NRI Status and NRI Taxation (2024)

A person of Indian origin living abroad is known as Non-Resident Indian (NRI). The Income Tax Act, 1961, provides different tax rules for Indian residents and NRIs. Indian-origin individuals are considered residents when they live for a certain period in India. The Act provides the definition of residents and NRIs for tax purposes.

This article discusses NRI statuses, taxation, and Resident but Not Ordinarily Resident (RNOR). Find out how taxable income is calculated based on your status and who is an RNOR.

Rules governing NRI status

The two main laws that govern and prescribe the rules for NRIs in India are as follows:

Income Tax Act - Governs the tax liabilities of NRIs
Foreign Exchange and Management Act (FEMA) - Governs all transactions and investments, the opening of bank accounts, etc., of NRIs

The definition of NRI is different under these acts. In this article, we have covered the definition of NRIs under the Income Tax Act, 1961.

Are you a Resident or a Non-Resident Indian?

To identify how much tax you need to pay in India, it is important to identify what your residential status is in India. Note that the residential status must be checked for every financial year in question.

Say, if you are non-resident for one year, for the next year and thereafter you must check your status again if you’ve travelled or changed homes, etc. Your tax-liability in India will be defined by this status. Before we understand who is a Non Resident Indian, lets first look at who is a Resident Indian.

Who is RESIDENT in India?

A person would be a RESIDENT of India for income tax purposesif-

He/she is in India for 182 days or more during the financial year.

If he/she is in India for at least 365 days during the 4 years preceding that yearANDat least 60 days in that year.

Note: These days may be a single visit or counted over many visits to India.

Resident status when you leave for employment outside India

In case you are an Indian citizen, and you leave India for employment outside of India, or as a member of the crew on an Indian ship, your status will be a Non-Resident Indian (NRI) if you stay in India in the previous year for more than 182 days. Thus, if you are an Indian citizen or a person of Indian Origin, and you live outside India for 182 days or above, you will be an NRI.

Deemed resident status

Irrespective of the conditions listed above for being a resident, there is also a concept of deemed resident.

An individual who is a citizen of India and has total income (from other than foreign sources) in excess of Rs 15 lakhs during a financial year, he shall be deemed to be resident in India in that year if he is not a tax resident of any other country.

Who is NON-RESIDENT in India?

If you do not satisfy the condition laid out above - you will be considered a NON-RESIDENT INDIAN (NRI). Thus, if you stay in India below 182 days, you will be considered as an NRI.

Residential status of Indian citizens as crew on Indian ships

In case of a citizen of India and a member of the crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage shall be computed as follows:

The numbers of days of stay in India for such person shall not include the days – from the start date of the Continuous Discharge Certificate and ending on the end date of this document, as signed off on the Discharge certificate.
Continuous Discharge Certificate must be as per the Merchant Shipping (Continuous Discharge Certificate-cum-seafarer’s Identity Document) Rules, 2001 made under the merchant shipping act, 1958
This Continuous Discharge Certificate must be for a voyage, which originates from any port in India and has its destination at any port outside India OR which originates from any port outside India and has its destination at any port in India. [Notification No. 70/2015/ F.No.142 /12/2015-TPL].

The above rule is applicable from 1 April 2015. The rule is applicable for finding out residential status of Indian citizens as crew on Indian ships starting from the financial year 2015-16. Such crew is considered as Non Resident Indian (NRI) for income tax purposes, when they have spent less than 182 days in India.

While calculating this stay of 182 days, the entire period mentioned in the Continuous Discharge Document shall be excluded even though the ship may have been on Indian coastal waters in its journey.

Earlier, the number of days outside India were only calculated from the date the Indian ship left Indian coastal waters.

In Case of Sailing on Foreign ships:Indian crew serving on foreign ships for 182 days or more are treated as non-resident in India, irrespective of where the ship trades (including Indian waters).

In case of sailing on Indian ships :A seafarer serving on Indian ships outside India for a period of 182 days or more in a year is considered to be a non-resident. However, the time spent by a ship in Indian territorial waters is considered as period of service in India, according to tax rules framed in 1990.

The number of days outside India of Indian crew working on such Indian ships gets counted only from the date when the Indian ship crosses the coastal boundaries of India. This increase in days is also applicable to you if you are an India citizen or a PIO and you live outside India and you come on a visit to India. The intention behind relaxing the minimum number of days to 182 is to protect your taxability (so you don’t get taxed as a Resident Indian) in case you decide to visit India for an extended stay to visit family or meet other obligations and end up staying more than 2 months.

If this sounds confusing, you can look at the ClearTax NRI tax filing assistancefor more help.

Besides Resident and Non Resident Indian there is a third category – Resident But Not Ordinarily Resident (RNOR). After having spent many years abroad, if you have recently moved back to India, you may fall in the category of Resident but not Ordinarily Resident (RNOR).

Who is a RNOR?

You will be considered Resident but Not Ordinarily Resident (RNOR) in a year – if you satisfy one of the two conditions -

If you have been an NRI in 9 out of 10 financial years preceding the year.

You have during the 7 financial years preceding the year been in India for a period of 729 days or less.

Taxable income of NRI and RNOR

If you are a NON RESIDENT INDIAN (NRI), any income that is ‘earned’ in India is taxable in India. Your Income outside of India is not taxable in India.

