NRI Returning to India? Avoid These Residential Status and Foreign Income Reporting Mistakes

Non-resident Indian (‘NRI’) while returning home in India are often filled with happiness and excitement. However, such happiness and excitement are also accompanied with lots of confusions and implications under the Indian taxation laws. The Income Tax Act, 1961 (‘Act’) along with Income Tax Rules, 1962 provides for specific provisions regarding taxability of income of NRI’s, reporting of assets and liabilities and claim of relief in respect of doubly taxed incomes

Understanding residential status

Under the provisions of Section 5 and 6 of the Income Tax Act, 1961, individuals are classified into the below mentioned three categories of residential statuses for tax purposes:

• Resident and ordinarily resident in India (‘ROR’),
• Resident but not ordinarily resident in India (‘RNOR’), and
• Non-Resident (‘NR’).

The basic residency test

Residential status of an Individual can be determined basis their actual physical presence in India during the period April 1 to March 31.

According to Section 6 of the Act, an individual before categorising either as ROR, RNOR or NR, first need to be either Resident or Non-resident which is further categorised as either ROR or RNOR.

An Individual qualifies as a resident in India if they satisfy either of two conditions:

1. If the individual is in India for 182 days or more during the financial year,
2. If individual is in India for 60 days or more during the financial year and 365 days or more during the four preceding years, subject to certain exceptions for Indian citizens who leave India for employment abroad or as crew members of Indian ships.

Once either of the above-mentioned criteria is satisfied, Individual is treated as Resident.

Once an individual qualifies as a resident, the next step is to determine whether they are ROR or RNOR.

Determination of ROR or RNOR requires evaluation and determination of the following:

An individual is considered ROR if they have been a resident in India in at least two out of the ten previous years and have been in India for 730 days or more during the seven preceding years. If either of these condition is not met, the individual becomes RNOR.

For returning NRIs, generally the RNOR status applies in the first year of return and for a few years thereafter, depending on their presence in India in the past periods.

Scope of taxability of income in India depends on residential status of Individual

The scope of taxable income varies based on residential status as follows:

For Non-Residents (NR)

In case of non-residents, income received or deemed to be received in India, income accrued or arisen or deemed to accrue or arise in India are taxable.
 
Further, as exception to the above rule, income from a business controlled from or profession set up in India are also taxable in India. Foreign incomes, like salary earned abroad fro services renderd in such country, interest from foreign bank accounts, rental income or capital gain from properties held abroad may remain outside the ambit of Indian taxation.

For Resident but Not Ordinarily Resident (RNOR)

The scope in respect of RNOR is broader than for NRs’ but narrower than ROR. RNOR individuals are taxed on all Indian income plus any income earned from a business controlled in India or a profession set up in India. However, income from all sources abroad other than income from business or profession setup in India may remain outside the ambit of Indian taxation.

For Resident and Ordinarily Resident (ROR)

The scope in respect of ROR covers the global income of the individual irrespective of the country of source or receipt and therefore, widest among for all three categories. ROR must pay tax on their global income regardless of where it is accrued or received or deemed to accrue or receive. Illustratively, income of ROR may include income from properties held outside India (though subject to relief under DTAA), salary from employers abroad, interest on investment held abroad, dividend from foreign Companies.
 
While we have gone through the basic concepts of determining residential status and scope of income as provided in in the Act, below we have discussed the common doubts or mistakes that happens in the first year of transition

Errors while filing income tax returns (‘ITR’)

Error One: Continuing to file as Non-Resident despite becoming RNOR

The most prevalent error made by returning NRIs is continuing to file their income tax returns as Non-Residents even after they have met the conditions for becoming Resident but Not Ordinarily Resident.

This error typically occurs due to several factors. Many individuals maintain a mental image of themselves as NRIs’ long after they have returned to India, especially if their return is gradual or if they continue to have strong ties abroad. Others may simply lack awareness about the change in residential status based on physical presence. Some NRIs return to India during the midst of the year and incorrectly assume their status remains unchanged for that entire year.

The residential status must be determined independently for every financial year irrespective of the status in the preceding years. An individual may be treated as RNOR in one year and may become ROR in next year depending upon fulfilment of the conditions relating to the number of days.

For instance: Mr A, worked in USA for Ten years and returned to India on 15^th August 2025. He started his employment with an Indian company from 16^th August 2025. For the financial year 2025-26, Mr. A stayed in India for approximately 229 days. Based on the number of days, Mr. A qualifies as a resident since he has been in India for more than 182 days.

However, neither he has been a resident in at least two out of the ten preceding years, nor has he been in India for 730 days during the preceding seven years. Therefore, his residential status for FY 2025-26 would be RNOR, instead of NR.

If Mr. A continues to file as NR, he would only report his Indian salary from August onward. However, as an RNOR, if he provides any professional consultancy services to his former USA employer (profession setup in India), that income would also be taxable in India, regardless of when and where it is paid.

