Under the Income Tax Act, 1961, NRIs are classified into three categories—non-resident (NR), resident but not ordinarily resident (RNOR), and resident and ordinarily resident (ROR). This classification determines how much of their income is subject to tax in India. If an individual stays in India for 182 days or more in a financial year, they are considered a resident. Additionally, staying for 60 days or more in the current year along with 365 days in the preceding four years can also trigger resident status.
The classification goes a step further. If a person has been a tax resident in India for at least two out of the last ten years and has spent 729 days or more in the country over the past seven years, they qualify as ROR. In this case, their global income becomes fully taxable in India. However, if either of these conditions is not met, the individual falls under RNOR status, where only income earned or sourced in India is taxed, providing relief on foreign earnings.
This distinction is particularly important for NRIs who continue working for foreign employers while staying in India, as income earned for work performed from India may be treated as Indian-sourced income.
Once an individual qualifies as ROR, they are required to declare their worldwide income in India. Filing an income tax return (ITR) becomes mandatory if their income exceeds the basic exemption limit. Even for those with RNOR status, income linked to work performed in India may be taxable, making ITR filing necessary in certain cases.
To avoid double taxation, NRIs can rely on the provisions of the Double Tax Avoidance Agreement (DTAA). If specific conditions related to duration of stay, employer residency, and nature of income are met, foreign income may not be taxed in India. In cases where income is taxed in both countries, individuals can claim foreign tax credit (FTC) in their country of residence to reduce the overall tax burden.
