Taxation of non-residents: NRO, NRE, FCNR demystified.

Our international tax practice.

1. Residential status, and why it changes everything.

An individual's residential status under Indian tax law determines what income is taxable in India. The status is determined each year based on physical presence; it is not based on citizenship.

Three categories:

• Resident and Ordinarily Resident (ROR). Taxed on worldwide income.
• Resident but Not Ordinarily Resident (RNOR). Taxed on Indian-source income, on income from a business controlled from India or a profession set up in India; foreign income not derived from such business/profession is exempt.
• Non-Resident (NR / NRI). Taxed only on income received in India, income accruing or arising in India, or income deemed to accrue or arise in India.

The tests for resident vs non-resident, and for ordinarily resident vs not-ordinarily resident, are based on the number of days of physical presence in India during the current and the preceding years. The IT Act, 2025 retains these definitions with updates on the days-thresholds and on the treatment of high-income Indian citizens.

2. NRO, NRE, FCNR accounts.

These are bank-account types governed by FEMA, not by income-tax law. The income-tax treatment of the funds in each, however, follows from the FEMA classification:

• NRO (Non-Resident Ordinary) account. Holds Indian-source income of the NRI (rent, dividends, pensions, sale proceeds of Indian assets). Repatriation is subject to limits and tax compliance. Interest is taxable in India.
• NRE (Non-Resident External) account. Holds funds remitted from abroad to India. Freely repatriable. Interest is exempt from Indian income tax under section 10(4) of the IT Act, 1961 (corresponding provision under the 2025 Act).
• FCNR (Foreign Currency Non-Resident) account. Held in foreign currency (USD, GBP, EUR etc.). Term deposit only. Interest exempt from Indian income tax. Both principal and interest freely repatriable.

NRIs typically maintain a combination: NRE/FCNR for foreign-earned funds (exempt and repatriable), NRO for Indian-source income (taxable, repatriation-controlled).

3. What income is taxable in India.

For a Non-Resident, the following Indian-connected incomes are taxable:

• Salary earned in India (where services are rendered in India), regardless of where it is paid.
• Rental income from Indian property.
• Capital gains on sale of Indian assets (immovable property, Indian shares, mutual funds).
• Dividend from Indian companies.
• Interest on NRO accounts and Indian deposits (other than NRE/FCNR).
• Royalty / FTS for services used in India, subject to DTAA relief.
• Pension received from past Indian employment.
• Business income, where the business is set up in India or controlled from India.

Income earned and received outside India - foreign salary, foreign investment income, foreign rental income - is not taxable in India for a Non-Resident.

4. Repatriation rules.

NRE and FCNR funds are freely repatriable; the bank effects the transfer on instruction.

NRO funds are subject to a USD 1 million per financial year repatriation limit (subject to compliance with applicable tax and reporting requirements). Within the limit, repatriation requires a CA certificate (Form 15CB equivalent under the new code) and the relevant FEMA form. Above the limit, RBI approval is required.

For repatriation of sale proceeds of Indian immovable property: subject to the USD 1 million limit; specific source-of-funds requirements apply (e.g. property acquired with remitted foreign funds, inherited property, etc.).

5. Surcharge and cess on NRI income.

The Indian tax rates applicable to NRIs include surcharge and Health and Education cess on the basic tax. The surcharge structure varies by income level (10%, 15%, 25%, 37%) and certain incomes (notably long-term capital gains on equity above the LTCG threshold) may attract a capped surcharge.

For DTAA-rate computation on outbound remittances (where the NRI is the recipient in a treaty country), the DTAA rate is the gross rate and surcharge / cess do not apply on top of it. The lower of (a) the DTAA rate and (b) the domestic rate including surcharge and cess applies.

6. The returning resident's transition.

When an NRI returns to India and becomes Indian tax resident, planning matters in the transition year. Key items:

• The transition from NR to RNOR to ROR happens over a few years based on physical presence. While RNOR, foreign income (not derived from India-controlled business/profession) remains exempt - a meaningful benefit window.
• Existing foreign assets must be disclosed in the Indian return once the individual becomes ROR (Schedule FA for foreign assets).
• NRE / FCNR accounts can be retained for a transition period after change of status; conversion to resident accounts is required after that.
• Foreign tax credit for taxes paid abroad on income that is now taxable in India is available under section 90 / 91 of the Act, subject to the DTAA.

7. Five common planning mistakes.

• Treating residential status as static. Residential status is computed every year. A frequent traveller can find themselves resident in years they spent more days in India than they realised.
• Missing the deemed-resident test for high-income Indian citizens. The IT Act includes a deemed-resident test for Indian citizens with significant Indian income who are not tax residents anywhere. This was specifically introduced to address stateless tax structures.
• Repatriating from NRO without the tax certificate. The bank cannot effect the repatriation without the CA certificate that the funds are tax-paid. Last-minute repatriations get stuck.
• Holding Indian mutual funds in joint names with resident family. Income tax and FEMA treatment of joint holdings is more complex than single holdings. Plan ownership cleanly from the start.
• Missing Schedule FA disclosures after returning. Once resident, foreign assets must be disclosed. Missing this is a separate offence with serious penalties under the Black Money Act, 2015.

CA Dheeraj Somani

Founder & Proprietor · D Somani & Associates · More about the firm →