Introduction
Many Indians who have moved to other countries continue to play an important role in India's development. They contribute to India in multiple ways - sending money back home to their families, sharing Indian culture in their new countries, and working as skilled professionals in various industries. However, when it comes to Indian taxation, NRIs face a unique set of challenges. The combination of frequent legislative changes, interpretational issues under tax law, interaction with the Foreign Exchange Management Act (FEMA), and the Double Taxation Avoidance Agreements (DTAA) leads to complex compliance landscapes for NRIs.
This article addresses several pertinent issues concerning NRI taxation, including recent amendment to determination of residential status, source-based taxation, head-wise income analysis, deduction eligibility, DTAA benefits, TDS implications under Section 195, and the procedural nuances of tax return filing. Legal interpretations, relevant case laws, CBDT circulars, and procedural guidelines are also discussed to guide professionals advising NRI clients.
Determination of Residential Status under Income-tax Act, 1961
Determining residential status under Section 6 of the Income-tax Act, 1961, is foundational in assessing the scope of taxable income of an individual's tax liability in India. As per Section 6 of the Income-tax Act, an individual is considered a resident in India in any previous year if:
- He/she is in India for a period of 182 days or more; OR
- He/she is in India for at least 60 days in that year and 365 days in the preceding four years.
However, the second condition above is relaxed in certain cases. One of those relaxations is in case of Indian citizens or Persons of Indian Origin (PIOs) visiting India, wherein the 60-day threshold is replaced with 182 days, unless their total income (excluding foreign income) exceeds ₹15 lakh, in which case the 60-day criterion is replaced with 120 days instead of 182 days.
Temporary visits exceeding the allowed stay
The Chennai Tribunal's recent decision in DCIT vs. M Mahadevan [2025] 175 taxmann.com 383 (Chennai - Trib.) has made some interesting observations regarding the evidence acceptable for determining days of stay in India. The tribunal held that immigration records maintained by the Foreigners Regional Registration Office (FRRO) carry greater weight than passport stamps provided by the assessee in the event of a mismatch and the FRRO records will prevail if immigration data differs from the passport-based computation. The taxpayer will not have access to such records of FRRO and thus would have to rely only on the passport stamps available, creating practical difficulty for the taxpayers. The Tribunal also observed that the taxpayer had travelled outside India on tourist visa and thus, such visits could not be considered to be travel for the purposes of business or employment outside India for determination of the residential status.
Deemed Resident
Finance Act, 2020 introduced the concept of 'Deemed Resident' under Section 6(1A), wherein an individual being an Indian citizen having total income (other than foreign sources) exceeding ₹15 lakh during the previous year shall be deemed to be resident in India if he/she is not liable to tax in any other country.
The interpretation of "total income" in this context would mean taxable total income as computed under Section 5, excluding exempt income under Section 10. The provision intends to target individuals, who structure their affairs to avoid tax liability globally while deriving substantial income from Indian sources.
However, the phrase "not liable to tax in any other country" requires careful analysis. It refers to the absence of a legal obligation to pay income tax by reason of domicile, residence, or citizenship, not merely the absence of actual tax liability due to zero income or losses. For instance, an individual residing in the UAE, which has no personal income tax system, would be caught by this provision despite being a bona fide resident of the UAE for all other purposes.
Such deemed residents are treated as 'Resident but Not Ordinarily Resident' (RNOR) under Section 6(6). This residential classification can affect the taxability of global income, foreign asset disclosures, and availability of DTAA relief.
Practical Implications for Returning Indians
The deemed residency provision under Section 6(1A) creates particular challenges for Indians returning to the country after extended periods abroad. Traditionally, such individuals could plan their return to enjoy RNOR status for initial years, thereby limiting their tax exposure to Indian-sourced income and income from business controlled from or profession set up in India. However, if they are deemed residents under Section 6(1A) during their absence from India, the "nine out of ten years" test under Section 6(6)(a) may be compromised.
