Income Tax for NRIs

Income Tax for NRIs. A Non-Resident Indian (NRI) is essentially a person of Indian origin who lives abroad. The Income-tax Act, 1961, outlines distinct tax regulations for Indian residents compared to NRIs. Individuals of Indian origin are classified as residents if they reside in India for a specified duration. The Act clearly defines both residents and NRIs for taxation purposes. This article aims to clarify NRI status, their taxation, and the concept of Resident but Not Ordinarily Resident (RNOR), detailing how taxable income is determined based on your status and who qualifies as an RNOR.
Laws Governing NRI Status
The regulatory framework for NRIs in India is primarily governed by two main laws: the Income Tax Act and the Foreign Exchange and Management Act (FEMA). The Income Tax Act specifically governs the tax liabilities of NRIs, while FEMA regulates all transactions, investments, and the opening of bank accounts for NRIs. It is important to note that the definition of an NRI can differ under these two acts. For the scope of this article, we focus on the definition of NRIs as provided under the Income Tax Act, 1961.
Residential Status for Taxation in India: Resident vs Non-Resident
To accurately determine your tax obligations in India, it is crucial to establish your residential status for each financial year. This status is not fixed and must be reassessed annually, especially if there have been changes in your travel patterns or residence. Your residential status directly defines your tax liability in India. Before delving into the specifics of who qualifies as a Non-Resident Indian, let us first clarify the criteria for being considered a Resident Indian.
Who is a Resident in India? 
An individual is considered a Resident of India for income tax purposes if they fulfill either of the following conditions:

They are present in India for a period of 182 days or more during the relevant financial year.

Alternatively, they are in India for at least 365 days during the four years immediately preceding the relevant financial year AND are present in India for at least 60 days in the relevant financial year. It's important to note that these days can be accumulated through a single continuous visit or multiple visits to India.

Residential Status of Indian Citizens Leaving India for Employment 
For an Indian citizen who departs from India for employment purposes outside the country, or as a member of the crew on an Indian ship, their status will be that of a Non-Resident Indian (NRI) if their stay in India in the previous year was less than 182 days. Consequently, if an Indian citizen resides outside India for 182 days or more, they will be classified as an NRI for tax purposes.
Residential Status of Indian Citizen or a Person of Indian Origin (PIO) Visiting India 
In the case of a citizen of India or a Person of Indian Origin who is residing outside India and visits India during the previous year, if their total income, excluding income from foreign sources, exceeds Rs. 15 lakh, such a person would be considered a Resident of India for income tax purposes if:

They are in India for 182 days or more during the financial year.

OR, they are in India for at least 365 days during the four years preceding that year AND are present for at least 120 days in the previous year.

Deemed Resident 
Beyond the aforementioned conditions for being a resident, there is also a concept of a "deemed resident." An individual who is a citizen of India and whose total income (from sources other than foreign sources) exceeds Rs. 15 lakhs during a financial year shall be deemed to be a resident in India in that year if they are not a tax resident of any other country. This provision ensures that high-income Indian citizens who might otherwise escape taxation due to their non-resident status in other countries are brought within the ambit of Indian taxation.
Who is a Non-Resident in India? 
If an individual does not satisfy any of the conditions outlined above for being considered a resident in India, they will be classified as a Non-Resident Indian (NRI). Therefore, if your stay in India is less than 182 days, you will generally be considered an NRI for income tax purposes.
Residential Status of Indian Citizens as Crew on Indian Ships 
For Indian citizens who are members of the crew of a ship, when calculating their period of stay in India for residential status, the days of stay will not include the period between the start and end dates recorded on their Continuous Discharge Certificate (CDC). This provision applies when the CDC complies with the Merchant Shipping (CDC-cum-Seafarer's Identity) Rules, 2001, under the Merchant Shipping Act, 1958, and pertains to a voyage commencing from an Indian port and concluding at a foreign port, or vice versa (as per Notification No. 70/2015/F.No.142/12/2015-TPL). Consequently, such crew members are considered Non-Resident Indians (NRIs) for income tax purposes if they have spent less than 182 days in India. Even if the ship was in Indian coastal waters during its journey, the entire period specified in the Continuous Discharge Document is excluded from the 182-day calculation. This relaxation in the minimum number of days is intended to prevent such individuals from being taxed as Resident Indians, particularly if they undertake extended visits to India to see family or fulfill other obligations and end up staying for more than two months.
Resident but Not Ordinarily Resident (RNOR)
In addition to Resident and Non-Resident Indian classifications, there exists a third category: Resident but Not Ordinarily Resident (RNOR). This status is particularly relevant for individuals who have spent many years abroad and have recently repatriated to India.
Who is an RNOR? 
A person is deemed "not ordinarily resident" in India for a given previous year if they fulfill the following criteria:

The individual must be a resident (i.e., satisfy the conditions to become a resident) AND has been a non-resident in India in 9 out of the 10 previous years immediately preceding the relevant financial year, OR

The individual has stayed in India for less than 730 days in the 7 years immediately preceding the relevant financial year.

