For NRIs, it can be quite a tricky thing to manage and comply with tax laws and regulations in different countries. Understandably, these regulations can sometimes be unclear and complex. Despite their ambiguity, one of the most crucial tax laws for any NRIs to be aware of is Section 6 of the Income Tax Act. This is because it deals with the residential status of a person for income tax purposes.
What is Residential Status and Why It Matters
Determining the residential status of an individual is crucial because it affects how their income is taxed in India. However, this is not to be confused with individual citizenship. Residential status is strictly restricted to determining an individual's tax liability. For instance, an individual who is a citizen of India may end up being a non-resident for a particular year. Likewise, a foreigner staying in India could end up being a resident of India for a particular year.
Therefore, it becomes necessary to have a system to identify and classify residents and non-residents of India, as well as their respective tax liabilities to the nation. The same logic applies to legal entities (such as corporations) whose residential statuses are determined differently.
Types of Residential Status Under the Income Tax Act
Under the Income Tax Act, there are three types of resident classifications. These classifications are based on the length of time an individual has spent living in India. More importantly, the period of time in which length of stay is considered can include both the current fiscal year as well as previous years of stay.
The three types of classifications are as follows:
Resident and Ordinarily Resident (ROR)
Non-Resident (NR)
Resident but Not Ordinarily Resident (RNOR)
Resident and Ordinarily Resident (ROR)
This is the most common classification of residential status under the Income Tax Act. Individuals are considered residents of India for tax purposes if they meet the following requirements:
They are physically present in India for a minimum of 182 days in a given fiscal year (the 182-day rule)
OR
They are physically present in India for at least 60 days and for a total of 365 days or more in the preceding four fiscal years. (the 60-day rule)
Resident but Not Ordinarily Resident (RNOR)
This classification is typically meant for Individuals with close ties/connections with India based on factors like place of birth and nationality. However, residential status is only awarded if these individuals meet the following conditions:
They have spent a total of 730 or more days in the preceding seven years in India.
OR
They have resided in India for two out of the preceding ten years in India.
Non-Resident (NR)
If the above-mentioned conditions are not met for either Resident (ROR) or Resident but Not Ordinarily Resident (NROR), the individual is considered Non-Resident (NR).
Tax Implications Based on Residential Status
If an individual is considered a resident, he/she is liable to pay taxes on his global income. In this respect, “global income” refers to income earned in and outside India. However, for those considered NR and NROR, taxation only applies to income generated within India.
In some instances where individuals are subject to taxation on income in India and in another country, they can always claim tax relief under the Double Tax Avoidance Agreement (DTAA). DTAAs are agreements signed by countries with each other to help their citizens avoid paying taxes twice on the same income generated across multiple borders. To date, India has signed over 88 DTAAs with other countries, such as the UAE, to support its NRI population.
Learn about the major benefits of NSE IFSC for Indian and global investors.
Income Tax Slabs & Exemptions for Each Category
For Residents, the latest Income Tax Slab (proposed to come into effect from April 1, 2025, outlines the following tax implications:
| Income tax slabs (Rs) | Income Tax Rate (%) |
|---|---|
| From 0 to 4,00,000 | 0 |
| From 4,00,001 to 8,00,000 | 5 |
| From 8,00,001 to 12,00,000 | 10 |
| From 12,00,001 to 16,00,000 | 15 |
| From 16,00,001 to 20,00,000 | 20 |
| From 20,00,001 to 24,00,001 | 25 |
| From 24,00,001 and above | 30 |
For Non-Residents (NR), their income tax obligations are strictly limited to income generated and received in India. All other foreign income remains non-taxable in India. For income generated in India, the tax slab is the same as for Residents (RORs) [summarised in the above table]. However, if opting for the new tax regime, these individuals are no longer eligible for certain deductions specified under the Income Tax Act under section 80.
Also Read: UAE Tax Residency Certificate
For RNORS, the same tax slab for residents applies to income earned or received in India. However, they are strictly not eligible for the benefits mentioned above that are offered to residents. This is because they more or less have similar privileges offered to Non-Residents under the new tax regime.