Section 6(6)(a) provides that an individual is not ordinarily resident if he has been a non-resident in nine out of the ten previous years or stayed in India for less than 729 days during the preceding seven previous years. If an individual is deemed to be a resident under Section 6(1A), even while physically absent from India, he would not qualify as a non-resident for those years, potentially affecting his ability to claim RNOR status upon return. While this position can be challenged on the grounds that Section 6(1A) creates a legal fiction/deeming provision that should not affect the natural interpretation of Section 6(6)(a), it still remains to be seen how jurisprudence evolves around this deeming provision.
Head-wise Taxation and Relevant Provisions
a) Income from Salary:
The taxation of salary income for non-residents is governed by the fundamental principle that salary income arises where services are rendered, not where the employer is located or where payment is made. Section 9(1)(ii) specifically states that salary payable by the Government of India to a non-resident is deemed to accrue or arise in India regardless of where services are rendered. However, for private employers, Section 9(1)(iii) provides that salary for services rendered in India is deemed to accrue or arise in India.
This principle has gained renewed significance with the proliferation of remote work arrangements. An Indian company paying salary to an employee working entirely from outside India would not create Indian tax liability merely by virtue of the employer's Indian residence, provided the salary is credited to a foreign bank account. Conversely, the receipt-based rule under Section 5(2) would trigger Indian taxation if salary is received in India, even for services rendered abroad.
The corresponding DTAA provision is typically found in the Article on Dependent Personal Services. Most DTAAs follow the OECD Model Convention, granting primary taxation rights to the country of residence of the employee. However, the source country (where services are rendered) can also tax such income, subject to certain thresholds. Many treaties provide that if the employee's stay in the source country does not exceed a specified period (usually 183 days), and if the remuneration is not paid by or on behalf of an employer resident in the source country, then only the country of residence may tax the salary.
b) Income from House Property:
Income from house property owned by non-residents in India is subject to straightforward source-based taxation under Section 22. The physical location of the property determines the source, and consequently, the taxability in India. Section 24 allows the same deductions to non-residents as available to residents, including municipal taxes paid by the owner, standard deduction at 30% of net annual value, and interest on borrowed capital.
The corresponding DTAA provision is invariably Article 6 (Income from Immovable Property), which universally grants exclusive taxation rights to the country where the property is situated. This principle is based on the internationally accepted rule that immovable property can only be taxed effectively by the jurisdiction where it is located.
The practical challenge lies in ensuring proper TDS compliance by tenants. Section 195 mandates deduction of tax at source on payments to non-residents at the rates in force, i.e., 30% tax plus surcharge (if applicable) plus 4% cess, yet many tenants remain unaware of this obligation or fail to comply or deduct TDS wrongly under Section 194I or 194-IB.
c) Income from Business or Profession:
Business income of a non-residents can be broadly categorized into three distinct streams, each governed by specific provisions and carrying different tax implications.
The first category encompasses royalty and fees for technical services, which are subject to deemed accrual provisions under Section 9(1)(vi) and Section 9(1)(vii) respectively. These provisions establish that royalty or fees for technical services are deemed to accrue or arise in India if they are payable by the Government of India, or by a person resident in India, unless the payment relates to business carried on by such person outside India or for the purposes of earning income from any source outside India.
The second category covers other business profits that fall under the general business connection provisions of Section 9(1)(i). This residuary category includes various commercial transactions, service provisions, and business activities that do not qualify as royalty or fees for technical services but nonetheless have sufficient connection with India to warrant taxation.
The third category has emerged with the introduction of the Significant Economic Presence (SEP) concept through Rule 10 of the Income Tax Rules, 2014, targeting digital economy transactions and non-resident entities deriving substantial revenue from Indian users without traditional physical presence.
Royalty and Fees for Technical Services
The treatment of royalty encompasses payments for the use of, or the right to use, any copyright of literary, artistic, or scientific work including cinematograph films, patents, trademarks, designs or models, plans, secret formulae or processes, or for information concerning industrial, commercial, or scientific experience.
