Who is an NRI? NRI Tax Status and Residency Rules Under the Income Tax Act

An individual of Indian origin living abroad is classified as a Non-Resident Indian (NRI). The Income Tax Act, 1961 outlines distinct tax rules for Indian residents and NRIs. Indian-origin individuals are considered residents for tax purposes when they reside in India for a specified period. The Act defines the criteria for determining residency status for both residents and NRIs.This article explores the various NRI statuses, tax implications, and the concept of Resident but Not Ordinarily Resident (RNOR).

Rules Governing NRI Status

In India, two primary laws govern and prescribe the rules for Non-Resident Indians (NRIs):

• Income Tax Act - This Act governs the tax liabilities of NRIs in India.
• Foreign Exchange Management Act (FEMA) - This Act regulates transactions, investments, and the opening of bank accounts for NRIs.

The definition of an NRI differs under these two Acts. This article focuses on the definition of NRIs under the Income Tax Act, 1961.

Also read:  Residential Status for Income Tax

Determining Your Tax Liability Based on Residential Status

To calculate how much tax you need to pay in India, it is essential to determine your residential status for each financial year. Your residential status must be assessed annually, as it can change depending on factors such as travel or changes in your living situation.

For example, if you are classified as a non-resident in one year, you will need to reassess your status for the next year and onward, especially if your circumstances, such as your travel or residence, have changed. Your tax liability in India will be determined by your residency status. Before we explore the concept of a Non-Resident Indian (NRI), let's first understand who qualifies as a Resident Indian.

Who is Considered a Resident in India for Tax Purposes?

A person is considered a Resident of India for income tax purposes if they meet either of the following conditions:

182-Day Rule: They are in India for 182 days or more during the financial year.

OR

60-Day and 365-Day Rule: They are in India for at least 60 days in the current year and have spent a total of 365 days or more in India during the 4 years preceding the current year.

Note: These days can be accumulated over multiple visits, rather than requiring a single continuous stay.

Resident Status for Indian Citizens Working Abroad

If you are an Indian citizen and leave India for employment outside the country or as a crew member on an Indian ship, you will be classified as a Non-Resident Indian (NRI) if you stay in India for less than 182 days during the previous year. Therefore, if you live outside India for 182 days or more, you will be considered an NRI for tax purposes.

Resident Status for Taxation of Indian Citizens and Persons of Indian Origin

A citizen of India or a person of Indian origin who resides outside India but visits India during the previous year will be considered a resident for income tax purposes if their total income (excluding foreign sources) exceeds ₹15 lakh, and they meet either of the following conditions:

• They are present in India for 182 days or more during the financial year OR
• They have stayed in India for at least 365 days in the four years preceding the relevant year and for at least 120 days in the previous year.

Deemed Resident Status for Indian Citizens

• Regardless of the standard conditions for determining residency, the concept of deemed resident applies in certain cases.
• An individual who is a citizen of India and has a total income (excluding foreign sources) exceeding ₹15 lakh in a financial year will be considered a deemed resident of India if they are not a tax resident of any other country.

Non-Resident Status in India

An individual is considered a Non-Resident Indian (NRI) if they do not meet the conditions for being a resident in India.

In general, a person is classified as an NRI if they stay in India for less than 182 days during the financial year.

Residential Status of Indian Citizens as Crew Members on Indian Ships

For Indian citizens working as crew members on Indian ships, their period of stay in India is calculated differently to determine their residential status. The key rules are as follows: 

Exclusion of Voyage Days:

The period of stay in India excludes the days between the start date and end date mentioned in the Continuous Discharge Certificate (CDC), as per the Merchant Shipping (Continuous Discharge Certificate-cum-Seafarer’s Identity Document) Rules, 2001 under the Merchant Shipping Act, 1958.

The CDC must be issued for a voyage that either:

• Starts from an Indian port and ends at a foreign port, OR
• Starts from a foreign port and ends at an Indian port.

Applicability and Effective Date:

• This rule applies from April 1, 2015, for determining the residential status of crew members from the financial year 2015-16 onward.
• Crew members are considered Non-Resident Indians (NRIs) for tax purposes if they spend less than 182 days in India during a financial year.

Special Considerations for Calculating Stay:

• While computing the 182-day threshold, the entire duration specified in the CDC is excluded, even if the ship remains within Indian coastal waters during its journey.
• For Indian crew members, the counting of days outside India begins only when the ship crosses India’s coastal boundaries.
• Relevance to Indian Citizens and Persons of Indian Origin (PIOs) Visiting India:
• If an Indian citizen or PIO residing abroad visits India, this relaxation ensures that an extended visit (exceeding two months) does not result in taxation as a resident.