Error Two: Not Reporting Overseas Income, Assets, and Bank Accounts

The second major category of errors involves the non-disclosure of foreign assets, income, and bank accounts. This is particularly required for individuals who have become ROR or who have specific foreign income that is taxable even under RNOR status.

The Act requires every individual (ROR and RNOR both) possessing equity shares of foreign Company, foreign bank accounts, signing authorities in bank accounts outside India, share in foreign partnership firms and all immovable properties to be reported Schedule FA in the income tax return for the relevant assessment year.

Several NRIs believe that in cases they are not earning substantial income from foreign assets, then neither assets nor income is required to be reported, which is not correct. Even in cases of dormant accounts, low income earning assets, Schedule FA need to be reported with the applicable incomes and assets and corresponding liabilities.

Further, Schedule FA requires reporting of foreign assts held at any time during the period, which means asset even held for a single day need to be reported in the said schedule.

Error Three: Assuming foreign tax paid means no tax liability in India

Another confusion which remains among the returning NRIs is that whether incomes on which taxes have been paid abroad need to be reported and included in the taxable income in India or not. The answer to this question would depend on each of the facts and incomes independently having regard to both the tax treaties and the Income Tax Act, 1961. It is incorrect to assume that once taxes are discharged in one country, no further compliances are required in respect of such income in India. Ignorance of disclosure requirements and computation mechanism in India may lead to notices and queries from the India tax department.

In case an Individual is classified as ROR, they are subject to tax on their global income in India irrespective of the source of income or its corresponding receipt. This means that income earned anywhere in the world needs to be reported in India and taxability thereon need to be determined separately along with reliefs provided under tax treaties.

For instance, if in the case of above illustration Mr. A becomes ROR in FY 2026-27 and receives dividend income from his investments held abroad (on which taxes have been according to the laws of foreign jurisdiction) all such income must be reported in the income tax return for FY 2026-27 and taxes need to be computed accordingly subject to the double taxation avoidance reliefs provided under the Act and tax treaties.

How double taxation relief works

The objective of entering into tax treaties is to provide relief from double taxation, promote economic relations, trade and investment and exchange of information with other countries. Accordingly, India has entered into Double Taxation Avoidance Agreements (‘DTAA’) with numerous countries and provided such provisions under Section 90 of the Act. Further, Section 91 of the Act also provides unilateral relief even in cases DTAA is absent with any country.

Under the provisions of Section 90 and DTAA, an individual can claim relief of taxes paid abroad against their income tax liability on the same income in India by furnishing necessary information and form (i.e. Form 67)

The Way Ahead

Here is a comprehensive guide for NRI’s to ensure smooth tax compliance during and after the transition.

Step 1: Firstly, determine residential status in India

While computing income for a financial year, firstly, determine residential status by calculating the number of days resided in India. The said computation should be carefully backed by passport and immigration stamps. Maintain a detailed log of your travel for the past 10 years, including dates of entry into and exit from India. It should be noted that the day of arrival and day of departure are both counted as days of presence in India.
 

Step 2: Compile a complete detail of global assets and income

Create a comprehensive list of all your assets, both in India and abroad. This should include all bank accounts (even if dormant or closed during the year), investment accounts holding stocks, bonds, or mutual funds, retirement accounts and pension funds, insurance policies with cash value, real estate properties, entities where you are having signing authorities and any other valuable assets.

Similarly, compile all sources of income, both Indian and foreign. This includes salary or business income, interest from all bank accounts, dividends from investments, rental income from properties, capital gains from sale of assets, and any other receipts.

Step 3: Determine what is taxed in India and what is not

Based on your residential status, determine which income streams are taxable in India. It is to be noted that in case of RNOR, even if a particular income income is not taxable in India, the same may need to be reported in Schedule FA in the income tax return.

Step 4: Compile documents for claiming Foreign Tax Credits

Once the correct residential status is determined and income is computed, the next step is to compile documents related to taxes paid on foreign income in another country to save income from double taxation by way of foreign tax credits. Documents may include foreign tax returns, tax payment receipts, tax deduction certificates, bank statements showing tax withholding etc.

Step 5: File necessary Form 67 along with relevant reporting in income tax return

While filing income tax return, it needs to be ensured that form 67 (i.e. form for claiming tax relief under rule 128 of the Income tax Rules, 1962) is filed before filing of income tax return in order to avoid disallowance of tax reliefs (such requirement has been amended w.e.f 01^st April 2022 which provides said form can be filed till the end of the relevant assessment year). It also need to be ensured that reporting in Schedule FA is made correctly

Conclusion

Mistakes of returning individuals relating to various taxation issues can be avoided by careful determination of residential status and taxing corresponding incomes accordingly along with correct reporting of foreign assets and liabilities which may otherwise occur unintentionally.
Further, by timely filing form 67, claiming tax reliefs and maintaining foreign tax payment related documents NRI’s can avoid double taxation of income in different jurisdictions.