In case ofSalary of a non-resident seafarerfor services outside India on a foreign ship willnotbe included in the total taxable income of the seafarer, even though such salary is credited in the NRE account of the seafarer with an Indian bank.

What does the term ‘Earned’ in India mean?

Any income received in India or the law deems it to be received in India by you or on your behalf.
Any income that accrues or arises in India or income that the law believes accrues or arises in India.

What does ‘Accrues in India’ mean?

This is laid out in Section 9 of the Income Tax Act (note that this applies to everyone while considering the income that accrues or arises to them irrespective of what their residential status is).

If your answer to any of these is a YES the law will consider these incomes to have accrued in India:-

Income from a business connection in India.
Income from any property, asset or source of income in India.
Capital gain on the transfer of a capital asset situated in India.
Income from salary if the services are rendered in India.
Income from salary which is payable to you by the Government of India for services rendered outside of India when you are an Indian citizen.
Dividend paid by an Indian company even though this may have been paid outside India.
Interest, royalty or technical fees received from the Central or the State Government or from specified persons in certain circ*mstances.

Deductions available for NRIs under Section 80C

NRIs can claim the following deductions under Section 80C while filing their ITR:

Payment towards Life Insurance premium
Tuition fees paid for kids
Payment towards Unit-Linked Insurance Plan (ULIP)
Amount spent to repay the principal amount of the loan taken for purchasing or constructing a residential property.
Investment in ELSS.

NRIs are also allowed deductions under certain conditions under Section 80G, 80D, 80TTA, Section 54 and Section 54EC.

Frequently Asked Questions

Is an NRI liable to tax in India on the sale of equity shares listed on an Indian stock exchange taxable in India?

An NRI gets taxed on the capital gains arising on the sale of shares listed on a stock exchange in India.

Is a non-resident taxable on salary income for the period of services rendered in India?

A non-resident is taxable on the salary income in respect of the services rendered in India under a deputation or any other arrangement.

Is a foreign company liable to tax in India on its branch operations in India?

The Indian branch of a foreign company is liable to pay income-tax in India and comply with the Indian tax laws.

Is an NRI liable to pay tax in India on rental income earned from house property in India?

Yes, an NRI is liable to pay tax on the rental income earned from a house property situated in India.

Can an NRI or a foreign company claim a foreign tax credit in their country of residence?

Yes, an NRI or a foreign company can claim the Foreign Tax Credit (FTC) in their country of residence. The FTC can be as per the tax treaty between India and the country of residence.

Which ITR should an NRI file?

ITR-2 and ITR-3 are applicable for NRIs.

Can NRIs hold a resident account in India?

No, NRIs cannot have or open a resident account in India.

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Greetings, I am an expert in Indian taxation, specializing in the complexities surrounding the Non-Resident Indian (NRI) status and related regulations. My extensive knowledge is derived from a comprehensive understanding of the Income Tax Act of 1961 and the Foreign Exchange and Management Act (FEMA), which together govern the tax liabilities, transactions, and investments of NRIs in India.

In the provided article, the key concepts related to NRI taxation are discussed, including NRI statuses, rules governing NRI status, taxation for residents and NRIs, and the unique category of Resident But Not Ordinarily Resident (RNOR). Let's delve into the critical points covered in the article:

Definition of NRI under Income Tax Act, 1961: The Income Tax Act defines NRIs and provides distinct tax rules for Indian residents and NRIs. The determination of residential status is crucial for tax purposes, considering the specific conditions outlined in the Act.
Laws Governing NRI Status: The two main laws governing NRIs in India are the Income Tax Act and the Foreign Exchange and Management Act (FEMA). These laws prescribe rules related to tax liabilities, transactions, investments, and other financial activities for NRIs.
Residential Status for Tax Purposes: The article outlines the criteria for determining whether an individual is a resident or non-resident for income tax purposes. The conditions include the number of days spent in India during a financial year and the preceding years.
Deemed Resident Status: Even if an individual does not meet the typical criteria for residency, there is a concept of deemed resident status. This applies to Indian citizens with a total income exceeding a specified threshold during a financial year.
RNOR (Resident But Not Ordinarily Resident): Individuals who have spent many years abroad and recently moved back to India may fall into the RNOR category. The conditions for being classified as RNOR are discussed, including the number of years as an NRI and the days spent in India.
Taxable Income of NRI and RNOR: The article explains that for NRIs, income earned in India is taxable, while income outside India is not. RNOR individuals, similar to NRIs, enjoy favorable tax treatment for a specified period after returning to India.
Calculation of Taxable Income: The concept of 'earned' income in India is clarified, specifying the criteria that determine whether income is taxable, including business connections, property, capital gains, and salary-related considerations.
Deductions Available for NRIs: NRIs can claim various deductions under Section 80C, including life insurance premium, tuition fees, Unit-Linked Insurance Plans (ULIPs), and more. Other sections, such as 80G, 80D, 80TTA, and provisions related to capital gains, provide additional deduction opportunities.
FAQs on NRI Taxation: Frequently asked questions cover a range of topics, including the taxation of equity shares, salary income, tax liability on rental income, foreign tax credits, applicable ITR forms, and the eligibility of NRIs to hold resident accounts in India.

In conclusion, the article provides a comprehensive overview of the intricate tax regulations applicable to NRIs in India, covering key aspects such as residential status, taxable income, deductions, and common queries. If you have further questions or need clarification on any specific point, feel free to ask.