Non-Resident Tax Benefits Under the Income Tax Act, 1961 – AY 2026-27

The Income Tax Act, 1961, as amended by the Finance Act, 2026, contains an extensive framework of special provisions governing the taxation of non-residents, including foreign companies. These provisions offer a range of benefits — from complete exemptions on specific income streams to concessional tax rates, presumptive taxation schemes, and relaxation from procedural compliances. This guide presents a structured overview of all such beneficial provisions applicable for Assessment Year 2026-27.

1. Determining Non-Resident Status

Section 2(30) of the Income Tax Act, 1961 defines a non-resident as any person who does not qualify as a resident in India. Section 6 lays down the residency tests for various categories of persons.

A. Residential Status of an Individual

The determination of residential status for an individual involves a two-step process:

  • Step 1 establishes whether the individual is a resident or non-resident.
  • Step 2 — applicable only if the individual qualifies as a resident — determines whether such person is ordinarily resident or not ordinarily resident.

Step 1: Resident or Non-Resident?

An individual qualifies as a resident in India for a given year if either of the following conditions is met:

  1. The individual is physically present in India for 182 days or more during that year; or
  2. The individual is present in India for 60 days or more during the year and for 365 days or more during the four immediately preceding years.

Important Exceptions:

  • In the case of an Indian citizen or a person of Indian origin visiting India during the year, the 60-day threshold in condition (2) is replaced by 182 days.
  • The same substitution applies to Indian citizens leaving India as crew members or for employment purposes abroad.
  • As per the Finance Act, 2020 (effective from Assessment Year 2021-22), where an Indian citizen or a person of Indian origin has total income exceeding Rs. 15 lakhs during the previous year — excluding income from foreign sources — the 60-day threshold is replaced by 120 days.

Income from foreign sources refers to income that accrues or arises outside India, excluding income from a business controlled in India or a profession set up in India.

Deemed Residency Under Section 6(1A)

The Finance Act, 2020 introduced Section 6(1A), under which an Indian citizen is deemed to be resident in India if:

  • Total income (other than from foreign sources) exceeds Rs. 15 lakhs during the previous year; and
  • Such individual is not liable to tax in any other country or jurisdiction by virtue of domicile, residence, or any similar criterion.

Note: "Liable to tax" means that an income-tax liability exists under the laws of a particular country. It also covers persons who have subsequently received an exemption from such liability under that country's laws.

If none of the Step 1 conditions are satisfied, the individual is treated as a non-resident.

Step 2: Ordinarily Resident or Not Ordinarily Resident?

A resident individual is classified as resident but not ordinarily resident (RNOR) if any of the following conditions apply:

  1. The individual has been a non-resident in India in 9 out of 10 immediately preceding years; or
  2. The individual's aggregate stay in India during the 7 immediately preceding years does not exceed 729 days.

From Assessment Year 2021-22, the Finance Act, 2020 added two further situations for RNOR classification:

  • (a) An Indian citizen or person of Indian origin with total income (excluding foreign source income) exceeding Rs. 15 lakhs, who has been present in India for 120 days or more but less than 182 days; or
  • (b) An Indian citizen deemed to be resident under Section 6(1A).

Summary of individual residency outcomes:

  1. Satisfies any condition in Step 1 + none in Step 2 → Resident and Ordinarily Resident
  2. Satisfies any condition in Step 1 + any condition in Step 2 → Resident but Not Ordinarily Resident
  3. Satisfies no condition in Step 1 → Non-Resident

B. Residential Status of a Partnership Firm

A partnership firm is treated as a non-resident in India when the control and management of its affairs is situated wholly outside India.

C. Residential Status of a Company

  • An Indian company is always considered resident in India.
  • A foreign company is resident in India only if the control and management of its affairs is situated wholly in India during the previous year.
  • Accordingly, a foreign company is treated as a non-resident if its control and management is situated wholly or partly outside India.

With effect from Assessment Year 2017-18, a company is resident in India if:

  1. It is an Indian company; or
  2. Its Place of Effective Management (POEM) during that year is in India.

POEM refers to the location where key managerial and commercial decisions necessary for the conduct of the business of the entity as a whole are, in substance, made.

2. Scope of Total Income for Non-Residents

As per Section 5 of the Income Tax Act, 1961, while a resident is taxable on global income, a non-resident is liable to tax in India only in respect of:

  1. Income received or deemed to be received in India during the year; or
  2. Income that accrues or arises, or is deemed to accrue or arise, in India during the year.

This territorial limitation is a fundamental benefit available to all non-residents.

3. Indirect Transfer of Capital Assets Situated in India

Under Section 9(1)(i), income accruing or arising — whether directly or indirectly — through the transfer of a capital asset situated in India is deemed to accrue or arise in India.

Explanation 5 to Section 9(1)(i)

Inserted by the Finance Act, 2012 (retrospectively from 01.04.1962), this explanation provides that a share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if such share or interest derives — directly or indirectly — its value substantially from assets located in India.

A proviso added by the Finance Act, 2017 restricts the applicability of Explanation 5 to assets held by a non-resident as an investment in a Foreign Institutional Investor (as defined in the Explanation to Section 115AD) for assessment years commencing from 01.04.2012 but before 01.04.2015.

Explanation 6 to Section 9(1)(i)

Inserted by the Finance Act, 2015 (effective 01.04.2016), Explanation 6 defines "substantially". A share or interest shall be deemed to derive its value substantially from assets in India if, on the specified date:

  • (i) The value of such assets exceeds Rs. 10 Crore; and
  • (ii) Such assets represent at least 50% of the value of all assets owned by the company or entity.

Explanation 7 to Section 9(1)(i) — Safe Harbour for Non-Residents

No income shall be deemed to accrue or arise to a non-resident from a transfer outside India of shares or interest in a foreign company (falling under Explanation 5) if: