1. Concept and Importance of “Non-Resident”
The Indian Income Tax Act does not use citizenship as the starting point for taxation; it uses residential status. A person may be an Indian citizen but still be a non-resident for tax purposes—and conversely, a foreign citizen may be resident in India for tax. For a non-resident, India taxes only income that has a sufficient nexus with India, such as income received in India, or income accruing or deemed to accrue in India. Global income, with no link to India, generally remains outside the Indian tax net.
In real life, non-residents include non-resident Indians (NRIs), foreign nationals, foreign companies, funds, LLPs, and other overseas entities that have Indian investments or business connections. Their tax treatment is shaped by three layers: the general provisions of the Income Tax Act, special non-resident provisions such as the investment income and royalty/FTS regimes, and India’s network of Double Taxation Avoidance Agreements (DTAAs) with other countries. Good planning requires understanding how these layers interact.
2. Determining Residential Status (Section 6)
2.1 Tests for Individuals
Residential status is determined independently for each financial year using Section 6. An individual is treated as a resident in India if they satisfy at least one of two primary tests:
- They stay in India for 182 days or more during the relevant year; or
- They stay in India for 60 days or more in that year and 365 days or more in the preceding four years.
If neither test is satisfied, the individual is a non-resident. Special relaxations apply to Indian citizens and persons of Indian origin who are merely visiting India—here, the 60-day condition may be replaced by a longer threshold (182 or 120 days depending on income level), ensuring that short visits do not accidentally convert an NRI into a resident.
2.2 Deemed Residency and “Not Ordinarily Resident”
Section 6 also introduces the concept of deemed residency. An Indian citizen whose Indian-source income (excluding foreign income) exceeds a specified threshold and who is not liable to tax in any other country may be deemed to be resident in India. Such individuals are often classified as Resident but Not Ordinarily Resident (RNOR), which restricts the scope of taxation to Indian income and certain foreign income with strong Indian connections.
For foreign companies and entities, residence is linked to where the place of effective management (POEM) is located—if key management and commercial decisions are made in India, the company can be treated as resident. By contrast, if control and management remain fully outside India, the entity may be regarded as non-resident.
3. Scope of Total Income of a Non-Resident (Section 5)
Section 5 defines what portion of a person’s income is taxable in India. For a non-resident, India taxes only:
- Income that accrues or arises in India,
- Income that is deemed to accrue or arise in India, and
- Income that is received or deemed to be received in India.
Income that both arises and is received outside India, from a business or profession carried on entirely overseas with no Indian link, is not taxable in India for a non-resident. Thus, salary earned abroad, rental income from foreign property, and interest from foreign bank accounts are generally outside India’s tax ambit for NRs, unless special anti-avoidance or deemed-residency rules apply.
In practical terms, a non-resident is taxable in India on salary for services rendered in India, rent from Indian property, capital gains on Indian assets, interest paid by residents (subject to conditions), India-linked royalty or fees for technical services, and profits attributable to a business connection or permanent establishment in India.
4. Deemed Accrual in India (Section 9) and Business Connection
4.1 Deemed Income Rules
Section 9 lists various categories of income that are deemed to accrue or arise in India. These deeming rules are particularly important for non-residents because they bring certain cross-border receipts into the Indian tax net even when surface facts (such as place of payment) may appear foreign.
Examples include capital gains from the transfer of property situated in India; income arising through a business connection in India; salary for services rendered in India; income from assets, property, or sources located in India; dividends from Indian companies; and certain payments of interest, royalty, and fees for technical services by residents or the Government, depending on where the services are utilised or the business is carried on.
4.2 Business Connection and Significant Economic Presence
The term business connection has been expanded over time to cover not only physical presence but also digital and agency arrangements. Habitually concluding contracts in India, maintaining stock for delivery, or routinely securing orders for a non-resident can create a business connection.
India has also introduced the concept of Significant Economic Presence (SEP), under which a non-resident can have a taxable presence in India even without a physical office if they cross specified revenue thresholds from Indian customers or systematically interact with a large base of users in India through digital means. Only the portion of profit attributable to such Indian activities is taxable, but the SEP concept brings many digital and platform-based businesses within India’s tax radar.
5. Tax Rates and Regimes for Non-Resident Individuals
5.1 Slab Rates and No Age-Based Benefit
For non-resident individuals, the slab structure broadly mirrors that for residents, but crucially, age-based benefits do not apply. Senior citizen and super-senior citizen slabs, with higher basic exemption limits, are reserved exclusively for resident individuals. A 25-year-old and a 75-year-old non-resident face the same basic exemption limit and slab thresholds.
This means non-residents cannot rely on age to reduce their Indian tax burden; they must instead work with the normal slabs, special rate provisions, and treaty relief where available.
5.2 New Tax Regime (Section 115BAC)
The new tax regime under Section 115BAC has been made the default regime for individuals, and it applies to non-resident individuals as well. Non-residents can remain in the new regime or opt out into the old regime, depending on which is more beneficial. However, the popular Section 87A rebate, which can reduce tax to zero up to a certain income level, is available only to resident individuals. Non-residents cannot claim this rebate even when using the new regime.
5.3 Special Rate Provisions Override Slabs
Many non-resident incomes are taxed at flat, special rates that override slab rates. Interest, dividends, royalty, and fees for technical services often fall under sections like 115A and related provisions, which prescribe specific rate structures and may disallow certain deductions. Similarly, capital gains on securities or immovable property can be taxed under dedicated provisions such as Sections 111A, 112, and 112A at specified rates.
In such cases, the choice between old and new regimes is less critical because the income is carved out and taxed separately regardless of the slab structure.
6. Special Regimes for Certain Non-Resident Incomes
6.1 Section 115A – Investment Income, Royalty, and FTS
Section 115A provides a special regime for certain incomes of non-resident individuals and foreign companies, especially investment income, royalty, and fees for technical services. Typically, these incomes are taxed at flat rates on a gross basis, often between 5% and 20%, depending on the nature of the income and the specific provision. In many situations, deductions for related expenses are not allowed when the concessional rate is used.
This regime is attractive because it offers certainty and may, in some cases, exempt the non-resident from filing a return in India if tax has been correctly deducted at source and no other Indian income exists. At the same time, if a Double Taxation Avoidance Agreement offers a lower rate, the treaty can override domestic law, giving the non-resident a choice of the more beneficial rate.
6.2 Other Special Provisions
Other chapters provide further special treatment for non-residents. Sections 115E–115I cover non-resident Indians investing in specified foreign-currency assets. Sections 115AC and 115AD deal with income of non-residents and foreign institutional or portfolio investors from certain bonds, GDRs, and securities. These provisions aim to keep India competitive as an investment destination by offering predictable and sometimes concessional taxation.
7. DTAA Relief and Treaty Override
7.1 Using Treaties to Avoid Double Taxation
India has entered into numerous Double Taxation Avoidance Agreements with other countries. Under Sections 90 and 90A, a non-resident who is also a tax resident of a treaty partner country can generally choose between the provisions of the Indian domestic law and the treaty, applying whichever is more beneficial in their case.
DTAAs typically allocate taxing rights between the two countries and cap maximum tax rates for dividends, interest, royalties, and FTS. They also provide rules for taxing business profits—usually requiring a permanent establishment (PE) in the source country before profits can be taxed there—and may contain specific capital-gains allocation rules. For many non-residents, treaty provisions are crucial to securing lower withholding tax rates and avoiding juridical double taxation.
7.2 Documentation: TRC and Form 10F
To claim treaty benefits, non-residents must typically produce a Tax Residency Certificate (TRC) from their home country, along with Form 10F and other self-declarations. Without these documents, Indian payers may be compelled to deduct tax at higher domestic rates, leaving the non-resident to later claim a refund through a return filing. Robust documentation is therefore a key practical step in cross-border tax planning.
8. Digital Taxation and Equalisation Levy
As global business models shifted online, India introduced an equalisation levy to tax certain digital transactions by non-residents—initially on online advertising, and later on the gross receipts of some e-commerce operators. Over time, however, India has moved towards greater alignment with international frameworks, phasing out separate equalisation levies and increasingly relying on the standard income-tax rules, including SEP and PE concepts, to tax digital activities.
For non-resident digital businesses, this means a stronger focus on whether they have a taxable presence in India under SEP or PE principles and how much of their global profit is attributable to Indian users and markets, rather than simply calculating a fixed percentage levy on gross revenue.
9. TDS Withholding on Payments to Non-Residents
9.1 Section 195 – Core Provision
Section 195 is the backbone of withholding tax on payments to non-residents. It requires any person (resident or non-resident) who is responsible for paying a sum to a non-resident that is chargeable to tax in India to deduct tax at source at the time of payment or credit, whichever is earlier. The applicable rate depends on the nature of income and may come from domestic provisions such as 115A or from an applicable DTAA.
Where there is uncertainty about how much of a composite payment is taxable in India, the payer can apply to the tax authorities for a lower or nil deduction certificate or seek an advance ruling. Failure to deduct correct TDS can expose the payer to interest, penalties, and even disallowance of related expenses.
9.2 Other TDS Sections
In addition to Section 195, several other TDS sections may apply to specific cross-border payments, such as those relating to salary, sports persons, certain bonds, and foreign currency borrowings. In all such cases, the key questions for the payer are: Is the sum chargeable to tax in India? If yes, what is the applicable rate under domestic law, and is there a more beneficial DTAA rate that can be applied with proper documentation?
10. Return Filing and Compliance for Non-Residents
Non-resident individuals must generally file an Indian income tax return if their total income that is chargeable to tax in India exceeds the basic exemption limit before considering deductions or certain capital-gain exemptions. Even where income is below this limit, filing may be necessary to claim a refund of excess TDS or to carry forward capital losses.
Non-residents typically use ITR-2 (for individuals/HUFs without business income but with salary, house property, capital gains, or other sources) or ITR-3 (where there is business or professional income). Obtaining a PAN is strongly advised, since it is essential for TDS credit, high-value transactions, and smooth compliance. Unlike resident senior citizens, non-residents do not get special paper-filing or 75+/80+ relaxations and must normally file returns electronically.
11. Practical Planning Considerations for Non-Residents
Effective tax planning for non-residents requires managing three moving parts: domestic Indian tax law, treaty law, and the tax rules of the home country. Non-residents must monitor their days of stay and income patterns to preserve non-resident or RNOR status where it is beneficial, ensuring that only true Indian-source income is exposed to Indian tax.
At the same time, they should structure interest, royalty, and service contracts to take advantage of concessional domestic rates and lower treaty rates, and ensure that Tax Residency Certificates and related declarations are in place before remittances. For digital and remote businesses, understanding when and how a significant economic presence or a permanent establishment might arise in India is critical to avoid unexpected tax disputes.
12. Conclusion
The Indian income-tax regime for non-residents is fundamentally source-based, targeting only income that is received in India or that has a strong economic and legal connection with India. Through Sections 5, 6, and 9, special rate provisions such as 115A, and its extensive DTAA network, India has built a comprehensive, treaty-sensitive framework for cross-border taxation.
For non-residents—NRIs, foreign investors, and international businesses—the main challenge is not a lack of law but the interaction of multiple provisions across jurisdictions. With careful planning, accurate residency analysis, proper documentation, and timely compliance, it is possible to manage Indian tax exposure efficiently while complying fully with both Indian law and treaty obligations.