Residential Status for NRIs: The Complete Guide to Tax & FEMA Rules Under India's New Income-tax Act
Based on the ICAI Handbook on Residential Status for NRIs, Tax and FEMA Aspects (International Taxation Committee, July 2026)
If you're an NRI, a returning Indian, an expatriate working in India, or an advisor to any of them, one question sits underneath almost every other tax and compliance decision you'll ever make: what is your residential status in India this year?
It sounds like a formality. It isn't. Your residential status decides whether India taxes your worldwide income or only what you earn here, whether you get treaty relief, whether you can claim foreign tax credit, and what you owe under India's foreign exchange law. Get it wrong, and the consequences show up later as reassessment notices, interest, and penalties.
With the Income-tax Act, 2025 ("ITA 2025") taking over from the 60-year-old Income-tax Act, 1961 ("ITA 1961"), the rules haven't changed as much as the numbering and language have. That itself creates a compliance trap: professionals now need to work fluently across two statutes at once. This guide walks through the framework end to end, chapter by chapter, exactly as ICAI's International Taxation Committee has laid it out.
Why This Matters More Than Ever
In the words of the Handbook's Foreword:
"The traditional assumption that a person belongs to one country throughout a financial year no longer adequately reflects the realities of an increasingly interconnected world."
Indian professionals now take up overseas jobs and return within short spans. Families split time between countries. Investments, property, and businesses span jurisdictions. Meanwhile:
Tax residence under Indian income tax law is decided mainly by physical presence (day counts).
Residence under FEMA (India's exchange control law) is decided by intention and purpose of stay.
These two tests can, and often do, produce different answers for the same person in the same year. That divergence is a running theme throughout this guide.
Part 1: The Framework, Overview of the ITA, 2025
From ITA 1961 to ITA 2025: What Actually Changed
Effective 1 April 2026 (Tax Year 2026-27), the ITA 2025 has replaced the ITA 1961, subject to savings under Section 536. The intent, per the Handbook, was to:
Simplify statutory language
Improve structural clarity
Reduce interpretational disputes
Align drafting style with modern legislative standards
Enhance voluntary compliance
The numbers tell the story of simplification:
Parameter | ITA, 1961 | ITA, 2025 | Change |
Sections | 819 | 536 | 35% reduction |
Schedules | 14 | 16 | 2 added |
Rules | 511 | 333 | 35% reduction |
Forms | 399 | 190 | 52% reduction |
Important transitional point: Section 536 of the ITA 2025 (with 22 sub-clauses) ensures pending proceedings continue without disruption and aligns terminology between the two Acts. Critically, Section 536(2)(c) provides that any assessment, scrutiny, or related tax consequence pertaining to income before Tax Year 2026-27 is still governed by the old ITA, 1961. So for several years to come, practitioners will need both statutes on their desk simultaneously.
The Tax Year Has a New Name
The ITA 2025 drops the old "Previous Year" / "Assessment Year" duo in favour of a single unified concept: the Tax Year.
Section 3(1): The Tax Year is the 12-month period of the financial year beginning 1 April. The underlying period is unchanged; only the terminology has shifted.
Section 3(2): Where a business, profession, or income source is newly set up mid-year, the tax year for that source runs from the date it is set up to the end of that financial year (a "truncated" tax year).
This matters directly for residency because residential status is always determined year by year, by reference to this Tax Year. A person can be resident in one year and non-resident the next, and their tax liability shifts accordingly.
The Charging Provision: Section 4
Section 4 is the operative charge:
4(1): Income tax is charged for a tax year at the rate specified by the Finance Act.
4(2): The charge falls on the total income of every person, computed as per the Act.
4(3): "Income tax" includes any additional income tax by whatever name called.
4(4): Covers charge where income of a period other than the tax year is assessed.
4(5): Deduction/collection at source and advance tax provisions apply.
The key insight: Section 4 charges total income, not gross receipts or turnover. And what counts as "total income" depends entirely on residential status, which is exactly what Section 5 defines.
Section 5: Scope of Total Income
This is where residential status starts to bite financially.
For a resident, Section 5(1): Total income includes all income from whatever source derived that is:
received or deemed received in India,
accrues/arises or is deemed to accrue/arise in India, or
accrues or arises outside India.
That last limb is the big one: a full resident is taxed on worldwide income.
