NRI Taxation in India: Residential Status, Exemptions & Filing Explained

Residential Status

Residents are further divided into two subcategories:

1. Resident And Ordinarily Resident
2. Resident But Not Ordinarily Resident.

The law specifies two alternative technical tests of residence for individual taxpayers, each of which relates to the taxpayer's physical presence in India during the "previous year," which would be the twelve months from April 1 to March 31. ^[2]

The Income Tax Act defines residence status based on physical presence in India during the previous year (April 1–March 31). According to Section 6 of the Income Tax Act, you are deemed an Indian resident for a fiscal year if you meet any of the following conditions: ^[2]

1. During the fiscal year, spend at least 182 days in India.
2. 60 days or more in India during the fiscal year, and 365 days or more during the previous four years. ^[2]

This also holds true for PIOs [Person of Indian Origins] who travelled to India in the last year and whose total income, excluding income from outside sources, was less than or equal to 15 lakhs. These people are exempt from the second criteria. A person who was born in undivided India by his parents or any of his grandparents is known as a PIO. ^[3]

You are a non-resident Indian if you don't fit any of the aforementioned requirements.

The definition of resident but not-ordinary resident (RNOR) has been modified. If an individual satisfies the following requirements, they will be deemed RNOR for the year^[3]:

• If you were not a resident of India for nine of the ten years prior to the previous year, or if you were not a resident of India for nine of the ten years prior to the previous year,
• If you spent seventy-nine days or less in India in the seven years prior to the previous year.

Under the Finance Act 2020, Indian citizens and persons of Indian origin who travel to India will now be regarded as RNORs, provided they meet the following requirements^[3]:

• The total revenue, excluding foreign income, is at least Rs 15 lakh.
• In the past year, the person has spent more than 120 days but fewer than 182 days in India.
• The person spent at least 365 days in India over the four years prior to the current year.

Income Tax

^[4]

A Non-Resident Individual (NRI) is someone who does not qualify as a resident of India for tax purposes. To determine whether an individual is a Non-Resident, their residential status must be assessed under Section 6 of the Income Tax Act, 1961.

A person is considered a Resident in India for a given financial year if they meet either of these conditions: they have stayed in India for at least 182 days during the year, or they have stayed for at least 60 days in the year and a total of 365 days in the four years immediately before that year. If neither of these conditions is met, the individual is classified as a Non-Resident.

However, Indian citizens and Persons of Indian Origin (PIOs) visiting India get a concession where the 60-day condition is extended to 182 days. This also applies to Indian citizens leaving India for employment or as crew members of an Indian ship.

From the Assessment Year 2021-22, the Finance Act, 2020, introduced changes for high-income individuals. If an Indian citizen or PIO earns more than ₹15 lakh in India (excluding foreign income), the 60-day condition is replaced with 120 days. Additionally, a new provision under Section 6(1A) states that an Indian citizen earning more than ₹15 lakh in India and not paying taxes in any other country will be considered a Resident in India for tax purposes.

Is filing an income tax return in India mandatory?

In India, everyone who makes more than Rs 2,50,000 must file an income tax return. ^[2]

Conclusion

NRI taxes in India is based on residential status, which is determined by the number of days spent in India throughout the fiscal year. NRIs are taxed exclusively on income earned in India, such as salary, rent, capital gains, and interest on NRO accounts, while international income is exempt from taxation.

FAQs

1. Who qualifies as a Non-Resident Indian (NRI)?

   An individual is considered an NRI if they spend less than 182 days in India during a financial year or 60 days or more in the current year together with at least 365 days during the four years prior. For PIOs if their total Indian income (excluding foreign income) exceeds ₹15 lakh, the 60-day threshold increases to 120 days. If you do not meet any of the above conditions, you are a Non-Resident Indian.^[3]

2. What is the difference between Resident and RNOR status?

   A Resident stays in India for 182 days or more in a year. An RNOR is someone who was an NRI for 9 out of the last 10 years or stayed in India for 729 days or less in the previous 7 years. ^[2]

3. How is NRI income taxed in India?

   NRI income is taxed only on what is earned or accrued in India, such as salary for services in India, rental income, capital gains, and interest on NRO accounts. Foreign income remains tax-free. ^[2]

4. Is interest on NRE and FCNR accounts taxable?

   No, interest earned on NRE and FCNR accounts is exempt from tax for NRIs. However, interest on NRO accounts is fully taxable^[2]

5. Is filing an income tax return in India mandatory for NRIs

   Yes, NRIs must file an income tax return if their total taxable income in India exceeds ₹2.5 lakh during the financial year. ^[2]

6. Do NRIs need to pay advance tax?

   Yes, NRIs must pay advance tax if their tax liability exceeds ₹10,000 in a financial year. Failure to do so attracts interest under Sections 234B and 234C. ^[3]

7. Is salary earned abroad taxable in India?

   No, salary earned abroad is not taxable in India unless it is received directly in an Indian account. ^[2]