Furthermore, a citizen of India, or a person of Indian origin, whose income (excluding foreign sources) exceeds Rs. 15 lakh and who has stayed in India for 120 days or more but less than 182 days during the relevant financial year, will also be classified as an RNOR.

An Indian citizen whose total income (excluding foreign source income) exceeds Rs. 15 lakhs during the previous year shall be deemed to be Resident but Not Ordinarily Resident in India in that relevant financial year if they are not liable to pay tax in any other country or territory due to their domicile, residence, or any other similar criteria.

Taxable Income of NRI and RNOR
The taxation rules for NRIs and RNORs differ significantly from those applicable to ordinary residents of India.
Taxable Income for Non-Resident Indians (NRIs) 
For a Non-Resident Indian (NRI), only income that is 'earned' or 'accrued' in India is subject to tax in India. Any income generated outside of India is typically not taxable in India. For instance, the salary of a non-resident seafarer for services rendered outside India on a foreign ship will not be included in their total taxable income in India, even if the salary is credited to their NRE (Non-Resident External) account in an Indian bank. For example, if a seafarer provided services in Europe, spent less than 182 days in India, and their company credited their salary to an NRE account with an Indian bank, this income would not be part of their total taxable income in India.
Taxable Income for Resident But Not Ordinarily Resident (RNORs) 
If you are classified as a Resident but Not Ordinarily Resident (RNOR) and have recently returned to India, you may be able to retain your RNOR status for up to 3 financial years after your return. This status can offer substantial benefits, as your tax treatment will closely resemble that of an NRI. Consequently, income earned outside of India (even after your return) will generally not be taxed in India. Similar to an NRI:

Any income that is ‘earned’ or ‘accrued’ in India is taxable for you in India.

Your income generated outside of India is typically not taxable in India. However, once you achieve the status of a Resident (Ordinarily Resident), all of your income, both from within and outside India, will become taxable in India, unless specific concessions are available under a Double Taxation Avoidance Agreement (DTAA) between India and the country from which your overseas income originated.

What Does ‘Earned’ or ‘Accrues’ in India Mean?
Understanding the precise meaning of income 'earned' or 'accrued' in India is paramount for NRIs and RNORs to ascertain their tax liabilities.
What Does ‘Earned’ in India mean?
 Income is considered 'earned' in India if:

It is received in India, or is deemed by law to be received in India, either by you directly or on your behalf.

It accrues or arises in India, or is deemed by law to accrue or arise in India.

What Does ‘Accrues in India’ mean? 
Section 9 of the Income Tax Act outlines specific types of income that are deemed to accrue or arise in India, irrespective of the residential status of the recipient. If your income falls into any of the following categories, it will be considered to have accrued in India:

Income derived from a business connection in India.

Income generated from any property, asset, or source of income located in India.

Capital gain realized from the transfer of a capital asset situated in India.

Income from salary if the services for which the salary is paid are rendered in India.

Income from salary which is payable to you by the Government of India for services rendered outside of India, provided you are an Indian citizen.

Dividend paid by an Indian company, even if the actual payment is made outside India.

Interest, royalty, or technical fees received from the Central or State Government, or from specified persons under certain circumstances.

Deductions Available for NRIs under Section 80C
NRIs are eligible to claim various deductions while filing their Income Tax Return (ITR), which can help reduce their taxable income in India.
Deductions under Section 80C 
NRIs can claim the following deductions under Section 80C, subject to an overall limit of Rs. 1.5 lakh:

Payments towards Life Insurance premium for self, spouse, or any child.

Tuition fees paid for the full-time education of any two children in India.

Payments towards Unit-Linked Insurance Plans (ULIP).

The principal amount repaid on a loan taken for purchasing or constructing a residential property.

Investments made in Equity-Linked Savings Schemes (ELSS).

Other Available Deductions 
Beyond Section 80C, NRIs can also claim deductions under specific conditions under other sections of the Income Tax Act, including:

Section 80G: Donations made to certain approved charitable institutions.

Section 80D: Premiums paid for health insurance.