Other Residential Categories:

• Besides Resident and Non-Resident Indians (NRI), there is a third category: Resident But Not Ordinarily Resident (RNOR).
• If an individual returns to India after several years abroad, they may qualify as RNOR, which has different tax implications.

Who is a Resident but Not Ordinarily Resident (RNOR)?

An individual is classified as a Resident but Not Ordinarily Resident (RNOR) in a financial year if they meet either of the following conditions:

• Past Non-Resident Status: The individual has been a Non-Resident Indian (NRI) in 9 out of the 10 financial years preceding the relevant year.
• Limited Stay in India: The individual has been in India for 729 days or less during the 7 financial years preceding the relevant year.
• Indian Citizens or Persons of Indian Origin Visiting India: The individual is a citizen of India or a Person of Indian Origin (PIO) who comes on a visit to India, has a total income exceeding ₹15 lakh (excluding foreign income), and has stayed in India for 120 days or more but less than 182 days in the previous year.
• Deemed Resident Criteria: The individual is a citizen of India with a total income exceeding ₹15 lakh (excluding foreign income) in the previous year and is not liable to pay tax in any other country or territory due to reasons such as domicile, residence, or similar criteria.

Taxation for Non-Resident Indians (NRIs)

• Any income earned in India is taxable in India.
• Income earned outside India is not taxable in India.

 Special case for seafarers:

• Salary earned by a non-resident seafarer for services outside India on a foreign ship is not included in taxable income in India.
•  Even if the salary is credited to the NRE account of the seafarer in an Indian bank, it remains non-taxable, provided the seafarer spends less than 182 days in India during the financial year.

Taxation for Resident but Not Ordinarily Resident (RNOR)

If you have recently returned to India, you can maintain RNOR status for up to 3 financial years after your return.

As an RNOR, your tax treatment remains similar to an NRI:

• Income earned in India is taxable.
• Income earned outside India remains non-taxable.
• This provides a significant tax benefit for returning NRIs.

Once you attain the status of a Resident, your global income (both Indian and foreign) becomes taxable in India, except for any relief available under the Double Taxation Avoidance Agreement (DTAA) with the country from which your foreign income originates.

Click here to learn more about NRI taxation in India.

New Income Tax Bill 2025: New Tax Residency Rules for NRIs

On February 13, 2025, India’s central government introduced the Income Tax Bill 2025, set to take effect from April 1, 2026. These changes will have substantial implications for Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and frequent visitors to India.  

Revised Tax Residency Criteria in India

Under the new bill, an individual qualifies as a resident in India if they meet one of the following conditions:

The 182-Day Rule (Unchanged)

The primary criterion remains unchanged from the Income-tax Act, 1961. An individual is considered a tax resident if they stay in India for 182 days or more in a financial year. If they stay for fewer than 182 days, they will continue to be classified as an NRI.

The Modified 60-Day + 365-Day Rule

Previously, individuals staying for at least 60 days in a tax year and 365 days over the past four years were deemed residents. The new bill modifies this by introducing exemptions:

• Indian citizens working abroad or crew members of Indian ships are not subject to the 60-day rule.
• NRIs and PIOs visiting India are exempt from this rule if their Indian income is below INR 1.5 million.

For example, Rahul, an Indian citizen working in the US, visits India for 100 days in a tax year. Under the old rule, he may have been considered a resident. However, under the new exemption, he remains an NRI since he moved abroad for employment.

The 120-Day Rule for High-Income NRIs & PIOs

A significant modification in the new tax bill affects high-income NRIs and PIOs earning INR 1.5 million or more in India. Instead of the previous 60-day rule, a 120-day threshold is now applied. An NRI or PIO earning above INR 1.5 million in India will be classified as RNOR if they:

• Stay in India for 120 days or more in a tax year.
• Have spent 365+ days in India over the past four years.

For instance, Raj, an NRI businessman earning INR 2 million (US$22,951.5) from India, visits for 130 days. Under the previous rule, he would have remained an NRI, but the new rule classifies him as RNOR.

Importance of RNOR Status

• As an RNOR, only an individual’s Indian income is taxable, while global income remains exempt.
• If an individual stays in India for 182 days or more, they become a full resident, making their global income taxable in India.

