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2-Minute Analysis: The Core Logic of Non-Resident Taxation
India taxes you on two bases. If you are a resident, all your income from anywhere in the world is taxable in India. If you are a non-resident, only income that has a connection to India gets taxed here.
That connection is either direct or deemed. Direct connection means you actually received money in India or earned it here. Deemed connection means the law treats certain income as arising in India even when the payment happens outside.
Example: Rahul is an Indian citizen working in Dubai for five years. He is a non-resident. His salary from Dubai is not taxable in India. But interest he earns from his NRE fixed deposit in an Indian bank is taxable. Why? Because Section 9 of the new Act deems interest paid by an Indian concern as income arising in India.
Now consider Priya, a US citizen with no Indian connection, who buys shares of a foreign company. Unknown to her, that foreign company holds land in India worth Rs. 15 crore, constituting 60% of its total assets. When she sells those foreign company shares, India taxes the capital gain. Why? Because Section 9(10) deems shares of a foreign company to be situated in India when the company’s value is substantially derived from Indian assets.
This is the breadth of India’s non-resident taxation framework. Three things govern your position: your residential status, the Income Tax Act 2025 provisions, and any Double Taxation Avoidance Agreement (DTAA) between India and your country of residence.
Part 1: Determining Residential Status
1.1 Who is a Resident, RNOR, and Non-Resident?
Section 6 of the Income Tax Act, 2025 (corresponding to Section 6 of the Income Tax Act, 1961) determines residential status.
An individual is a RESIDENT in India in a tax year if he satisfies either of the following conditions [Section 6(2)]:
(a) He is in India for 182 days or more during the tax year, or
(b) He is in India for 60 days or more during the tax year AND has been in India for 365 days or more during the four preceding tax years (cumulatively)
Exception 1 [Section 6(3)]: Condition (b) does not apply to an Indian citizen (not a PIO) who leaves India as a member of the crew of an Indian ship or for the purposes of employment outside India.
Exception 2 [Section 6(4) and 6(5)]: Condition (b) does not apply to an Indian citizen or PIO who is outside India and comes on a visit to India, unless his total income excluding income from foreign sources exceeds Rs. 15 lakh. In that case, condition (b) applies with “60 days” substituted by “120 days.”
Deemed Resident Rule [Section 6(7)]: An Indian citizen who is not liable to tax in any other country by reason of domicile, residence, or any similar criterion, and whose total income excluding foreign source income exceeds Rs. 15 lakh, is deemed to be a resident in India for that tax year. This rule does not apply to an individual who is already resident under Sections 6(2) to 6(6) [Section 6(8)].
An individual is a NON-RESIDENT if he does not satisfy any of the conditions in Sections 6(2) to 6(7).
1.2 Resident but Not Ordinarily Resident (RNOR)
RNOR is a middle category. A person is RNOR under Section 6(13) if he is:
(a) An individual who has been a non-resident in 9 out of the 10 tax years preceding the current year, OR has been in India for 729 days or less (cumulatively) in the 7 preceding tax years, or
(b) A citizen of India or PIO whose income excluding foreign sources exceeds Rs. 15 lakh (as referred to in Section 6(5)) AND who has been in India for 120 days or more but less than 182 days during the tax year, or
(c) A citizen of India who is a deemed resident under Section 6(7)
| Status | Test |
| Resident and Ordinarily Resident (ROR) | Satisfies Section 6(2); does not fall in Section 6(13) |
| Resident but Not Ordinarily Resident (RNOR) | Satisfies Section 6(2) but falls in Section 6(13) |
| Non-Resident (NR) | Does not satisfy Section 6(2) and is not a deemed resident under Section 6(7) |
1.3 For Companies and Other Persons
A company is resident in India if it is an Indian company OR if its Place of Effective Management (POEM) is in India during the tax year. POEM means the place where key management and commercial decisions necessary for the conduct of business as a whole are, in substance, made [Section 6(10)].
A HUF, firm, or association of persons is resident in India unless the control and management of its affairs is situated wholly outside India [Section 6(9)].
Every other person is resident unless, during that tax year, the control and management of affairs is situated wholly outside India [Section 6(11)].
Part 2: Scope of Total Income for Non-Residents
Section 5(2) of the Income Tax Act, 2025 (corresponding to Section 5(2) of the Income Tax Act, 1961) defines the taxable scope for a non-resident:
A non-resident is taxable in India ONLY on income that: (a) is received or deemed to be received in India in that year, or (b) accrues or arises, or is deemed to accrue or arise, in India in that year
Income accruing outside India is NOT included in a non-resident’s total income unless it falls within the “deemed to accrue or arise in India” provisions of Section 9.
Compare this with a Resident and Ordinarily Resident (ROR): their total income includes income from all sources worldwide under Section 5(1).
