Understanding the New Tax Residency Rules for NRIs

Posted by Written by Lalitha Rao Reading Time: 5 minutes

On February 13, 2025, India’s central government introduced the Income Tax Bill 2025 in parliament, proposing a major overhaul of the tax filing system to simplify compliance. A key aspect of the bill includes significant amendments to tax residency rules, set to take effect from April 1, 2026. These changes will impact Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and frequent visitors to India. Understanding these new rules is essential for effective tax planning and compliance.

New definition of tax residency in India

Under the revised income tax bill, an individual is classified as a resident in India if they meet either of the following conditions:

  1. The 182-day rule (unchanged from the Income-tax Act, 1961)

An individual is considered a tax resident in India if they stay for 182 days or more in a tax year. This remains the primary criterion for determining residency. If an individual stays for fewer than 182 days in India, they will continue to be classified as an NRI.

The 182-day rule remains straightforward with no additional conditions in the new income tax bill.

  1. The 60-day + 365-day rule (modified)

Previously, an individual was classified as a tax resident if they stayed in India for at least 60 days in a tax year and had spent 365 days in India over the past four years. While this rule remains, exemptions have been introduced:

  • Indian citizens working abroad or crew members of Indian ships are no longer subject to the 60-day rule.
  • NRIs and PIOs visiting India are exempt from this rule if their Indian income is below INR 1.5 million.

For example, Rahul, an Indian citizen working in the US, visits India for 100 days in a tax year. Under the old rule, he might have been classified as a resident. However, since he moved abroad for employment, he is now exempt and remains an NRI.

Readers should note that in India, an individual’s tax liability is determined by their residential status for a given financial year, not their citizenship. A person may be an Indian citizen yet be classified as a non-resident for tax purposes in a particular year. Conversely, a foreign national could be considered a resident under Indian tax laws.

Categories of taxable individuals in India

For income tax purposes, individuals are categorized into three groups:

  1. Resident and Ordinarily Resident (ROR)
  2. Resident but Not Ordinarily Resident (RNOR)
  3. Non-Resident (NR)

The key change: 120-day rule for high-income NRIs & PIOs

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An important modification brought in under the new income tax bill targets high-income NRIs and PIOs earning INR 1.5 million (US$17,213.6) or more in India. The 60-day rule is now replaced with a 120-day threshold.

Under the new rule, an NRI or PIO earning over INR 1.5 million (US$17,213.6) in India will be classified as RNOR if they:

  • Stay in India for 120 days or more in a tax year.
  • Have stayed in India for 365+ days in the past four years.

For example, Raj, an NRI businessman earning INR 2 million (US$22,951.5) from India, visits for 130 days. Under the previous rule, he would have remained an NRI. However, the new rule classifies him as RNOR.

Why is this important?

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  • As an RNOR, only an individual’s Indian income is taxable, while global income remains exempt.
  • If an individual stays for 182 days, they become a full resident, and their global income is taxable in India.

Understanding the Not Ordinarily Resident status

An individual qualifies for NOR status if they meet any of the following conditions:

  • They were an NRI for 9 out of the last 10 years.
  • They spent 729 days or less in India over the last 7 years.
  • They are an Indian citizen or PIO with Indian income exceeding INR 1.5 million (US$17,213.6) and have stayed in India for 120 to 182 days in a financial year.

For example, Nikhil, an NRI moving back to India, has stayed only 500 days in the country over the last 7 years. He qualifies as NOR, meaning only his Indian income is taxable, while his global income remains exempt.

Deemed residency rule for ‘Stateless Indians’

A debatable provision in the new bill is the deemed residency rule, which applies to Indian citizens earning INR 1.5 million (US$17,213.6) or more in India but not paying tax in any other country.

This rule affects Indian citizens living in tax-free jurisdictions like the UAE, Saudi Arabia, or Monaco who have significant earnings from India.

It is worth noting that even if an individual never visits India, they can still be classified as a tax resident, making their global income taxable in India.

For instance, Suresh, an Indian citizen working in Dubai (which has no income tax), earns INR 2 million (US$22,951.5) from India but does not visit India. Under the new rule, he will still be classified as a resident, making his global income taxable in India.

Other important residency rules

  • Crew members of foreign ships: Special rules will determine how their time in India is calculated (details pending).
  • Firms, Hindu Undivided Family (HUF), Association of Person (AOPs), and trusts: These entities are residents unless their entire management and control are outside India.
  • Companies: A company is a tax resident if:
    • It is an Indian-incorporated entity.
    • Its Place of Effective Management (PoEM) is in India.

For instance, if a foreign company’s key management decisions are made in India, it will be classified as an Indian tax resident.

Taxability of foreign income under the new bill

Foreign income includes any earnings made outside India, except:

  • Business income if the business is controlled from India.
  • Professional income if the professional practice was set up in India.

For instance, Arjun, an NRI, earns INR 50 million (US$573,789.2) from his Dubai business. Since his business is based in Dubai, his income is not taxable in India. However, if the business is managed from India, it becomes taxable.

How to avoid becoming a tax resident in India

  • Monitor stay duration: Limit visits below 120 days if earning INR 1.5 million (US$17,213.6) and above in India.
  • Plan visits strategically: Spread travel across different tax years.
  • Ensure tax payments abroad: If residing in a tax-free country, structure income wisely.
  • Pay attention to Indian income: Keep the income below INR 1.5 million (US$17,213.6) if possible, to avoid deemed residency.
  • Invest smartly: Plan property and business income to minimize tax liability.

Key takeaways

  • The 182-day rule remains the primary criterion for residency.
  • 60-day rule does not apply to NRIs, crew members, or Indian citizens working abroad.
  • 120-day rule applies to high-income NRIs earning INR 1.5 million and over in India.
  • Deemed residency rule applies to Indian citizens earning INR 1.5 million and over in India but not paying tax anywhere else.
  • RNOR status helps individuals avoid global taxation.

The Income Tax Bill 2025 introduces significant changes that can impact NRIs, PIOs, and Indian citizens living abroad. Proactive tax planning and monitoring residency status will be crucial to avoid unexpected tax liabilities in India. Understanding these new provisions will help individuals make informed financial decisions and ensure compliance with Indian tax laws.

(US$1 = INR 87.14)

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