Fees for Technical Services, as defined in Section 9(1)(vii) read with Explanation 2, covers payments for services in the nature of managerial, technical, or consultancy services. The deemed accrual provisions ensure that such payments are taxable in India regardless of where the services are actually performed, provided they are made by Indian residents or the Government of India.
Article 12 of most Double Taxation Avoidance Agreements specifically addresses the taxation of royalty and fees for technical services, representing one of the few income categories where DTAAs prescribe specific withholding tax rates rather than merely allocating taxation rights between contracting states. This article typically provides that royalty and fees for technical services arising in a contracting state and paid to a resident of the other contracting state may be taxed in both states, but the tax imposed by the state in which such royalty or fees arise shall not exceed a specified percentage of the gross amount.
Any person making payments to non-residents for royalty or fees for technical services must deduct tax at source under Section 195 at rates prescribed under the Act (20% plus applicable surcharge and cess under section 115A) or at preferential rates available under applicable DTAAs (which typically range from 10% to 15% for most of India's DTAAs). The payer must also ensure proper characterization of payments, as misclassification can lead to incorrect tax deduction and subsequent disputes.
Business Connection and Significant Economic Presence
The concept of business connection under Section 9(1)(i) has been interpreted broadly by courts to include various forms of commercial presence in India. The Explanation to Section 9(1)(i) clarifies that business connection includes any business activity carried out through an agent who, acting on behalf of the non-resident, has and habitually exercises authority to conclude contracts, or has no such authority but habitually maintains stock of goods from which deliveries are made on behalf of the non-resident, or habitually secures orders wholly or mainly for the non-resident or for the non-resident and other enterprises controlled by him.
The introduction of Significant Economic Presence through Explanation 2A represents India's response to the challenges posed by the digital economy where traditional concepts of physical presence may not capture the economic reality of business operations. Under Rule 11UD, a non-resident is considered to have significant economic presence in India if aggregate payments arising from transactions with persons resident in India exceed ₹2 crores in a financial year, or if the non-resident systematically and continuously solicits business activities or engages in interaction with more than 3 lakh users in India through digital means.
Article 7 (Business Profits) of most DTAAs follows the OECD Model Convention in providing that profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. If there is such permanent establishment, the profits of the enterprise may be taxed in the other state, but only to the extent of profits attributable to that permanent establishment.
The concept of Permanent Establishment (PE) is typically defined in Article 5 of DTAAs and includes a fixed place of business through which the business of an enterprise is wholly or partly carried on. This definition encompasses places of management, branches, offices, factories, workshops, etc. Article 5 also covers agency PE, where a person acting on behalf of an enterprise has and habitually exercises authority to conclude contracts in the name of the enterprise or undertakes such other activities as specified in Article 5.
Independent Personal Services, covered under Article 14 in older treaties (though many modern treaties have eliminated this article by incorporating such services into Article 7), addresses income derived by individuals from professional services or other activities of an independent character. The taxation typically follows similar principles to business profits, with the concept of "fixed base" replacing "permanent establishment".
Special Considerations for Deemed RNOR Cases
The taxation framework becomes particularly complex for individuals who are deemed Resident but Not Ordinarily Resident under Section 6(1A). Such individuals, while physically absent from India, may be deemed residents if they are Indian citizens with India-sourced income exceeding ₹15 lakhs and are not liable to tax in any other country. For such deemed residents, Section 5(2) expands the scope of total income to include income from business or profession set up or controlled from India, even if such business is carried on entirely outside India.
