For Indians living abroad, foreign nationals earning income from India, and businesses with cross-border operations, understanding India's tax and foreign exchange rules is essential. A person’s residential status can significantly influence which income becomes taxable in India.
The Income Tax Department has outlined key provisions of the Income-tax Act, 2025, as amended by the Finance Act, 2026, along with important provisions of the Foreign Exchange Management Act, 1999 (FEMA) that are relevant to non-residents.
The document explains residential status, taxation of Indian and foreign income, income deemed to accrue or arise in India, business connection, significant economic presence and major FEMA provisions.
Residential Status Under Income-tax Law
An individual can fall into one of three residential categories:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
Residential status is determined every year, meaning an individual’s status can change from one tax year to another depending on the applicable conditions.
How Is an Individual's Residential Status Determined?
The determination takes place in two stages.
Step 1: Resident or Non-Resident
An individual is generally treated as resident in India if he or she:
- Stays in India for 182 days or more during the relevant year; or
- Stays in India for 60 days or more during the year and for 365 days or more during the immediately preceding four years.
Special rules apply to Indian citizens and persons of Indian origin visiting India, as well as Indian citizens leaving India for employment abroad or as crew members of an Indian ship. For certain visiting citizens or PIOs whose Indian income exceeds ₹15 lakh, the 60-day threshold is substituted with 120 days.
There is also a deemed-resident provision for an Indian citizen whose income, other than income from foreign sources, exceeds ₹15 lakh and who is not liable to tax in any other country or jurisdiction due to domicile, residence or similar criteria.
If none of the applicable conditions are satisfied, the individual is treated as a non-resident.
When Does a Resident Become RNOR?
Once an individual qualifies as a resident, the next step is to determine whether the person is ROR or RNOR.
A resident individual is treated as RNOR if:
- The individual was a non-resident in 9 out of the 10 preceding years, or
- The individual was in India for 729 days or less during the preceding seven years.
Additional RNOR provisions apply to certain Indian citizens and persons of Indian origin visiting India whose Indian income exceeds ₹15 lakh and who stay in India for 120 days or more but less than 182 days. An Indian citizen deemed resident under the relevant provision is also treated as RNOR.
Taxability of Income for ROR, RNOR and NR
Residential status is important because it determines the scope of income taxable in India.
| Nature of Income | ROR | RNOR | NR |
|---|---|---|---|
| Income accruing or arising in India | Taxed | Taxed | Taxed |
| Income deemed to accrue or arise in India | Taxed | Taxed | Taxed |
| Income received in India | Taxed | Taxed | Taxed |
| Income deemed to be received in India | Taxed | Taxed | Taxed |
| Foreign income from business controlled from India/profession set up in India | Taxed | Taxed | Not taxed |
| Other foreign income with no India connection | Taxed | Not taxed | Not taxed |
The distinction between ROR, RNOR and NR can therefore have a major impact on the tax treatment of overseas income.
Which Income Is Deemed to Accrue or Arise in India?
Certain income may be taxable in India even when it is received by a non-resident outside India.
The document identifies several categories, including income arising from:
- Transfer of a capital asset situated in India
- A business connection in India
- Salary for services rendered in India
- Property, assets or other sources of income located in India
- Dividends paid by an Indian company
- Interest received from the Government of India
- Certain interest received from residents or non-residents
- Royalty and fees for technical services in specified circumstances.
This makes the source and nature of income particularly important for non-residents.
What Is a Business Connection in India?
A business connection may arise where a person acting on behalf of a non-resident habitually exercises authority to conclude contracts or habitually concludes contracts in India.
It may also arise where a person:
- Maintains stock of goods in India for regular delivery on behalf of a non-resident; or
- Habitually secures orders in India mainly or wholly for the non-resident.
However, an independent broker, general commission agent or other independent agent acting in the ordinary course of business does not, by itself, create such a business connection under the provision described in the document.
Importantly, only the income attributable to the business connection is treated as accruing or arising in India, rather than the entire income of the non-resident.
Significant Economic Presence and Non-Residents
The concept of Significant Economic Presence (SEP) is also relevant for determining a business connection in India.
SEP can arise through specified transactions involving goods, services or property, including downloads of data or software in India, when the prescribed payment threshold is exceeded.
It can also arise from systematic and continuous solicitation of business activities or interaction with the prescribed number of users in India. Only income attributable to the specified transactions or activities is treated as accruing or arising in India.
FEMA Provisions Relevant to Non-Residents
The second part of the document covers important provisions of the Foreign Exchange Management Act, 1999 (FEMA).
FEMA aims to facilitate external trade and payments while promoting the orderly development and maintenance of the foreign exchange market in India. Foreign exchange transactions under FEMA are broadly classified into:
- Capital Account Transactions
- Current Account Transactions
Capital Account Transaction
A capital account transaction is broadly a transaction that alters the assets or liabilities outside India of persons resident in India or the assets or liabilities in India of persons resident outside India.
Capital account transactions are governed by Section 6 of FEMA along with the relevant regulations.
Current Account Transaction
Current account transactions cover transactions other than capital account transactions and include payments connected with:
- Foreign trade and other current business
- Services
- Short-term banking and credit facilities
- Interest on loans
- Net income from investments
- Certain remittances for living expenses
- Foreign travel, education and medical expenses.
Other Major FEMA Areas
The document highlights several other areas covered by FEMA, including:
- Dealing in foreign exchange
- Holding foreign exchange
- Acquisition and transfer of immovable property in India and outside India
- Export of goods and services
- Realisation and repatriation of foreign exchange
- Authorised persons dealing in foreign exchange or foreign securities
- RBI inspection powers
- Contraventions and penalties
- Adjudication and appeals
- Directorate of Enforcement.
Why Non-Residents Should Pay Attention
For non-residents, tax compliance is not determined simply by where they currently live. Days of stay in India, the source of income, business connections, the nature of overseas income and the person's residential classification can all influence Indian tax liability.
Similarly, individuals and businesses dealing with cross-border payments, investments, property or foreign exchange need to consider FEMA requirements in addition to income-tax provisions.
The Income Tax Department's document provides a consolidated overview of these provisions, making it particularly relevant for NRIs, foreign nationals, overseas businesses, tax professionals, Chartered Accountants and other professionals handling cross-border transactions.
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