Exception carved out for the "Not Ordinarily Resident" (NOR) sub-category (defined under Section 6(13)): foreign income is taxable only if it comes from a business controlled from India or a profession set up in India. All other foreign income for a NOR individual sits outside India's tax net.
For a non-resident, Section 5(2): Total income is limited to income received/deemed received in India, or accruing/arising/deemed to accrue or arise in India. Foreign income has no place in a non-resident's total income at all.
Anti-abuse and anti-duplication safeguards:
Section 5(3): Foreign-sourced income isn't treated as "received in India" just because it shows up in Indian books of account.
Section 5(4): The same income cannot be taxed twice, once on accrual and again on receipt.
The Three Residential Categories, At a Glance
The ITA 2025 preserves the same three-tier structure of ITA 1961:
Category | Defined by | Tax Treatment |
Resident and Ordinarily Resident (ROR) | Satisfies Sec 6(2)(a) or 6(2)(b); doesn't meet any NOR condition under 6(13) | Taxed on worldwide income, the broadest tax net |
Resident but Not Ordinarily Resident (NOR) | Resident under Sec 6(2), but satisfies one of the two NOR conditions in Sec 6(13)(a) | Taxed on India-sourced income plus foreign income from an India-controlled business/profession. Common for returning NRIs in their transitional years |
Non-Resident (NR) | Fails both tests under Sec 6(2) | Taxed only on income received/accruing/arising (or deemed to) in India. Normally zero Indian tax on foreign income |
The Taxability Matrix
Here's the master reference: what's actually taxable for each category, and under which sub-section of Section 5.
Source of Income | ROR (Sec 5(1)) | NOR (Sec 5(1) + 6(13)) | NR (Sec 5(2)) |
Income received or deemed received in India | ✔ Taxable | ✔ Taxable | ✔ Taxable |
Income accruing, arising, or deemed to accrue/arise in India | ✔ Taxable | ✔ Taxable | ✔ Taxable |
Foreign income from a business controlled in India | ✔ Taxable | ✔ Taxable | ✘ Not taxable |
Foreign income from a profession set up in India | ✔ Taxable | ✔ Taxable | ✘ Not taxable |
Other foreign income (salary, rent, investments, capital gains) | ✔ Taxable | ✘ Not taxable | ✘ Not taxable |
Advisory from the Handbook: The scope of total income is determined at the level of the tax year. Someone who changes residential status mid-engagement (returning to India permanently, or leaving for long-term employment) can face a different scope of income in different years, even where the underlying income source hasn't changed. The NOR category can provide a materially lower tax liability during transition years, but whether it's available, and for how long, depends entirely on the Section 6(13) conditions covered next. And where a person is also tax-resident elsewhere under that country's own law, the applicable Double Taxation Avoidance Agreement (DTAA) may further modify what India can tax.
Part 2: Individual Residency, The Section 6 Deep Dive
This is the technical heart of the Handbook: Section 6 of the ITA 2025 (formerly scattered across Section 6 and its Explanations in ITA 1961).
New Section | What it Covers | Old ITA 1961 Reference |
6(1) | The governing clause | (none) |
6(2)(a) & (b) | The 182-day and 60/365-day tests | Sec 6(1)(a) and 6(1)(c) |
6(3) | Crew of Indian ship / employment-departure carve-outs | Explanation 1(a) to Sec 6(1) |
6(4) & 6(5) | Visiting Indian citizen/PIO carve-out; the ₹15 lakh threshold | Explanation 1(b) to Sec 6(1) |
6(6) | Day-computation for crew of foreign-bound ships | Explanation 2 to Sec 6(1) |
6(7) & 6(8) | Deemed residency | Sec 6(1A) |
6(13) | NOR conditions | Sec 6(6) |
Here's the full decision map, translated visually:
Section 6(1): The Governing Clause
A short but important clause: it simply states that residential status of an individual for a tax year is to be determined entirely as per this section. It's a signpost, not a test.
Section 6(2)(a): The 182-Day Test
An individual is resident if present in India for a total period of 182 days or more in the tax year.
Key practical points from the Handbook:
The ITA 1961 used the phrase "period or periods amounting in all," while ITA 2025 uses "total period." This is likely just a drafting simplification, unlikely to change the legal position.
The Bureau of Immigration's entry/exit records are the primary official evidence. Any deviation from immigration records, even by a day or two, needs documentary explanation (passport stamps, boarding passes, itineraries).