For an RNOR: income accruing outside India is included only if it is derived from a business controlled in India or a profession set up in India [Section 5(1)(c)].
Part 3: Income Deemed to Accrue or Arise in India
Section 9 of the Income Tax Act, 2025 (corresponding to Section 9 of the Income Tax Act, 1961) is the most critical provision for non-residents. It deems several categories of income as arising in India even when the actual payment occurs outside India.
3.1 Income Through Business Connection in India [Section 9(2)(c)]
Income arising through a business connection in India is deemed to arise in India. Only the portion of income reasonably attributable to Indian operations is taxable [Section 9(9)(f)].
A “business connection” under Section 9(9)(a) includes:
- Business carried out in India, either directly or through a dependent agent who habitually concludes contracts, maintains stock, or secures orders on behalf of the non-resident, and
- Significant Economic Presence (SEP) in India
Significant Economic Presence [Section 9(9)(d)]: A non-resident has SEP in India if:
- Aggregate payments from transactions with any person in India exceed the prescribed threshold, or
- There is systematic and continuous soliciting of business or interaction with a prescribed number of users in India, irrespective of whether the agreement is entered into in India or the non-resident has any residence or place of business in India
Exemption: The SEP rule does not apply to transactions confined to purchase of goods in India for export [Section 9(9)(e)].
Income attributable to SEP includes income from advertisements targeting Indian customers, sale of data collected from Indian users, and sale of goods or services using data from Indian users [Section 9(9)(g)].
3.2 Income from Transfer of Capital Asset in India [Section 9(2)(d)]
Capital gains from transfer of a capital asset situated in India are taxable in India for a non-resident.
Indirect Transfer Rule [Section 9(10)]: Shares of, or interest in, a company or entity registered outside India are deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from assets located in India. “Substantially” means both:
- The value of Indian assets exceeds Rs. 10 crore [Section 9(10)(b)(i)], AND
- Those Indian assets represent at least 50% of the value of all assets owned by the company or entity [Section 9(10)(b)(ii)]
The value of each asset is its fair market value on the “specified date” (the last accounting period end date before transfer, or the transfer date if book values have increased by more than 15%) without reduction for liabilities [Section 9(10)(c) and (d)].
Where not all assets of the foreign company are in India, only the proportionate income attributable to Indian assets is taxable [Section 9(10)(f)].
Exemptions from Indirect Transfer Rule [Section 9(10)(g)]:
- The transferor (individually or with associated enterprises) holds less than 5% voting power or share capital and has no right of management or control in the foreign company
- The non-resident holds the shares as a Category I FPI under SEBI (FPI) Regulations 2019
3.3 Salary Income [Section 9(3)]
Salary is deemed to arise in India if:
- It is earned for services rendered in India, including rest and leave periods between two Indian service stints, or
- It is paid by the Government of India to an Indian citizen for services rendered outside India
3.4 Dividend from Indian Companies [Section 9(4)]
Any dividend paid by an Indian company outside India is deemed to accrue or arise in India and is taxable in the non-resident’s hands.
3.5 Interest Income [Section 9(5)]
Interest is deemed to arise in India when payable by:
- The Government of India, or
- A resident, unless the debt was used for a business or profession carried on by the resident outside India, or for earning income from a source outside India, or
- A non-resident, if the debt was used for a business or profession carried on by that non-resident in India
Special rule for banking PE [Section 9(5)(b)]: Interest payable by the Indian permanent establishment of a non-resident bank to its own head office or other branch outside India is also deemed to arise in India. The Indian PE is treated as a separate and independent person from the non-resident for this purpose.
3.6 Royalty [Section 9(6)]
Royalty is deemed to arise in India when payable by the Government, by a resident (unless the right is used for business or income outside India), or by a non-resident when the right is used for business or income in India.
“Royalty” under Section 9(6)(b) includes consideration for:
- Transfer or grant of rights in patents, trademarks, models, secret processes, copyrights, films, radio tapes
- Imparting of information about technical, industrial, commercial, or scientific knowledge
- Transfer of rights in computer software including licensing, regardless of the medium [Section 9(6)(c)(i)]
- Use of industrial, commercial, or scientific equipment (except amounts under Section 61(2) Table Sl. No. 5 presumptive scheme)
The term “process” includes transmission by satellite, cable, optic fibre, or similar technology, whether or not the process is secret [Section 9(6)(c)(iii)].
3.7 Fees for Technical Services [Section 9(7)]
Fees for Technical Services (FTS) are deemed to arise in India under the same conditions as royalty. FTS means consideration for any managerial, technical, or consultancy services including provision of technical personnel. It excludes consideration for construction, assembly, or mining projects and amounts taxable as salary.
Key rule for interest, royalty, and FTS [Section 9(11)]: For sub-sections (5), (6), and (7), income of a non-resident is deemed to accrue or arise in India whether or not: (a) the non-resident has a residence, place of business, or business connection in India, or (b) the non-resident has rendered services in India
This means a foreign company receiving FTS from an Indian company is taxable in India even if it has no physical presence in India and performed all services entirely outside India.
Part 4: Tax Rates for Non-Residents
4.1 General Non-Resident: Section 207 of the Income Tax Act, 2025
(Corresponding to Section 115A of the Income Tax Act, 1961)
For a non-resident not being a company, or a foreign company, the following special rates apply on total income:
Section 207(1) rates:
| Nature of Income | Tax Rate |
| Dividend (other than from IFSC unit) | 20% |
| Dividend from a unit in an International Financial Services Centre | 10% |
| Interest received from Government or Indian concern on money borrowed in foreign currency | 20% |
| Interest from infrastructure debt fund [Schedule VII, Table Sl. No. 46] | 5% |
| Income from units (purchased in foreign currency) of a Mutual Fund specified in Schedule VII or Unit Trust of India | 20% |
| All other income | Rates in force |
Section 207(2) rates for royalty and FTS:
Where a non-resident or foreign company receives royalty or FTS from the Government or an Indian concern under an agreement made after 31st March 1976, and the agreement is either: (a) approved by the Central Government (where the agreement is with an Indian concern), or (b) as per the industrial policy in force (where the agreement relates to a matter covered by such policy),
then the following rates apply:
| Nature of Income | Tax Rate |
| Royalty (other than income under Section 59(1)) | 20% |
| Fees for Technical Services (other than income under Section 59(1)) | 20% |
Section 207(3) exception: Where the royalty under Section 207(2) is for transfer or grant of rights in copyright of a book to an Indian concern, or in computer software to a person resident in India, the 20% rate applies without needing Central Government approval or industrial policy compliance.
No expense deductions [Section 207(5)]: No deduction for any expenditure or allowance is allowed under Sections 28 to 58, 60, and 61 and Section 93 of the new Act while computing income falling under Sections 207(1) and 207(2).
No Chapter VIII and Schedule XV deductions [Section 207(6)(a)]: If the gross total income consists only of income under Section 207(1) Table Sl. Nos. 1 to 7, no deduction is allowed under Chapter VIII (equivalent to Chapter VI-A of the 1961 Act) and under Schedule XV (equivalent to Section 80C investments such as life insurance premium, PPF, etc.). Where other income is also present, the Chapter VIII and Schedule XV deductions apply only to the reduced income after removing the special rate income [Section 207(6)(b)].
Exception for IFSC units [Section 207(7)]: Section 207(6) does not apply to a deduction allowed to a unit in an International Financial Services Centre under Section 147.
Exemption from filing ITR [Section 207(8)]: A non-resident or foreign company does not need to file a return of income under Section 263(1) if total income consists only of income under Sections 207(1) (Sl. Nos. 1 to 7) and 207(2) (Sl. Nos. 1 and 2), AND tax has been deducted at source at a rate not less than the rates specified in those sub-sections.
4.2 NRI Investment Income: Section 214 of the Income Tax Act, 2025
(Corresponding to Section 115E of the Income Tax Act, 1961)
For a non-resident Indian specifically:
| Nature of Income | Tax Rate |
| Investment income (income from foreign exchange asset) | 20% |
| Long-term capital gains on specified foreign exchange asset | 12.5% |
| All other income | Rates in force |
“Foreign exchange asset” means any specified asset acquired with convertible foreign exchange [Section 212(a)]. “Specified asset” includes shares in Indian companies, debentures of non-private Indian companies, deposits with non-private Indian companies, Central Government securities, and other notified assets [Section 212(e)].
4.3 Offshore Fund: Section 208 of the Income Tax Act, 2025
(Corresponding to Section 115AB of the Income Tax Act, 1961)
| Nature of Income | Tax Rate |
| Income from units purchased in foreign currency | 10% |
| Long-term capital gains from transfer of those units | 12.5% |
| Other income | Rates in force |
An “overseas financial organisation” (Offshore Fund) means a fund, institution, association, or body established under laws of a country outside India, which has entered into an arrangement for investment in India with any public sector bank, public financial institution, or specified mutual fund, and such arrangement is approved by SEBI [Section 208(3)(a)].
4.4 Non-Resident with Bonds or Global Depository Receipts: Section 209 of the Income Tax Act, 2025
(Corresponding to Section 115AC of the Income Tax Act, 1961)
| Nature of Income | Tax Rate |
| Interest on bonds of Indian company or public sector company purchased in foreign currency | 10% |
| Dividends on Global Depository Receipts (GDRs) purchased in foreign currency | 10% |
| Long-term capital gains from transfer of such bonds or GDRs | 12.5% |
| Other income | Rates in force |
Exemption from filing ITR [Section 209(4)]: If total income during the tax year consists only of interest on bonds and dividends on GDRs as above, and TDS has been deducted from such income, no ITR filing is required.