Foreign Income Taxation Rules
If the income is earned in India, it is typically subject to taxation. Though, it can sometimes be hard to keep track of all the taxation rules surrounding the origin of income generated. To overcome this issue, we must first understand what is considered “foreign income” and what is not, and for the different types of resident classifications. The below-given table accurately summarises these rules:
| Type of Income | ROR (Residents) | RNOR (Residents but Not Ordinarily Resident) | Non-Resident |
|---|---|---|---|
| Income generated or received in India | Taxable | Taxable | Taxable |
| Income earned or accrued in India | Taxable | Taxable | Taxable |
| Income outside India (from businesses controlled in India or profession established in India) | Taxable | Taxable | Non-Taxable |
| Income outside India (other sources) | Taxable | Non-Taxable | Non-Taxable |
Basic Conditions for Residential Status
| Type of Resident | Conditions |
|---|---|
| Residents (ROR) | They are physically present in India for a minimum of 182 days in a given fiscal year (the 182-day rule) OR They are physically present in India for at least 60 days and for a total of 365 days or more in the preceding four fiscal years. (the 60-day rule) |
| Resident but Not Ordinarily Resident (RNOR) | They have spent a total of 730 or more days in the preceding seven years in India. OR They have resided in India for two out of the preceding ten years in India |
| Non-Resident (NR) | They have not met the above-mentioned conditions |
Additional Conditions for RNOR & ROR
| Type of Resident | Additional Conditions |
|---|---|
| ROR | For Indian citizens leaving for employment abroad or as crew members of an Indian ship, the 60-day criterion is extended to 182 days. For Indian citizens or Persons of Indian Origin (PIOs) residing abroad who visit India, the 60-day criterion is extended to 182 days (except for cases where the sourced income exceeds ₹15 lakhs, wherein the threshold is reduced to 120 days) |
| NROR | An individual is also classified as RNOR if they meet any of these extra conditions: They are deemed residents (Indian citizens with Indian-sourced income exceeding ₹15 lakhs) and not liable to tax in another country. They have been a non-resident in India in 9 out of 10 preceding financial years. |
Practical Examples & Case Studies
Consider Anand. Who is an Indian Citizen who works for a multinational company and is deputed to its branch in Singapore? During the financial year, he spends 200 days in Singapore and 165 days in India and earns ₹20 Lakhs from Indian Sources and ₹38 lakhs from Singaporean sources. What residency status does he qualify under?
Well, to qualify as a resident of India for tax purposes, an individual must either observe the 182-day or 60-day rule. However, since he had only stayed in India for 165 days, his case failed both conditions. Consequently, Anand only qualifies as a Non-Resident for the financial year. Therefore, he is liable to pay taxes for the ₹20 Lakhs sourced from India but is not liable to pay taxes on the ₹38 lakhs sourced from Singapore.
Tax Planning Strategies Based on Residential Status
Since effective tax planning hinges significantly on an individual’s residential status, understanding and strategically managing this status is absolutely crucial to having optimised tax liabilities. Below are some examples Individuals can utilise to effectively minimise their tax liabilities using key tax regulations to their benefit:
Understanding your Residential Status: This is the first and most important step in identifying strategies to optimise tax liabilities. Your residential status is key to unlocking several tax benefits awarded to individuals of different residency types, such as ROR, RNOR and NR.
You can check out our residential status calculator to identify your residential status. Residential Status Calculator | Check Your NRI Status Instantly
Leveraging DTAA schemes: By leveraging DTAA agreements, NRIs can claim tax credits or exemptions on income taxed in India and their country of residence.
Investing in Tax-Efficient Instruments: For NRs, NREs and FCNR accounts offer tax-free interest rates. For RNORs, equity-linked savings schemes (ELSS) can provide tax benefits and investing in the Public Provident Fund (PPF) offers tax-free interest and maturity amounts.
How NRIs Can Reduce Tax Liability?
NRIs can utilise the exemptions and deductions provided in the Income Tax Act to reduce their tax liabilities in India. These deductions & exemptions include the following:
Property transactions: Capital gain exemptions for the sale of properties are contingent on conditions specified under the Capital Gains Account Scheme of 1988.
Bank accounts and bonds: Tax exemptions are available on the interest earned on an NRE or FCNR account, interest earned on notified bonds, and savings certificates issued by the government.
