Indian Tax Status for Returning NRIs: Understanding the Risks and Relief

As the conflict in Iran unfolds, many Indian nationals in the Middle East are grappling with whether to return home or continue staying abroad. For those who do return even temporarily, the concern is not just about safety or job continuity, but also about their tax status in India.

Residency Status and Tax Liability

Under Indian tax laws, residency status determines whether an individual is taxed only on Indian income or on global income as well. For NRIs, a change in status can significantly increase tax liability. Residency is primarily linked to the number of days spent in India during a financial year, with an individual becoming a resident if they stay in India for 182 days or more.

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Tracking Travel Days and Residency Status

Tax residency in India is determined largely by days of stay. Even a part of a day counts as a full day. For NRIs with India-based income, tracking travel days becomes critical as a change in status can expand the scope of taxable income, including global income.

Relief for NRIs

There is some relief built into the law. For Indian citizens and Persons of Indian Origin (PIOs) visiting India, the 60-day threshold is relaxed to 182 days. However, this flexibility narrows for those with higher India-linked income. If an NRI earns more than Rs 15 lakh in India (excluding foreign income), the threshold drops to 120 days instead of 182 days.

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Consequences of Extended Stay

If an NRI stays beyond 120 days, they may lose their non-resident status and be classified as Resident but Not Ordinarily Resident (RNOR). RNOR status offers partial relief, but it is not a blanket exemption. Individuals under this category are generally not taxed on foreign income unless it is linked to a business or profession controlled from India. However, income earned in India remains fully taxable.

Experts' Caution

Experts caution that while RNOR provides a cushion, it is not fully evaluated. Maintaining accurate travel records and periodically reviewing residency status can help avoid unintended tax implications. Careful tracking of stay duration and a clear understanding of applicable thresholds can help avoid unpleasant surprises when filing tax returns.