Section 80TTA: Interest income from savings accounts (applicable to NRO accounts for NRIs).

Section 54: Capital gains from the sale of a residential house reinvested in another residential house.

Section 54EC: Capital gains from the sale of long-term capital assets invested in specified bonds.

Frequently Asked Questions (FAQs)
Q1. How is residential status determined for NRIs under the Income Tax Act?
Ans. Residential status is determined based on physical presence in India during the relevant financial year. An individual is considered a Resident if:

They stay in India for 182 days or more in the financial year, or

They stay for 60 days or more in the financial year and 365 days or more in the preceding 4 years.

Exceptions apply for Indian citizens or Persons of Indian Origin (PIOs) visiting India, and for those leaving India for employment, where the 182-day rule solely applies.
Q2. What is the difference between an NRI and an RNOR?
Ans.

An NRI (Non-Resident Indian) is someone who doesn’t meet the residency criteria (i.e., not present in India for at least 182 days).

An RNOR (Resident but Not Ordinarily Resident) is a transitional status for returning NRIs. They must:

Be a resident in the current year, and

Have been an NRI for 9 out of 10 preceding years or stayed in India for less than 730 days in the last 7 years.

RNORs get similar tax benefits as NRIs for a limited time (up to 3 years).
Q3. Is global income taxable for NRIs or RNORs in India?
Ans.

For NRIs, only income earned or accrued in India is taxable. Global income is not taxed in India.

For RNORs, foreign income is also generally exempt, unless they become ordinary residents. However, income earned or accrued in India remains taxable for both NRIs and RNORs.

Q4. Are Indian citizens working as crew on ships considered NRIs?
Ans. Yes. For seafarers and ship crew, the days between departure and arrival as recorded in the Continuous Discharge Certificate (CDC) are excluded from the stay calculation. If total stay in India is less than 182 days, they are considered NRIs—even if the ship was in Indian coastal waters during that period.
Q5. What tax deductions can NRIs claim in India?
Answer:  NRIs can claim deductions under:

Section 80C: Life insurance premiums, tuition fees, ULIPs, ELSS, principal repayment on housing loan (up to Rs.1.5 lakh).

Section 80D: Health insurance premiums.

Section 80G: Donations to eligible charities.

Section 80TTA: Interest on savings in NRO accounts.

Sections 54 & 54EC: Capital gains exemptions on reinvestment.

A Non-Resident Indian (NRI) is essentially a person of Indian origin who lives abroad. The Income-tax Act, 1961, outlines distinct tax regulations for Indian residents compared to NRIs. Individuals of Indian origin are classified as residents if they reside in India for a specified duration. The Act clearly defines both residents and NRIs for taxation purposes. This article aims to clarify NRI status, their taxation, and the concept of Resident but Not Ordinarily Resident (RNOR), detailing how taxable income is determined based on your status and who qualifies as an RNOR.

Laws Governing NRI Status

The regulatory framework for NRIs in India is primarily governed by two main laws: the Income Tax Act and the Foreign Exchange and Management Act (FEMA). The Income Tax Act specifically governs the tax liabilities of NRIs, while FEMA regulates all transactions, investments, and the opening of bank accounts for NRIs. It is important to note that the definition of an NRI can differ under these two acts. For the scope of this article, we focus on the definition of NRIs as provided under the Income Tax Act, 1961.

Residential Status for Taxation in India: Resident vs Non-Resident

To accurately determine your tax obligations in India, it is crucial to establish your residential status for each financial year. This status is not fixed and must be reassessed annually, especially if there have been changes in your travel patterns or residence. Your residential status directly defines your tax liability in India. Before delving into the specifics of who qualifies as a Non-Resident Indian, let us first clarify the criteria for being considered a Resident Indian.

Who is a Resident in India?

An individual is considered a Resident of India for income tax purposes if they fulfill either of the following conditions:

They are present in India for a period of 182 days or more during the relevant financial year.
Alternatively, they are in India for at least 365 days during the four years immediately preceding the relevant financial year AND are present in India for at least 60 days in the relevant financial year. It's important to note that these days can be accumulated through a single continuous visit or multiple visits to India.

Residential Status of Indian Citizens Leaving India for Employment

For an Indian citizen who departs from India for employment purposes outside the country, or as a member of the crew on an Indian ship, their status will be that of a Non-Resident Indian (NRI) if their stay in India in the previous year was less than 182 days. Consequently, if an Indian citizen resides outside India for 182 days or more, they will be classified as an NRI for tax purposes.