Life insurance premium: Deductions available on NRI life insurance premiums up to ₹1.5 lakhs paid to self and/or family (only available under the Old Tax Regime).
Education loans: Deductions are available on tuition fees paid to an education institute for full-time education (limited to two children under the old tax regime).
Using DTAA: Avoidance of Double Taxation on income generated across multiple borders under DTAA (Double Taxation Avoidance Agreements) for select countries.
Best Investment Options for ROR, RNOR, and NR
| Investment Option | ROR | RNOR | NR |
|---|---|---|---|
| Public Provident Fund (PPF) | Eligible for investment with tax-free interest. | Same tax benefits as ROR during tenure, but can only continue existing accounts until maturity (i,e cannot open new accounts) | NRs are not eligible to invest in PPF. |
| National Pension System (NPS) | Contributions up to ₹2 lakhs per annum are deductible under Section 80C of the old tax regime | Same as ROR | Same as ROR, but may be liable to pay taxes in their respective country of residence |
| Equity-Linked Savings Scheme (ELSS) | Investments up to ₹1.5 lakhs per annum are deductible under Section 80C of the old tax regime | Same as ROR | Same as ROR, but may be liable to pay taxes in their respective country of residence |
| Real Estate | Tax deductions are available for Rental income and capital gains | Same as ROR | Rental income and capital gains are taxable in India but can avail double tax avoidance under DTAA agreements |
DTAA (Double Taxation Avoidance Agreement) Benefits
The Key benefits of DTAA (especially for NRIs) include avoidance of Double Taxation, tax relief on different types of income, lower tax (capped) rates, easier repatriation of income, and Tax-free status in certain countries (such as the UAE by gaining a Tax Residency Certificate).
Misconceptions About Residential Status
As there are many conditions and caveats for meeting the different types of residency statuses under the Income Tax Act, there are also considerable chances for misconceptions to arise for various individuals. Interestingly, due to these common misconceptions, individuals often overlook the benefits awarded to different residency types under the new tax regime. Let’s look at some common misconceptions and their ground realities.
Misconception 1 - Equating Residential Status with Citizenship: Many believe that just because they are Indian citizens, they automatically qualify for residential status for tax purposes. But this is simply not true. To be considered a Resident, an individual must meet either the 182 or 60-day rule.
Misconception 2 - Assuming Global Income is Always Taxed In India: This is a fairly popular misconception that people seem to hold regardless of their residential status. But in reality, only residents are taxed on their global income. For RNORs and NRs, the criteria for taxation strictly apply to income accrued or otherwise received in India.
Misconception 3 - Assuming Residential Status is Permanent: People tend to believe that if they have been awarded a resident or non-resident status, this status remains unchanged. However, this is patently false. Instead, residency statuses are determined annually based on the conditions specified and, thus, are liable to change year-on-year.
Failure to Report Foreign Income
If failing to report foreign income under the Income Tax Act, particularly within the framework of the new tax regime, an individual is subject to significant penalties and legal consequences. These regulations fall under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
The Non-Disclosure of foreign income can attract the following consequences:
Penalty Imposition: Given under section 43 of the Black Money Act, failure to disclose foreign income or assets in the income tax return can result in a penalty of ₹10 Lakhs if the aggregate value of such income or assets (excluding immovable property) exceeds ₹20 Lakhs.
Assessment Proceedings & Prosecution: In addition to monetary penalties, assessment proceedings can be triggered (which would involve a thorough investigation of the taxpayer's financial affairs), and prosecution proceedings may also be initiated (which can result in imprisonment and further fines).
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Conclusion
In conclusion, understanding the concept of residential status under the Income Tax Act is important as it determines one’s tax obligations. Individuals can be classified into three different resident types: ROR (Resident & Ordinarily Resident), RNOR (Resident but not Ordinarily Resident), and NR (Non-Resident). These classifications help determine the scope of taxation and the strategies individuals can utilise to optimise their tax liabilities.
Because tax regulations are complex and ever-evolving, they give rise to many misconceptions. Staying up-to-date on policy changes (such as regulations under the new tax regime) is essential, no matter your residential status.