A "day" = any part of a calendar day spent in India. Landing at 11:55 PM counts as a day in India; departing at 12:05 AM counts too.
Inclusive vs exclusive counting is a genuine landmine near the 182-day line. Someone arriving 1 April and departing 30 September has been in India for 183 days on an inclusive count, but only 181 days on an exclusive count of intermediate days: a 2-day swing that alone flips residency status.
Judicial precedent is mixed on how to treat arrival/departure days, but two recent rulings, Manoj Kumar Reddy v. ITO [2009] 34 SOT 180 (affirmed by the Karnataka High Court, [2011] 12 taxmann.com 326) and Pradeep Kumar Joshi v. ITO [2022] 192 ITD 577, suggest that on their facts, a fractional arrival day could be excluded from the count.
Multi-leg journeys and time zones add complexity. A layover with no Indian immigration stamp doesn't count; a missed connection resulting in an overnight Indian immigration clearance might add a day. And the count runs on Indian calendar dates as per Indian immigration records, not the destination country's local date.
The count is of physical presence, full stop. Business days, weekends, and vacation days all count identically.
Section 6(2)(b): The 60/365-Day Test
Even if someone fails the 182-day test, they may still be resident under this independent second test: present in India for 60 days or more in the current tax year, and present for 365 days or more cumulatively across the preceding four tax years.
Practical trap flagged by the Handbook: taxpayers routinely track only the current year's day count and overlook the rolling four-year lookback. For someone based abroad who visits India two or three times a year, that four-year total quietly accumulates, and "residency surprises happen precisely because no one was watching."
Both tests are independent: satisfying either one is sufficient to make someone resident. The analysis must be run against every year under review, not just the current year.
Section 6(3): Crew of Indian Ship & Employment-Departure Carve-Outs
The 60/365-day test (Sec 6(2)(b)) does not apply to an Indian citizen who, in the relevant tax year, leaves India:
(a) as a member of the crew of an Indian ship (as defined under Section 3(18), Merchant Shipping Act, 1958), or (b) for the purposes of employment outside India.
For these individuals, only the 182-day test applies in the year of departure.
Some sharp nuances here:
"Employment" is interpreted broadly, not limited to a master-servant relationship. Following the Kerala High Court's reasoning in CIT vs. O. Abdul Razak (2011), "employment" includes self-employment, setting up a business, or establishing a professional practice abroad. So entrepreneurs and freelancers leaving India to build a venture overseas get the same benefit.
The carve-out applies only in the specific year of departure. Someone who left India for employment in an earlier year, then returns to their country of employment after a visit to India in the current year, is not "leaving India for employment" in the current year, so the benefit doesn't automatically repeat.
This is confirmed in Binny Bansal v. DCIT, IT(IT)A No. 571/Bang/2023: the benefit under Section 6(3) applies only in the first year an individual leaves India for employment.
Section 6(4) & 6(5): Visiting Citizens and Persons of Indian Origin (PIOs)
Section 6(4) excludes visiting Indian citizens and PIOs from the 60/365-day test; the applicable test is, at first pass, 182 days alone.
But Section 6(5) claws this back where the visiting person's total income (excluding foreign-source income) exceeds ₹15 lakh during the tax year: in that case, the 60-day threshold in Section 6(2)(b) is replaced with 120 days.
So the practical rule for high-income visiting NRIs/PIOs is:
Indian-source income > ₹15 lakh, and
Present in India ≥ 120 days in the tax year, and
Present in India ≥ 365 days cumulatively over the preceding four years
→ Resident, even though they didn't cross the 182-day mark.
Worked example from the Handbook: A PIO ordinarily resident outside India visits India for 140 days and earns Indian investment income. Below 182 days, they'd normally be non-resident. But if their qualifying Indian income exceeds ₹15 lakh, the 120-day substituted threshold applies. 140 days clears it, and if they've also spent 365+ days in India across the preceding four years, they become resident for that year.
Note: Section 6(5) only changes the day threshold (60 to 120); the requirement of 365 days cumulative presence over the preceding four years under Section 6(2)(b) must still be independently satisfied.
The Bangalore Tribunal's ruling in Binny Bansal v. DCIT clarified that this relaxed day-count benefit is meant for Indian citizens already settled abroad, not someone who has only recently relocated overseas.
What Counts as "Income From Foreign Sources"?
Defined under Section 6(14): income accruing/arising outside India, except income from a business controlled in India or a profession set up in India, and except income deemed to accrue/arise in India.
Included in the ₹15 lakh Indian-income computation (i.e., NOT "foreign source" income):
Salary received in India
Rental income from Indian immovable property
Interest on deposits with Indian banks (except NRE deposit interest)
Dividends from Indian companies
Capital gains on Indian assets
Income deemed to arise in India under Section 9 (royalties, fees for technical services, interest paid by Indian residents/Government, regardless of contractual structure)
Excluded (i.e., genuinely "foreign source"):
Foreign salary
Rental income from property situated outside India
Interest on foreign bank deposits
Capital gains on assets situated outside India
Worked examples:
₹18 lakh Indian rental income plus ₹2 crore UAE salary: this exceeds the ₹15 lakh threshold (the foreign salary doesn't dilute the Indian-source figure).
₹12 lakh Indian dividend income plus ₹50 lakh Singapore employment income: this stays below the threshold (the Singapore income is excluded from the computation).
Open interpretational issue flagged in the Handbook: Does "total income, other than income from foreign sources" mean taxable total income after exemptions (Section 11) and reliefs (Section 159), or all Indian-source income regardless of taxability? Sections 2(108), 5, 11 and 159 arguably support the former reading; the Section 6 definition of "foreign source income" could support the latter. As of the Handbook's publication, there's no CBDT clarification or judicial precedent settling this directly.
Section 6(6): Crew of Foreign-Bound Ships
For an Indian citizen who is a crew member of a foreign-bound ship, the days of joining and leaving the ship are computed as prescribed by rules, not by the ordinary day-count logic.
Why this exists: Merchant navy crew depart India on every sailing and return on every voyage-end, generating a rapid sequence of short India-presence periods. Applied mechanically, ordinary day-count rules could produce results disconnected from the seafarer's real ties to India.
The mechanism, Rule 8 of the Income-tax Rules, 2026:
For an "eligible voyage," the period of stay in India is computed by excluding entirely the period:
Starting on the date entered in the Continuous Discharge Certificate (CDC) for joining the ship for that voyage, and
Ending on the date entered in the CDC for signing off from the ship for that same voyage.
This is a precise, document-based formula designed so seafarers aren't penalised tax-wise for time genuinely spent on international voyages.
Section 6(7) & 6(8): Deemed Residency
This is an entirely separate, residual deeming rule, independent of the physical-presence tests in Sections 6(2) through 6(6).
An individual is deemed resident in India if all of these conditions are met:
(a) They are a citizen of India; (b) They are not liable to tax in any other country or territory by reason of domicile, residence, or similar criteria; and (c) Their total income (excluding foreign-source income) exceeds ₹15 lakh in the tax year.
Section 6(8) clarifies this deeming rule doesn't apply to anyone already resident under the ordinary tests (Sections 6(2) through 6(6)); it's a backstop, not an overlap.
Worked example from the Handbook: An Indian citizen resident in the UAE earns ₹22 lakh of Indian rental and dividend income, spends only 40 days in India during the year, and pays no income tax in the UAE (which doesn't tax individuals on income or residence at all). She fails both the 182-day and 60/365-day tests. But because she's an Indian citizen, not taxed anywhere else by domicile/residence, and her qualifying Indian income exceeds ₹15 lakh, she is deemed resident in India under Section 6(7).
This provision exists specifically to prevent "stateless" high-net-worth individuals, that is, Indian citizens who structure their affairs to avoid tax residency anywhere in the world, from escaping the Indian tax net entirely.
Section 6(9)-6(12): Residency of Non-Individual Persons (Brief Context)
While the Handbook's detailed focus is individuals, Section 6 also sets out residency for other persons, for context:
HUF, firm, or association of persons (6(9)): Resident in India in any tax year unless control and management of its affairs is situated wholly outside India.
Company (6(10)): Resident if it is an Indian company, or its Place of Effective Management (POEM) is in India that year. POEM is defined as the place where key management and commercial decisions necessary for the conduct of the business as a whole are, in substance, made.
Every other person (6(11)): Resident unless control and management is situated wholly outside India during the tax year.
Section 6(12): If a person is resident in India for any source of income in a tax year, they are deemed resident for all their other sources of income too. Residency doesn't split by income stream.
