Non-Resident Indian (NRI)

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Introduction

“Non-Resident Indian” (NRI) is not a mere descriptive phrase — it is a legal status that triggers an array of distinct rules across taxation, foreign exchange, property law and procedural law in India. For a practitioner, correctly characterising a client as an NRI (or not) is often the first, decisive issue that determines tax liability, permissibility of transactions (especially immovable property and investments), withholding obligations on payers, repatriation rights and choice of remedies. This article synthesises the statutory tests, practical evidence, regulatory contours and litigation strategy that Indian lawyers must master when advising clients whose lives straddle India and abroad.

Core Legal Framework

  • Income-tax Act, 1961
  • Section 6 — Determination of residential status. Key tests:
    • An individual is a “resident in India” in a previous year if he/she is in India for 182 days or more in that year; or is in India for 60 days or more in that year and for at least 365 days in the four preceding years. (See s.6(1).)
    • The “60 days” threshold has limited exceptions in the statute (for example, Indian citizens leaving India for employment abroad or Indian citizens/PIOs visiting India — consult the statute for precise exceptions and provisos).
    • Section 6(6) — Test for “Ordinarily Resident” and thus the concept of Resident but Not Ordinarily Resident (RNOR): an individual who is resident in India is ordinarily resident if he has been resident for at least 2 out of 10 previous years preceding that year AND has been in India for at least 730 days during the seven preceding years. Failure to satisfy leads to RNOR status, which has narrower tax incidence.
  • Section 5 — Scope of total income (residents taxed on global income; non-residents on India-sourced / received income).
  • Section 9 — Income deemed to accrue or arise in India (critical to determine taxable Indian-sourced income of NRIs).
  • Section 195 — Obligations of persons making payments to non-residents to deduct tax at source.

  • Sections 90/90A — Indian power to enter Double Taxation Avoidance Agreements (DTAA) and the mechanism to claim treaty relief.

  • Foreign Exchange Management Act, 1999 (FEMA)

  • FEMA (and the regulations and RBI directions thereunder) governs what NRIs may acquire, hold and repatriate: investments in India, purchase or transfer of immovable property, and the operation of NRE/NRO/FCNR accounts.

  • FEMA defines “person resident in India” and “person resident outside India” (statutory definitions form the base for who is an NRI for FEMA purposes). RBI master directions and the Foreign Exchange Management (Non-debt Instruments) Rules/Regulations provide specifics.

  • Reserve Bank of India (RBI) / Ministry of Finance rules

  • RBI Master Directions and A.P. (DIR) circulars prescribe types of accounts (NRE, NRO, FCNR), repatriation limits, and documentation (e.g., conversion from NRO to NRE, permitted capital account transactions).

  • FEMA Regulations / RBI circulars govern acquisition of immovable property by NRIs (generally prohibited for agricultural land/farmhouses but permitted for residential/commercial immovable property subject to conditions).

  • Procedural and documentary scaffolding

  • Tax Residency Certificate (TRC) and Form 10F (for DTAA claims) — documentation required by authorities to substantiate treaty relief.
  • Passport and immigration records — primary evidence of physical presence.

Practical Application and Nuances

The practitioner’s task is to translate statutory tests into proof on the ground and to anticipate how tax authorities, RBI or courts will scrutinise the claim.

  1. Determining residential status — the arithmetic and the documentary proof
  2. Compute days of physical presence strictly on calendar days. Include day of arrival and day of departure as per administrative guidance and judicial interpretation — check the relevant year’s practice.
  3. Example: Client left India on 10 July 2023 and returned on 20 December 2023. Count days in India during the previous year (1 April 2023–31 March 2024). Maintain a trip ledger with passport entry/exit stamps, boarding passes, employer letters and leave records.
  4. Practical evidence to collate: passport pages with stamps, boarding passes/itineraries, immigration exit/entry records (available under e-immigration), employer contract and assignment letters, salary slips (abroad and India), overseas tax returns and TRC, rental/utility bills in foreign jurisdiction, bank statements showing salary remittances.

  5. Trap: Relying solely on visa validity or an OCI/PIO card is inadequate — the statutory test is days of physical presence.

  6. Tax treatment once NRI status is established

  7. Broad principle: NRI taxed in India only on income that accrues/arises in India or is received in India (see s.5 and s.9). Income earned and received abroad (remitted to India) is generally not taxable in India if the person is a non-resident.
  8. Examples:
    • Salary earned for services rendered outside India while physically present outside: Generally not taxable in India for an NRI.
    • Rental income from Indian immovable property: Taxable in India irrespective of residential status.
    • Capital gains on transfer of Indian assets (shares/property): Taxable in India and subject to specific withholding rules. For NRIs, buyer/ transferee may have enhanced withholding obligations — counsel to advise on obtaining lower/nil withholding certificates under s.195/197.

  9. Double Taxation: Use DTAA (s.90) and TRC to claim relief; plan filings to secure foreign tax credit where applicable.

  10. Withholding and procedural obligations

  11. Any person (resident or Indian payer) making payments to a non-resident must consider s.195 deductions; failure to deduct attracts liability on payor.

  12. Practical step: For large payments to NRIs (professional fees, sale consideration to NRI vendor), advise the payor to ask for TRC and certificate under s.195/197 and, if necessary, apply to tax authorities for a withholding order to reduce TDS.

  13. FEMA and property / investment transactions for NRIs

  14. NRIs may invest in India subject to FEMA limits and sectoral caps. Purchase of immovable property: NRIs are permitted to acquire residential/ commercial property but acquisition of agricultural land/farmhouse/plantation is generally prohibited; inheritance is permitted.
  15. Repatriation of sale proceeds: Subject to RBI limits and conditions — e.g., repatriation of proceeds of sale of immovable property (subject to tax compliance and CA certificate) up to specified USD limits per financial year; there are cooling-off / documentation conditions. Practitioners must follow the specific RBI circulars and file prescribed forms.