This provision creates significant implications for Indian entrepreneurs and businesspersons who have established global businesses while being deemed residents under Section 6(1A). Unlike pure non-residents who are taxable only on Indian-sourced income, deemed RNORs face taxation on their global business income if the business is controlled from India. The determination of whether a business is "controlled from India" depends on factual analysis including location of key decision-making, management oversight, strategic planning, and operational control.
d) Income from Capital Gains:
Under the Income-tax Act, 1961, the taxability of capital gains for non-residents is determined primarily by Section 9(1)(i), which deems income arising from the transfer of a capital asset situated in India to accrue or arise in India and therefore to be taxable in India, regardless of the seller's residential status. Consequently, the capital gains on sale of shares, securities, or property located in India by an NRI, is fully taxable in India unless relief is provided in a specific DTAA. For instance, Article 13 of the India-UAE DTAA clearly spells out that only immovable property located in India, movable property of business in India, shares of a company whose primary business is in immovable assets which are located in India and shares of an Indian Company will be taxed in India and gains from assets other than those mentioned above will be taxed in UAE wherein as per UAE domestic laws, there is no taxability. A classic case is on account of sale of Indian Mutual Funds by an UAE resident, which will come under the ambit of residuary clause thereby granting exclusive taxation rights to the country of residence i.e. UAE, making it effectively a tax free income for UAE residents. It is pertinent to note that it is no longer sufficient to read the DTAA in isolation - the MLI provisions must also be checked for modifications or anti-abuse conditions that apply to the specific treaty article being invoked
The Finance Act 2024 introduced significant changes to capital gains taxation, removing indexation benefits for all assets except bonds and debentures while reducing the tax rate for non-residents to 12.5% for long-term capital gains. Unlike residents, non-residents do not have the option to choose between the old regime (with indexation) and the new regime (without indexation) for properties acquired before July 23, 2024.
e) Income from Other Sources:
Under Section 115A of the Income Tax Act, 1961, dividends received by non-residents from Indian Companies are subject to tax at a special rate of 20% (plus applicable surcharge and cess) on the gross amount received. The corresponding DTAA provision is invariably found in Article 10 (Dividends) of bilateral tax treaties, which typically allows taxation in both the country of residence of the recipient and the source country (India), but limits the source country taxation to a specified percentage. Most of India's DTAAs provide for dividend taxation rates between 10% to 15% in the source country.
Section 115A prescribes the general rate of 20% (plus surcharge and cess) for interest payments to non-residents. However, Section 194LC provides concessional rates for interest on certain categories of debt, including 5% for interest on bonds or Government securities, rupee denominated bonds of Indian companies, and long-term infrastructure bonds. In addition, Interest earned on NRE and FCNR accounts is exempt under Section 10 provided the individual qualifies as NRI under FEMA. DTAA provisions for interest are typically found in Article 11, which generally provides for taxation in both the country of residence and the source country, with the source country taxation limited to specified percentages. Most treaties provide rates between 10% to 15% for interest income, though some specialized treaties provide even lower rates.
Procedural Requirements for Claiming Treaty Benefits under DTAA
The procedure for availing relief under a Double Taxation Avoidance Agreement (DTAA) is governed by Section 90(4) of the Income-tax Act, 1961 read with Rule 21AB of the Income-tax Rules, 1962. A Tax Residency Certificate (TRC) issued by the competent authority of the taxpayer's country of residence is a mandatory documentary requirement. Additionally, Form 10F is required to be furnished electronically (or physically in exceptional circumstances) before claiming treaty relief - whether at the withholding tax stage (for tax deducted at source by payer of the income or for lower TDS under Section 195) or at the time of filing the Indian return of income. TRCs are issued on a calendar-year basis in many jurisdictions, including the UAE, while India's tax year follows an April-March financial year. This mismatch creates timing issues - for example, when a taxpayer seeks treaty relief in April or early in the Indian financial year, but the current year TRC is not yet available.
The Mumbai ITAT in Skaps Industries India Private Limited v. ITO ([2022] 139 taxmann.com 226) clarified that Section 90(4) is procedural in nature and cannot override substantive treaty rights if the taxpayer can otherwise demonstrate residency (e.g., by producing prior year TRC and other reliable evidence such as passport, tax filings, and proof of foreign taxation). This decision provides practical relief in case of interim documentary gaps.
