NRI Taxation in India: Residential Status, New LTCG Rules & Practical Compliance Overview

India’s connection with its overseas community is stronger than ever. Large numbers of Indian citizens and Persons of Indian Origin continue to hold investments, property, and bank accounts in India even while living abroad. For such individuals, understanding how Indian tax law applies is critical, especially after recent amendments like the new 12.5% LTCG regime effective from 23 July 2024.

A key point many NRIs miss: Indian income tax is not based on citizenship, passport, or OCI/PIO status. It is driven purely by residential status under the Income Tax Act 1961, determined separately for each financial year.

This article offers a structured and updated guide for NRIs and those who may become NRIs, covering:

  • How residential status is decided under Section 6
  • What income is taxable in India for NRIs, Residents, and RNORs
  • Treatment of salary, house property, capital gains, interest, and dividends
  • Impact of the new 12.5% LTCG regime from 23 July 2024
  • Use of DTAA relief
  • FEMA-linked banking aspects (NRE/NRO/FCNR)
  • TDS obligations and return filing requirements

Important: This write-up focuses on core legal and compliance principles. Exact tax planning should be tailored to each assessee’s facts and jurisdiction of residence.

1. Residential Status – Foundation of NRI Taxation (Section 6)

Indian tax liability hinges on where you are considered resident for that year, not on where you hold a passport or where your family is based.

1.1 Basic Tests for “Resident” Status

Under Section 6, an individual becomes a Resident in India in a financial year if any one of the following conditions is met:

  1. Physically present in India for 182 days or more in that financial year; or
  2. Physically present in India for:
    • 60 days or more in that financial year; and
    • 365 days or more in the immediately preceding four financial years.

If neither condition is satisfied, the person is treated as Non-Resident (NR) for that year.

1.2 Relaxed Rules for Certain Indian Citizens and PIOs

The law softens the 60-day requirement in some cases. For:

  • Indian citizens or Persons of Indian Origin (PIOs) who come to India on a visit, and
  • Indian citizens leaving India for employment abroad or as crew members of an Indian ship,

the standard “60 days” threshold is replaced with a longer period, such as 182 days (or 120 days in specified situations). This flexibility makes it easier for such individuals to maintain non-resident status even if they spend a sizable period in India.

1.3 Three Categories of Residential Status

For individuals, Indian tax law recognises three broad classes:

  1. Resident
  2. Resident but Not Ordinarily Resident (RNOR)
  3. Non-Resident (NR)

For tax planning and compliance, the term NRI is practically used to refer to an individual who falls in the Non-Resident category for that particular financial year.

Note: RNOR is a transitional status. While technically a Resident, an RNOR enjoys a restricted tax scope more favourable than a full Resident.

2. Scope of Taxable Income – Section 5

Once residential status is determined, Section 5 explains which income is taxable in India.

2.1 Tax Scope for Different Categories

  1. Resident

    • Taxable on global income, i.e., income earned or received anywhere in the world.

  2. Resident but Not Ordinarily Resident (RNOR)

    • Taxable on:
      • Income received or deemed to be received in India;
      • Income accruing or arising in India;
      • Income from a business controlled in or a profession set up in India, even if earned abroad.

  3. Non-Resident (NRI)

    • Taxable only on:
      • Income received or deemed to be received in India; and
      • Income accruing or arising or deemed to accrue/arise in India.

Any foreign salary, business profits, foreign property rent, interest on overseas deposits or securities, etc., which do not fall under “deemed accrual/arising in India” remain outside the Indian tax net for a Non-Resident.

3. Deemed Income in India – Section 9

Section 9 broadens the concept of “income accruing or arising in India” by treating certain categories of income as if they arise in India, even if payment is made abroad or contracts are executed outside India.

3.1 Business Connection in India

Income that is attributable to a business connection in India – such as:

  • A fixed place or business presence,
  • A dependent agent, or
  • A person habitually concluding contracts in India,

can be taxed in India to the extent linked to that Indian business connection.

3.2 Salary for Services in India

Salary is considered to accrue in India when services are rendered in India, regardless of:

  • Where the employer is situated,
  • Where the employment contract is signed, or
  • Where the salary is actually paid or credited.