Section 6(13): The NOR (Not Ordinarily Resident) Conditions
A person who is otherwise "resident" under Section 6(2) can still qualify for the more favourable Not Ordinarily Resident status if any one of these applies:
6(13)(a): An individual (or HUF manager) who has been: (i) non-resident in India in 9 out of the preceding 10 tax years, or (ii) present in India cumulatively for 729 days or less across the preceding 7 tax years.
6(13)(b): A citizen of India or PIO: (i) whose Indian-source total income exceeds ₹15 lakh during the tax year, and (ii) who has been present in India for 120 days or more but less than 182 days during the tax year.
6(13)(c): A citizen of India who is deemed resident under Section 6(7) (the "stateless person" provision above). This falls automatically into NOR status, not full ROR status.
This is the provision that gives returning NRIs a valuable transitional window: for the first few years back in India (until the "9 of 10 years" or "729 days in 7 years" thresholds are breached), their foreign income outside an India-controlled business/profession stays untaxed in India.
Putting It Together: A Practical Checklist
Count your days precisely. Get certified immigration records; don't rely on memory. Check both the current year's count and the rolling 4-year (Sec 6(2)(b)) and 7/10-year (Sec 6(13)) lookbacks.
Check for carve-outs before assuming residency. Are you an Indian citizen leaving for employment (including self-employment) or ship's crew? Are you a visiting citizen/PIO? These change which test applies.
Watch the ₹15 lakh threshold. It appears in three different places (Sec 6(5), 6(7), and 6(13)(b)) with three different consequences. Know exactly what counts as "income from foreign sources" under Section 6(14) before computing it.
Don't assume NOR status is permanent. It's re-tested afresh every year against the 9-of-10-years or 729-days-in-7-years conditions.
Remember: FEMA residency is a different question entirely, governed by intention and purpose of stay rather than day-counts. The Handbook devotes a full chapter (Chapter 10) to this divergence.
Re-run the whole analysis under both statutes if your facts straddle 1 April 2026. Pre-Tax-Year-2026-27 issues are still governed by the old ITA, 1961 per Section 536(2)(c).
What the Rest of the Handbook Covers
The uploaded material covers Chapter 1 (Overview) and Chapter 2 (Individual Residency) in full detail, reproduced above. Per the Handbook's own Preface, the remaining chapters, outlined here for completeness, build on this foundation:
Chapter | Subject |
3 | ITA 1961 vs ITA 2025: clause-by-clause comparison, transitional position, and changes to prescribed forms |
4 | Treaty & Foreign Tax Credit: how domestic residence interacts with DTAA residence, tie-breaker rules for dual residents, evidentiary value of a Tax Residency Certificate (TRC), and the foreign tax credit mechanism |
5 | Global Mobility: residence and tax consequences of secondment, deployment, and expatriate engagements |
6 | Transfer Pricing: regime overview, arm's-length principle, documentation, safe harbour rules, and Mutual Agreement Procedure (MAP) |
7 | Taxability: scope of total income for each residency class and how Indian/foreign income is brought to tax |
8 | Judicial Precedents: case law on residence determination (decided mainly under ITA 1961, but relevant to ITA 2025's corresponding provisions) |
9 | Global Residency Laws: comparative residency rules in the UK, US, UAE, Singapore, Canada, Australia, and the Netherlands, read alongside the relevant DTAAs |
10 | FEMA, 1999: the intention-based residence test under Section 2(v), repatriation rules, disclosure/reporting requirements, and how FEMA residence diverges from income-tax residence |
11 | Case Studies: worked examples combining tax and FEMA analysis, including scenarios where the two regimes reach different conclusions for the same person in the same year |
The Bottom Line
Every question of individual taxation for an NRI, expatriate, or returning Indian starts in the same place: which of the three residential categories applies, and why. As the Handbook puts it:
"For a ROR individual, total income includes world income. For a NOR individual, it covers Indian-source income and income from a business or profession with an Indian connection, but not other foreign income. For a NR, normally, it is limited to income sourced in India."
Get that classification right, with the day counts, carve-outs, thresholds, and deeming provisions all correctly applied, and everything downstream (tax liability, treaty relief, FEMA compliance) follows logically. Get it wrong, and it doesn't matter how carefully the rest of the return was prepared.