Form 10F generation and filing can be completed without PAN requirements, though practical difficulties arise in receiving OTPs on foreign phone numbers and email addresses. A common practice involves using Indian contact details of an authorised representative for OTP validation. While effective, this requires robust documentation and internal controls to ensure proper communication, avoid unauthorised filings, and maintain compliance evidence as also to prevent risk of being treated as a representative assessee under the Income-tax Act, 1961 for the Indian contact
Lower/Nil Rate TDS Certificates - Section 197
Non-residents may apply to the AO for a lower or nil TDS certificate under Section 197 of the Act. The Assessing Officer determines appropriate rates based on estimated income, past assessment history, advance tax payments, and existing TDS credits.
For computing the capital gains on sale of immovable property for the purpose of the lower / nil deduction certificates, the purchase cost of the property and stamp duty are considered as deductions, while other expenses or reinvestment benefits (like 54/54EC/54F) are allowed only on the basis of proof of actual expenses or investment. The requirement to submit proof of reinvestment to claim the benefit of sections 54, 54EC or 54F creates cash flow difficulties where sale proceeds are required for subsequent investment, necessitating careful planning and even potentially acceptance of higher TDS with subsequent refund claims.
The time limit for issue of the certificate by the AO is 30 days, which practically extends to 5-6 weeks considering the queries raised and responses provided. The certificates are specific to assessment years, valid for payments made on or after the date of issuance of the certificate and must be applied for again for continuing payment relationships.
The certificates issued will only specify the base TDS rate (exclusive of surcharge and education cess). It is the responsibility of the taxpayer/deductor to apply applicable surcharge and cess based on the recipient's status (individual/company/FII) and threshold limits. This frequently causes confusion and compliance errors where deductors deduct tax at the certificate rates without appropriate surcharge and cess adjustments, leading to potential short deduction and interest/penalty exposure.
Disclosure Requirements in Return Forms
Non-residents individuals are required to provide certain additional information in their Indian Income-tax Return Form, including their period of physical stay in India for the current year and the four immediately preceding previous years, and the Tax Identification Number (TIN) or passport number of their country of residence.
The Foreign Assets Schedule which tracks global assets does not apply to Non-Residents or RNORs. It only applies to RORs. This is a crucial point often missed by taxpayers transitioning from RNOR to ROR status. Non-disclosure can attract penalties under the Black Money Act.
When disclosing foreign investments, the initial value of investment (cost) should be reported. Where investments have been acquired in tranches over multiple periods, the aggregate cost incurred up to the date of attaining ROR status should be disclosed. For foreign demat accounts, the balance of investments in the custodial account can be disclosed instead of individual shares considering the practical difficulty in reporting information of each share separately. For reporting the peak balance during the year, it is advisable to report the peak value of the cost of investment during the year, rather than the fluctuating fair market value, so as to avoid misrepresentation and potential queries.
Miscellaneous Points
PAN-Aadhar Linking for Non-Residents
Non-residents are not mandated to link their Aadhaar with PAN. However, instances have been seen wherein the income tax portal still prompts non-residents to complete Aadhaar-PAN linkage, without which the PAN is marked as inoperative. The issue often arises because the PAN's jurisdiction is with a domestic tax office instead of the international tax office. The practical solution is to get the jurisdiction of the PAN transferred to the appropriate international tax office by submitting documents in support of the non-resident status of the taxpayer and thereafter requesting the Jurisdiction AO to make the PAN operative
Reporting of Joint Foreign Bank Accounts under Black Money Act / Schedule FA
Technically, where a foreign bank account is jointly held but all contributions and remittances are solely made by the first holder, the obligation to disclose such account in the Indian return of income (Schedule FA) would rest primarily with that first holder. However, in practice, we have seen instances wherein the second joint holders are receiving notices for non-disclosure of bank accounts under Schedule FA with hefty penalty amounts solely because the information exchange from foreign jurisdictions reflects both names. Accordingly, to avoid potential notice (as exchanged information will show both names) and penalty exposure, risk-averse taxpayers may prefer to disclose the account in both returns (typically with a token or nominal disclosure for the second holder), even if it's not entirely accurate.