Residential Status of Indian Citizen or a Person of Indian Origin (PIO) Visiting India

In the case of a citizen of India or a Person of Indian Origin who is residing outside India and visits India during the previous year, if their total income, excluding income from foreign sources, exceeds Rs. 15 lakh, such a person would be considered a Resident of India for income tax purposes if:

They are in India for 182 days or more during the financial year.
OR, they are in India for at least 365 days during the four years preceding that year AND are present for at least 120 days in the previous year.

Deemed Resident

Beyond the aforementioned conditions for being a resident, there is also a concept of a "deemed resident." An individual who is a citizen of India and whose total income (from sources other than foreign sources) exceeds Rs. 15 lakhs during a financial year shall be deemed to be a resident in India in that year if they are not a tax resident of any other country. This provision ensures that high-income Indian citizens who might otherwise escape taxation due to their non-resident status in other countries are brought within the ambit of Indian taxation.

Who is a Non-Resident in India?

If an individual does not satisfy any of the conditions outlined above for being considered a resident in India, they will be classified as a Non-Resident Indian (NRI). Therefore, if your stay in India is less than 182 days, you will generally be considered an NRI for income tax purposes.

Residential Status of Indian Citizens as Crew on Indian Ships

For Indian citizens who are members of the crew of a ship, when calculating their period of stay in India for residential status, the days of stay will not include the period between the start and end dates recorded on their Continuous Discharge Certificate (CDC). This provision applies when the CDC complies with the Merchant Shipping (CDC-cum-Seafarer's Identity) Rules, 2001, under the Merchant Shipping Act, 1958, and pertains to a voyage commencing from an Indian port and concluding at a foreign port, or vice versa (as per Notification No. 70/2015/F.No.142/12/2015-TPL). Consequently, such crew members are considered Non-Resident Indians (NRIs) for income tax purposes if they have spent less than 182 days in India. Even if the ship was in Indian coastal waters during its journey, the entire period specified in the Continuous Discharge Document is excluded from the 182-day calculation. This relaxation in the minimum number of days is intended to prevent such individuals from being taxed as Resident Indians, particularly if they undertake extended visits to India to see family or fulfill other obligations and end up staying for more than two months.

Resident but Not Ordinarily Resident (RNOR)

In addition to Resident and Non-Resident Indian classifications, there exists a third category: Resident but Not Ordinarily Resident (RNOR). This status is particularly relevant for individuals who have spent many years abroad and have recently repatriated to India.

Who is an RNOR?

A person is deemed "not ordinarily resident" in India for a given previous year if they fulfill the following criteria:

The individual must be a resident (i.e., satisfy the conditions to become a resident) AND has been a non-resident in India in 9 out of the 10 previous years immediately preceding the relevant financial year, OR
The individual has stayed in India for less than 730 days in the 7 years immediately preceding the relevant financial year.
Furthermore, a citizen of India, or a person of Indian origin, whose income (excluding foreign sources) exceeds Rs. 15 lakh and who has stayed in India for 120 days or more but less than 182 days during the relevant financial year, will also be classified as an RNOR.
An Indian citizen whose total income (excluding foreign source income) exceeds Rs. 15 lakhs during the previous year shall be deemed to be Resident but Not Ordinarily Resident in India in that relevant financial year if they are not liable to pay tax in any other country or territory due to their domicile, residence, or any other similar criteria.

Taxable Income of NRI and RNOR

The taxation rules for NRIs and RNORs differ significantly from those applicable to ordinary residents of India.

Taxable Income for Non-Resident Indians (NRIs)

For a Non-Resident Indian (NRI), only income that is 'earned' or 'accrued' in India is subject to tax in India. Any income generated outside of India is typically not taxable in India. For instance, the salary of a non-resident seafarer for services rendered outside India on a foreign ship will not be included in their total taxable income in India, even if the salary is credited to their NRE (Non-Resident External) account in an Indian bank. For example, if a seafarer provided services in Europe, spent less than 182 days in India, and their company credited their salary to an NRE account with an Indian bank, this income would not be part of their total taxable income in India.

Taxable Income for Resident But Not Ordinarily Resident (RNORs)

If you are classified as a Resident but Not Ordinarily Resident (RNOR) and have recently returned to India, you may be able to retain your RNOR status for up to 3 financial years after your return. This status can offer substantial benefits, as your tax treatment will closely resemble that of an NRI. Consequently, income earned outside of India (even after your return) will generally not be taxed in India. Similar to an NRI:

Any income that is ‘earned’ or ‘accrued’ in India is taxable for you in India.
Your income generated outside of India is typically not taxable in India. However, once you achieve the status of a Resident (Ordinarily Resident), all of your income, both from within and outside India, will become taxable in India, unless specific concessions are available under a Double Taxation Avoidance Agreement (DTAA) between India and the country from which your overseas income originated.

What Does ‘Earned’ or ‘Accrues’ in India Mean?

Understanding the precise meaning of income 'earned' or 'accrued' in India is paramount for NRIs and RNORs to ascertain their tax liabilities.

What Does ‘Earned’ in India mean?

Income is considered 'earned' in India if:

It is received in India, or is deemed by law to be received in India, either by you directly or on your behalf.
It accrues or arises in India, or is deemed by law to accrue or arise in India.

What Does ‘Accrues in India’ mean?

Section 9 of the Income Tax Act outlines specific types of income that are deemed to accrue or arise in India, irrespective of the residential status of the recipient. If your income falls into any of the following categories, it will be considered to have accrued in India:

Income derived from a business connection in India.
Income generated from any property, asset, or source of income located in India.
Capital gain realized from the transfer of a capital asset situated in India.
Income from salary if the services for which the salary is paid are rendered in India.
Income from salary which is payable to you by the Government of India for services rendered outside of India, provided you are an Indian citizen.
Dividend paid by an Indian company, even if the actual payment is made outside India.
Interest, royalty, or technical fees received from the Central or State Government, or from specified persons under certain circumstances.

Deductions Available for NRIs under Section 80C

NRIs are eligible to claim various deductions while filing their Income Tax Return (ITR), which can help reduce their taxable income in India.

Deductions under Section 80C

NRIs can claim the following deductions under Section 80C, subject to an overall limit of Rs. 1.5 lakh:

Payments towards Life Insurance premium for self, spouse, or any child.
Tuition fees paid for the full-time education of any two children in India.
Payments towards Unit-Linked Insurance Plans (ULIP).
The principal amount repaid on a loan taken for purchasing or constructing a residential property.
Investments made in Equity-Linked Savings Schemes (ELSS).

Other Available Deductions

Beyond Section 80C, NRIs can also claim deductions under specific conditions under other sections of the Income Tax Act, including:

Section 80G: Donations made to certain approved charitable institutions.
Section 80D: Premiums paid for health insurance.
Section 80TTA: Interest income from savings accounts (applicable to NRO accounts for NRIs).
Section 54: Capital gains from the sale of a residential house reinvested in another residential house.
Section 54EC: Capital gains from the sale of long-term capital assets invested in specified bonds.

Frequently Asked Questions (FAQs)

Q1. How is residential status determined for NRIs under the Income Tax Act?

Ans. Residential status is determined based on physical presence in India during the relevant financial year. An individual is considered a Resident if:

They stay in India for 182 days or more in the financial year, or
They stay for 60 days or more in the financial year and 365 days or more in the preceding 4 years.

Exceptions apply for Indian citizens or Persons of Indian Origin (PIOs) visiting India, and for those leaving India for employment, where the 182-day rule solely applies.

Q2. What is the difference between an NRI and an RNOR?

Ans.

An NRI (Non-Resident Indian) is someone who doesn’t meet the residency criteria (i.e., not present in India for at least 182 days).
An RNOR (Resident but Not Ordinarily Resident) is a transitional status for returning NRIs. They must:

Be a resident in the current year, and
Have been an NRI for 9 out of 10 preceding years or stayed in India for less than 730 days in the last 7 years.

RNORs get similar tax benefits as NRIs for a limited time (up to 3 years).

Q3. Is global income taxable for NRIs or RNORs in India?

Ans.

For NRIs, only income earned or accrued in India is taxable. Global income is not taxed in India.
For RNORs, foreign income is also generally exempt, unless they become ordinary residents. However, income earned or accrued in India remains taxable for both NRIs and RNORs.

Q4. Are Indian citizens working as crew on ships considered NRIs?

Ans. Yes. For seafarers and ship crew, the days between departure and arrival as recorded in the Continuous Discharge Certificate (CDC) are excluded from the stay calculation. If total stay in India is less than 182 days, they are considered NRIs—even if the ship was in Indian coastal waters during that period.

Q5. What tax deductions can NRIs claim in India?

Answer: NRIs can claim deductions under:

Section 80C: Life insurance premiums, tuition fees, ULIPs, ELSS, principal repayment on housing loan (up to Rs.1.5 lakh).
Section 80D: Health insurance premiums.
Section 80G: Donations to eligible charities.
Section 80TTA: Interest on savings in NRO accounts.
Sections 54 & 54EC: Capital gains exemptions on reinvestment.