Not Ordinarily Resident (NOR) Status

An individual qualifies for NOR status if they meet any of the following conditions:

• They were an NRI for 9 out of the last 10 years.
• They spent 729 days or less in India over the last 7 years.
• They are an Indian citizen or PIO earning over INR 1.5 million in India and have stayed between 120 and 182 days in a financial year.

For example, Nikhil, an NRI returning to India, has stayed only 500 days in the last seven years. He qualifies as NOR, meaning only his Indian income is taxable, while his global income remains exempt.

The Deemed Residency Rule for ‘Stateless Indians’

A controversial provision in the bill is the deemed residency rule, which applies to Indian citizens earning INR 1.5 million or more in India but not paying taxes in any other country. This primarily affects Indian citizens in tax-free jurisdictions like the UAE, Saudi Arabia, or Monaco with significant Indian earnings.

Notably, even if an individual never visits India, they could still be classified as a tax resident, making their global income taxable in India.

For instance, Suresh, an Indian citizen working in Dubai (which has no income tax), earns INR 2 million from India but does not visit India. Under the new rule, he will still be classified as a resident, making his global income taxable in India.

Other Important Residency Rules

• Crew Members of Foreign Ships: Special rules will determine how their time in India is calculated.
• Firms, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), and Trusts: These entities are considered residents unless their entire management and control are outside India.
• Companies: A company is a tax resident if:
  • It is incorporated in India.
  • Its Place of Effective Management (PoEM) is in India. For example, if a foreign company’s key management decisions are made in India, it will be classified as an Indian tax resident.

Taxability of Foreign Income Under the New Bill

Foreign income is defined as earnings generated outside India, except:

• Business income, if the business is controlled from India.
• Professional income, if the professional practice was set up in India.

For instance, Arjun, an NRI, earns INR 50 million from his Dubai business. Since his business is based in Dubai, his income is not taxable in India. However, if the business is managed from India, it becomes taxable.

Key Takeaways

• The 182-day rule remains the primary criterion for tax residency.
• The 60-day rule no longer applies to NRIs, crew members, or Indian citizens working abroad.
• A 120-day rule applies to high-income NRIs earning INR 1.5 million or more in India.
• The deemed residency rule impacts Indian citizens earning INR 1.5 million or more in India but not paying taxes elsewhere.
• RNOR status allows individuals to avoid global taxation.

FAQs on NRI Tax Status and Residency Rules Under the Income Tax Act

1. Who is considered a Non-Resident Indian (NRI) for tax purposes?

A Non-Resident Indian (NRI) is an Indian citizen or a Person of Indian Origin (PIO) who does not meet the criteria of a resident under the Income Tax Act.An individual is classified as an NRI if they:

• Stay in India for less than 182 days in a financial year, or
• Do not meet other residency conditions under Indian tax laws.

2. How is residential status determined for tax purposes in India?

Residential status is based on physical presence in India during a financial year. A person is considered a Resident if they meet either of these conditions:

• They stay in India for 182 days or more in a financial year, or
• They stay in India for 60 days or more in a financial year and 365 days or more in the past four years.

Special Rule for NRIs & PIOs Visiting India:

• If their total Indian income (excluding foreign income) exceeds ₹15 lakh, the 60-day threshold increases to 120 days.
• If their Indian income is below ₹15 lakh, the 60-day condition does not apply.

3. What is the difference between NRI and Resident but Not Ordinarily Resident (RNOR)?

• NRI: An individual who does not meet the conditions for residency in India. Only their Indian income is taxable; foreign income is not taxed in India.
• RNOR: A transitional status for returning NRIs who meet any of the following conditions:
• They were an NRI for 9 out of the past 10 financial years, or
• They stayed in India for 729 days or less in the last 7 years.
• They are an Indian citizen or PIO with Indian income exceeding ₹15 lakh and have stayed in India for 120-182 days in a financial year.
• RNORs are taxed only on Indian income, while their foreign income remains non-taxable for up to 3 years after returning to India.

4. How is income taxed for NRIs in India?

NRIs are taxed only on income earned or received in India, including:

• Salary received in India or for services provided in India
• Rental income from property in India
• Capital gains from the sale of Indian assets
• Interest on Indian bank accounts (NRO account interest is taxable; NRE account interest is tax-free)

Foreign income is not taxable in India for NRIs, unless it is derived from a business or profession controlled or set up in India.

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