NRI Taxation Explained: How India taxes non-resident Indians

An Indian-origin individual living outside India is termed a Non-Resident Indian (NRI). The Income Tax Act, 1961, outlines different tax rules for residents and NRIs. Residency status is determined based on the time spent in India during a financial year.

This guide explains NRI status, taxation rules, and the concept of Resident but Not Ordinarily Resident (RNOR), including how income is taxed based on your residency status and who qualifies as an RNOR.

Regulations defining NRI status

Two primary legislations outline the rules applicable to NRIs in India:

• Income Tax Act, 1961: Specifies the tax obligations of NRIs.
• Foreign Exchange Management Act (FEMA): Regulates transactions, investments, bank account operations, and other financial dealings of NRIs.

It is important to note that the term NRI is defined differently under these two laws. This discussion focuses on the definition provided in the Income Tax Act, 1961.

Are you a resident or a non-resident Indian?

Your residential status in India plays a crucial role in determining your tax liability. Whether you are a Resident Indian (RI) or a Non-Resident Indian (NRI) is assessed for each financial year (1st April to 31st March), as the status may vary depending on your physical presence and other factors.

Even if you are an NRI in one year, you must recheck your status for subsequent years, especially if your travel patterns, employment, or living arrangements have changed.

Who is a resident in India?

An individual is considered a resident of India in a given financial year if they satisfy any of these conditions:

• Presence in India for 182 days or more during the previous year; OR
• Presence in India for at least 60 days or more during the previous year and for 365 days or more during 4 years immediately preceding the previous year.

What is deemed resident status?

In addition to the conditions mentioned earlier for determining residency, there is also the concept of a deemed resident. An individual who is a citizen of India and has a total income (excluding income from foreign sources) exceeding ₹15 lakh in a financial year will be considered a resident of India for that year, provided they are not a tax resident of any other country.

Who is non-resident in India?

If you do not meet the criteria specified for being classified as a resident in India, you will be regarded as a non-resident Indian. Therefore, if your stay in India is less than 182 days, you will be treated as an NRI.

Who is a resident but not an ordinary resident in India?

You will be classified as resident but not ordinarily resident for a particular year if you satisfy one of the following conditions:

• If he/she has been a NRI in 9 out of the 10 previous years preceding the current year, OR
• If he/she has stayed in India during the 7 previous years preceding the current year for a period of 729 days or less, OR
• If you’re an Indian citizen or a Person of Indian Origin (PIO) visiting India, and if your total income (excluding income from foreign sources) exceeds ₹15 lakh and you have stayed in India for at least 120 days but less than 182 days during the preceding year.
• If you’re an Indian citizen with a total income (other than income from foreign sources) exceeding ₹15 lakh in the previous year, and you are not subject to tax in any other country or region due to your domicile, residence, or similar criteria.

Taxable income for NRI and RNOR

If you are a NRI, any income earned within India is subject to taxation in India. However, your income earned outside India is not taxable in India.

A non-resident seafarer working on a foreign ship and providing services outside India will not have their salary included in the total taxable income, even if that salary is credited to their NRE (Non-Resident External) account with an Indian bank.

For example, if a seafarer worked in America and spent less than 182 days in India, and their salary was credited to their NRE account with an Indian bank, this income would not be included in the seafarer’s taxable income in India.

If you are a RNOR and have recently returned to India, you can retain your RNOR status for up to 3 financial years after your return. This status can offer significant benefits, as your taxation will align with that of an NRI, meaning any income earned outside India will remain non-taxable in India during this period. So, like an NRI:

• Any income earned in India is subject to taxation in India.
• Income earned outside India is not taxable in India.
• You can retain this RNOR status for up to 3 years.

However, once you transition to the status of a resident, both your Indian and foreign income will become taxable in India, except for any reliefs or exemptions available under the Double Taxation Avoidance Agreement (DTAA) between India and the country from which the foreign income originates.

Conclusion

NRI taxation is designed to tax Indian income while keeping foreign income exempt, ensuring that individuals maintaining their primary residence abroad are not taxed on their global earnings in India. It’s important for NRIs to understand their status each year to ensure proper tax compliance, and take advantage of tax exemptions where applicable.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited