nabeer was kicked out of Madeenah, and from amongst them were the sons of the Ansaar, and they said that “we will not leave our sons,” so Allaah (subhaana wa ta’laa) said:
There is no compulsion in religion. (Al-Baqarah 2:256).
As for the polytheists, they have to be invited to Islam. Everyone has to be invited to Islam. If the Polytheists accept the invitation, then all praise be to Allah Alone; otherwise, Muslims have to fight against them until they accept Islam (the Legislated fighting i.e. When a Muslim ruler calls for it, and not individually taking up arms and fighting like terrorists).
And even if the "No compulsion in religion" verse were to be considered, it is known that this verse is abrogated by the verses of fighting. Such as the statement of Allaah in Qur'an also says:
Then when the Sacred Months (the 1st, 7th, 11th, and 12th months of
the Islâmic calendar) have passed, then kill the Mushrikûn wherever
you find them, and capture them and besiege them, and lie in wait for
them in each and every ambush. But if they repent and perform As-Salât
(Iqâmat-as-Salât), and give Zakât, then leave their way free. Verily,
Allâh is Oft-Forgiving, Most Merciful.[Surah At-Tawbah 9:5]
And it is known that Sooratul-Baqarah is from one of the first of what has descended after
the Prophet’s (salallahu alayhi wassalam) hijrah to Madeenah. And Sooratut-Tawbah is from some of the last verses that have descended. And the statement of abrogation is narrated from Ibn Mas’ood and Zayd ibn Aslam. And according to other situations, the verses of the sword have descended after the verse:
There is no compulsion in religion. (Al-Baqarah 2:256)
. And the verses that have been descended after are more forthcoming and probable to hold onto than the previous verses.
“I have been ordered to fight the people till they say: ‘Laa ilaaha
illAllaah’ (None has the right to be worshipped but Allaah)”
(Bukhaaree, no. 388 and no. 2754).
Source:Tafsir of Ayah: No compulsion in Religion,
Q&A by Shaykh Ahmed al-Wasaabee