An individual of Indian origin residing outside India is referred to as a Non-Resident Indian (NRI). The Income Tax Act of 1961 outlines separate tax provisions for Indian residents and NRIs. A person is considered a resident for tax purposes if they meet specific stay requirements in India. The Act clearly defines who qualifies as a resident and who is classified as an NRI.
This article explains the criteria for determining NRI status, applicable tax rules, and the concept of Resident but Not Ordinarily Resident (RNOR). Learn how your tax liability is computed based on your residency status and who qualifies as an RNOR.
Laws Defining NRI Status
The two primary legislations that regulate the status and rights of NRIs in India are:
- Income Tax Act – Determines the tax obligations of NRIs
- Foreign Exchange Management Act (FEMA) – Regulates NRI-related transactions, investments, and the management of bank accounts
The interpretation of an NRI varies between these two laws. This article focuses on the NRI definition as provided in the Income Tax Act, 1961.
Understanding Residential Status for Taxation in India: Resident vs. Non-Resident
To determine your tax liability in India, it is essential to identify your residential status. This status must be assessed for each financial year individually.
For instance, if you qualify as a non-resident in one year, you will still need to reassess your status the following year, especially if there have been changes such as travel or relocation. Your tax obligations in India are based on this classification. Before defining who qualifies as a Non-Resident Indian (NRI), let’s first understand the criteria for being considered a Resident.
Who is a Resident in India?
An individual is treated as a Resident in India for income tax purposes if:
- They stay in India for 182 days or more during the relevant financial year,
OR - They are in India for at least 365 days in the four years preceding the relevant year, and for at least 60 days during that financial year.
Note: This period can include one or multiple visits during the year.
Residential Status of Indian Citizens Leaving India for Employment
If an Indian citizen leaves the country for employment abroad, or to serve as a crew member on an Indian ship, they will be considered an NRI if they stay in India for less than 182 days during the previous financial year. Hence, if you are an Indian citizen and spend 182 days or more outside India, you are classified as an NRI.
Residential Status of Indian Citizens or Persons of Indian Origin Visiting India
In the case of Indian citizens or individuals of Indian origin visiting India during a financial year, and if their total income (excluding income from foreign sources) exceeds ₹15 lakhs, they will be considered Residents if:
- They are present in India for 182 days or more,
OR - They were in India for 365 days in the previous four years and at least 120 days in the relevant year.
Deemed Resident
Apart from the above criteria, a person may also be classified as a Deemed Resident. This applies to an Indian citizen whose total income (excluding foreign sources) exceeds ₹15 lakhs in a financial year and who is not a tax resident in any other country. Such a person will be considered a resident in India for that year.
Who is a Non-Resident in India?
If an individual does not meet any of the conditions required to be a resident, they will be classified as a Non-Resident Indian (NRI). Typically, this means staying in India for less than 182 days in a financial year.
Residential Status of Indian Citizens Serving as Crew on Indian Ships
For Indian citizens working as crew members on ships, the calculation of their stay in India for determining tax residency excludes certain periods. Specifically, the duration recorded in their Continuous Discharge Certificate (CDC) is not considered part of their stay. This applies if the CDC adheres to the Merchant Shipping (CDC-cum-Seafarer’s Identity) Rules, 2001, under the Merchant Shipping Act, 1958, and the voyage begins at an Indian port and ends at a foreign port, or vice versa (as per Notification No. 70/2015/F.No.142/12/2015-TPL).
Such individuals are classified as Non-Resident Indians (NRIs) for income tax purposes if they are physically present in India for less than 182 days in a financial year. While computing this 182-day threshold, the full period noted in the CDC is excluded—even if the vessel navigates through Indian coastal waters.
The count of days spent outside India for crew members begins only from the point when the ship exits Indian coastal boundaries. This extended calculation period also benefits Indian citizens or Persons of Indian Origin (PIOs) residing abroad who visit India. It ensures that those visiting for long durations—such as family visits or personal commitments—do not unintentionally become tax residents due to exceeding a two-month stay.
If these provisions seem complicated, assistance is available through Jethani & Associate’s NRI tax filing support.
In addition to the classifications of Resident and Non-Resident, there exists a third status—Resident but Not Ordinarily Resident (RNOR). If you have returned to India after living abroad for several years, you may qualify as an RNOR for tax purposes.
Who is an RNOR (Resident but Not Ordinarily Resident)?