  16. Accounts: Distinguish NRE (repatriable principal & interest), NRO (non-resident ordinary; restricted repatriability), FCNR(B) (foreign currency deposits). Tax consequences on interest depend on the instrument and year—check current tax notifications.

  17. Civil and procedural implications

  18. Service on NRIs: Service out of jurisdiction requires compliance with Section 27 of CPC (service within India) and Order V rules; where defendant is abroad, consider bilateral treaties, diplomatic channels, substituted service, or serving through the Central Authority under the Hague Service Convention if applicable.

  19. Evidence: Obtaining evidence abroad (witnesses, documents) can require Letters Rogatory or reliance on affidavits with apostille/consular legalization.

  20. Matrimonial, probate and succession issues

  21. NRIs owning Indian assets remain subject to Indian succession and family laws (e.g., Hindu Succession Act, Indian Succession Act). For estate planning, advise on the interaction between domicile, nationality and succession laws in foreign jurisdictions.
  22. Practical tip: Wills by NRIs disposing of Indian immovable property ideally executed in India and compliant with Indian formalities to avoid probate complications.

Landmark Judgments

  • Azadi Bachao Andolan v. Union of India, (2003) 263 ITR 706 (SC)
  • Principle of relevance: The Supreme Court examined treaty interpretation, residency and substance over form in the context of treaty benefits and tax avoidance. Its ratio is useful when taxpayers claim treaty benefits (DTAA) on the basis of foreign residency: tax authorities will seek to test the genuineness of arrangements and the real place of effective management/residence.

  • Practical lesson: Courts will look beyond labels to substance (place of effective management, control, and conduct of business) when treaty benefits or residency-based relief are claimed.

  • Commissioner of Income-tax v. McDowell & Co. Ltd., (1991) (landmark on tax avoidance principles — Supreme Court)

  • While not an NRI case per se, McDowell established the boundaries of permissible tax planning and the scope of anti-avoidance scrutiny. For NRIs and cross-border arrangements, this case reminds practitioners that aggressive structuring to obtain tax benefits may attract scrutiny/denial where substance is missing.

(Use these decisions as doctrinal anchors: treaty claims and anti-avoidance principles are recurrent in disputes involving NRIs.)

Strategic Considerations for Practitioners

  1. First-mover checklist — facts you must secure at intake
  2. Detailed travel ledger (all entries/exits of India for the last 10 years).
  3. Passport copies (all pages), boarding passes, immigration records (obtainable via e-immigration).
  4. Employment contracts and letters evidencing foreign assignment/secondment; salary remittances to India.
  5. Foreign tax returns and Tax Residency Certificate (TRC) issued by foreign tax authority.
  6. Indian bank account statements (NRE/NRO), property documents, sale/purchase deeds.

  7. PAN and previous Indian tax returns, notices, assessment orders, TDS certificates.

  8. Tactical uses of residency status

  9. Pre-empt assessment exposures: If client is likely to be taxed as resident, restructure timing of returns/trips to meet NRI days-test if commercially feasible.
  10. Withholdings: Before major payments (property sale, consultancy fees), obtain a practice opinion, seek advance withholding certificate under s.195/197 to minimise withholding.
  11. DTAA planning: Secure TRC and file Form 10F contemporaneously; maintain documentary trail to meet the “place of effective management” or “tie-breaker” tests in DTAAs.

  12. For property transactions: advise on FEMA compliance early (to ensure repatriation eligibility and to avoid RBI queries).

  13. Litigation strategy tips

  14. If tax demand is served on an alleged resident: immediately produce contemporaneous travel evidence, employment documents, TRC. Seek interim relief from withholding where appeal/rectification is pending.
  15. Anticipate factual disputes about day-counts: prepare a day-by-day Excel ledger, corroborated by independent evidence (immigration, flight manifests).
  16. Challenge jurisdictional defects where service was incompetent (improper personal service, non-compliance with service rules for persons abroad).

  17. When facing an income characterization dispute (e.g., whether income is India-sourced), seek stay of demand conditioned on furnishing security or deposit limited to a percentage of assessed tax pending appeal.

  18. Common pitfalls to avoid

  19. Relying only on statements of intent (e.g., “I intended to live abroad”) without documentary proof.
  20. Failing to obtain TRC before claiming DTAA benefits — TRCs are frequently demanded as a precondition.
  21. Overlooking RNOR status: an RNOR is taxed differently from a resident; misclassification causes wrong tax computations.
  22. Ignoring FEMA compliance when advising NRI clients on property acquisition or repatriation — tax advice without FEMA compliance creates enforcement risk.
  23. Neglecting TDS implications on payments to NRIs — the payer becomes the first line of enforcement.

Conclusion

“NRI” is a legal status with discrete legal consequences under the Income-tax Act, FEMA and RBI regulations. The decisive questions are (i) where the individual was physically present during the relevant previous year(s) (s.6 Income-tax Act), (ii) where the income arises/ is received (s.5 & s.9), (iii) what treaty relief (if any) applies (s.90), and (iv) whether FEMA/RBI permissions or documentation are needed for investments and repatriation. For practitioners: build a meticulous documentary record at the outset, use TRCs and Form 10F when claiming treaty relief, anticipate withholding obligations, and coordinate tax advice with FEMA compliance. The most successful strategies are fact-driven: calculate days precisely, obtain independent corroborative evidence, and pre-empt enforcement by engaging with tax authorities and the RBI where necessary.