NRI residency: the 120-day rule and what it actually costs

Residency is the first question in Indian tax, not a detail at the end. A resident is taxed on worldwide income. A non-resident is taxed only on income that arises in India. The difference is frequently larger than any deduction you could claim.

The rules were amended with effect from FY 2020-21, and the version many people still work from is out of date.

The basic test

You are a resident for a financial year if either applies:

• you are in India for 182 days or more in that year, or
• you are in India for 60 days or more in that year and 365 days or more across the four preceding years.

For an Indian citizen leaving India for employment, or a crew member on an Indian ship, the 60-day limb is extended to 182 days. For an Indian citizen or person of Indian origin visiting India, it used to be 182 days unconditionally. That is where the change bites.

The 120-day rule

Since FY 2020-21, a visiting Indian citizen or PIO whose Indian-sourced income exceeds ₹15 lakh in the year becomes resident at 120 days rather than 182, provided the four-year condition is also met.

Indian income here means income accruing in India — rent on an Indian property, interest on Indian deposits, capital gains on Indian shares, business income from India. Salary earned abroad does not count towards it.

The practical effect: an NRI with substantial Indian rental and investment income who used to spend four months a year in India without consequence can now cross into residency. Nothing about their travel pattern changed; the threshold moved underneath them.

Deemed residency

A second provision deems an Indian citizen resident regardless of days if Indian income exceeds ₹15 lakh and they are not liable to tax in any other country by reason of domicile or residence. It was aimed at people structuring their affairs to be tax-resident nowhere.

In practice it rarely affects NRIs in countries with an income tax, since they are liable to tax there. It can affect people in jurisdictions with no personal income tax, and that group should take specific advice rather than rely on general guidance.

RNOR: the useful middle status

Resident but Not Ordinarily Resident sits between the two. An RNOR is taxed on Indian income and on foreign income from a business controlled from India — but not on other foreign income.

You are RNOR if you were non-resident in nine of the ten preceding years, or in India for 729 days or less in the preceding seven years. Someone caught by the 120-day rule is also treated as RNOR.

For a returning NRI this status is valuable and temporary — usually two or three years. Foreign interest, foreign rental income and gains on foreign holdings stay outside the Indian net during it. Bringing foreign assets into India, or restructuring them, is substantially cheaper while RNOR applies than after it lapses.

What changes when you become resident

• Worldwide income becomes taxable — foreign salary, foreign rent, foreign dividends and gains, whether or not remitted to India.
• Schedule FA — every foreign bank account, security, immovable property and beneficial interest has to be reported. Non-disclosure attracts penalties under the Black Money Act that dwarf the tax.
• NRE accounts lose their exemption — NRE interest is exempt only for a non-resident. Once resident, it is taxable, and the account should be redesignated to a resident account.
• Relief under a treaty — the applicable DTAA may still reduce or eliminate double taxation, but it has to be claimed, with a Tax Residency Certificate and Form 10F.

Counting days properly

Count the day of arrival and the day of departure as days in India — the Act counts presence, not full days. Keep the record contemporaneously: passport stamps, boarding passes and immigration records. A dispute about residency three years later is decided on documents, and reconstructing a travel history from memory is not a position worth defending.

What to do before the year ends

If you are close to a threshold, the days are the one variable entirely within your control, and only until 31 March. Work out your Indian income for the year first — rent, interest, gains — because that determines whether your limit is 182 days or 120. If the figure is near ₹15 lakh and you are near 120 days, both numbers deserve attention before the year closes rather than after.

Where capital gains on Indian shares or property are part of the picture, work the tax out separately: non-residents face different rates and TDS treatment, and the gain itself counts towards the ₹15 lakh test.