An individual is classified as Resident but Not Ordinarily Resident (RNOR) in India for a particular financial year if they fulfill specific criteria:
- The person qualifies as a resident for that year and
- Has been a non-resident in India in 9 out of the 10 preceding financial years,
OR - Has stayed in India for less than 730 days during the last 7 financial years preceding the relevant year.
- Has been a non-resident in India in 9 out of the 10 preceding financial years,
Additionally:
- An Indian citizen or person of Indian origin who earns more than ₹15 lakh (excluding foreign income) and stays in India for 120 days or more but less than 182 days in that year will also be considered an RNOR.
- Furthermore, an Indian citizen with total income (excluding foreign-sourced income) exceeding ₹15 lakh during the financial year is deemed to be an RNOR if they are not liable to pay tax in any other country or territory due to domicile, residence, or similar reasons.
Taxable Income for NRI and RNOR
- For Non-Resident Indians (NRIs):
Income that is earned or accrued in India is taxable in India. Any foreign income is not subject to Indian tax. For example, if a non-resident seafarer provides services on a foreign vessel, and his salary is deposited in an NRE account with an Indian bank, that salary is not taxable in India—provided he has stayed in India for less than 182 days in the financial year. - For RNORs:
If you recently returned to India after living abroad, you may retain your RNOR status for up to three financial years after your return. This status allows for tax benefits similar to those of an NRI. So, like an NRI:- Income earned or received in India is taxable in India.
- Foreign income is not taxable during the RNOR period.
However, once you become a Resident (Ordinarily Resident), all global income—whether earned in India or abroad—will become taxable in India, except where relief is provided under Double Taxation Avoidance Agreements (DTAA) between India and the foreign country.
What Does ‘Earned in India’ Mean?
‘Earned in India’ refers to any income that is either:
- Received in India, either by you directly or on your behalf; or
- Accrued or arisen in India, or is legally considered to have accrued or arisen in India.
What Does ‘Accrued in India’ Mean?
Section 9 of the Income Tax Act explains the concept of income that is considered to have accrued or arisen in India. These rules apply to all taxpayers, regardless of their residential status.
If the answer to any of the following is “Yes”, the income is treated as having accrued in India:
- Is the income derived from a business connection in India?
- Is it earned from property, assets, or any source located in India?
- Is it a capital gain arising from the transfer of a capital asset situated in India?
- Is the salary related to services performed in India?
- Is the salary paid by the Government of India for services rendered abroad, and you are an Indian citizen?
- Is it a dividend paid by an Indian company, regardless of where it is received?
- Is it interest, royalty, or technical service fees received from the Central or State Government or specific persons under certain conditions?
If any of these apply, the income is treated as accruing or arising in India and will be taxed accordingly.
Section 80C Deductions Available for NRIs
While filing their Income Tax Return (ITR), Non-Resident Indians (NRIs) are eligible to claim certain deductions under Section 80C of the Income Tax Act. These include:
- Premiums paid for life insurance policies
- Tuition fees paid for their children’s education
- Contributions made to Unit-Linked Insurance Plans (ULIPs)
- Repayment of the principal portion of a home loan taken for purchasing or constructing a residential property
- Investments in Equity-Linked Saving Schemes (ELSS)
Additionally, NRIs may also be eligible for deductions under the following sections, subject to specific conditions:
- Section 80G – Donations to certain charitable institutions
- Section 80D – Payments made towards health insurance premiums
- Section 80TTA – Interest earned on savings accounts
- Section 54 and Section 54EC – Capital gains exemptions under specified scenarios
These deductions can help reduce overall tax liability and should be carefully considered while filing taxes in India.
Frequently Asked Questions (FAQs) for NRI Taxation in India
1. Is salary earned for services performed in India taxable for a non-resident?
Yes, any salary earned by a non-resident for services carried out in India—whether through deputation or any other arrangement—is taxable in India.
2. Do NRIs need to pay tax on rental income from property in India?
Yes, NRIs are required to pay tax on rental income earned from residential or commercial properties located in India.
3. Which Income Tax Return (ITR) form should NRIs use to file their returns?
NRIs typically need to file either ITR-2 or ITR-3, depending on the nature of their income and other criteria.
4. Are capital gains from selling listed shares in India taxable for NRIs?
Yes, NRIs are subject to capital gains tax on profits from the sale of equity shares listed on Indian stock exchanges.
5. Can NRIs or foreign entities claim tax relief in their country of residence?
Yes, NRIs and foreign companies can claim Foreign Tax Credit (FTC) in their country of residence. This credit is generally available under the Double Taxation Avoidance Agreement (DTAA) between India and the respective country.