4.5 FII and Specified Funds: Section 210 of the Income Tax Act, 2025
(Corresponding to Section 115AD of the Income Tax Act, 1961)
| Nature of Income | Applicable to | Tax Rate |
| Income from securities (other than units under Section 208) | FII | 20% |
| Income from securities (other than units under Section 208) | Specified fund | 10% |
| Short-term capital gains NOT under Section 196 (i.e., non-STT transactions) | Both | 30% |
| Short-term capital gains under Section 196 (STT-charged equity shares, equity funds, business trusts) | Both | 20% |
| Long-term capital gains NOT under Section 198 | Both | 12.5% |
| Long-term capital gains under Section 198 (STT-charged equity LTCGs) exceeding Rs. 1,25,000 | Both | 12.5% |
Important: Under Section 210, for LTCGs covered by Section 198 (STT-charged equity shares and equity-oriented funds), tax at 12.5% applies only on gains exceeding Rs. 1,25,000. The first Rs. 1,25,000 of such gains in a tax year is not subject to tax [Section 198(2)(a)].
For specified funds, Section 210 applies only to the extent of income attributable to units held by non-residents (not being a PE in India) [Section 210(2)].
4.6 Non-Resident Sportsmen, Entertainers, and Sports Associations: Section 211 of the Income Tax Act, 2025
(Corresponding to Section 115BBA of the Income Tax Act, 1961)
| Nature of Income | Tax Rate |
| Income of a non-citizen non-resident sportsman from participation in India, advertisement, or articles relating to game or sport | 20% |
| Income of a non-resident sports association or institution from guaranteed amounts for games or sports played in India | 20% |
| Income of a non-citizen non-resident entertainer from performances in India | 20% |
No deduction for any expenditure or allowance is allowed under any provision of the Act in computing the above income [Section 211(2)]. No ITR filing is required if total income consists only of the above categories and TDS has been deducted [Section 211(3)].
4.7 Presumptive Taxation for Non-Resident Businesses: Section 61 of the Income Tax Act, 2025
(Corresponding to Sections 44B, 44BB, 44BBA, 44BBB of the Income Tax Act, 1961)
For specific non-resident businesses, income is computed on a presumptive basis as a percentage of gross receipts:
| Business | Assessee | Deemed Profit |
| Shipping (other than cruise ships) | Non-resident | 7.5% of gross receipts (A+B) |
| Cruise ship operation | Non-resident | 20% of gross receipts (A+B) |
| Aircraft operation | Non-resident | 5% of gross receipts (A+B) |
| Civil construction or erection in turnkey power project approved by Central Government | Foreign company | 10% of amounts paid or payable |
| Providing services or facilities for mineral oil prospecting, extraction, or production | Non-resident | 10% of gross receipts (A+B) |
| Providing services or technology in India for electronics manufacturing facility or for producing electronic goods | Non-resident | 25% of amounts paid or payable |
In the formula, A = amounts paid or payable in or outside India; B = amounts received or deemed received in India by the assessee.
4.8 Head Office Expenditure Deduction: Section 60 of the Income Tax Act, 2025
(Corresponding to Section 44C of the Income Tax Act, 1961)
In computing income under “Profits and gains of business or profession” for a non-resident, head office expenditure attributable to Indian business or profession is deductible. However, the deduction is restricted to:
- 5% of adjusted total income, if adjusted total income is a positive figure [Section 60(2)(b)], or
- 5% of average adjusted total income for the three preceding tax years (or fewer if not assessable for all three), if adjusted total income for the current year is a loss [Section 60(2)(a)]
“Head office expenditure” means executive and general administration expenditure incurred outside India, including rent, taxes, repairs, salaries, and travelling expenses in respect of any office outside India [Section 60(3)(c)].
Part 5: TDS on Payments to Non-Residents
TDS on payments to non-residents is governed by Section 393(2) of the Income Tax Act, 2025 (corresponding to Section 195 of the Income Tax Act, 1961).
5.1 Section 393(2) TDS Table for Non-Residents
| Nature of Payment | Payee | Rate |
| Income of non-resident sportsmen, entertainers, and sports associations (Section 211) | Non-resident non-citizen sportsman, entertainer, or sports association | 20% |
| Interest on infrastructure bonds borrowed in foreign currency (under approved loan or bond before 1st July 2023) | Any non-resident or foreign company | 5% |
| Interest on rupee-denominated bonds (issued before 1st July 2023) | Any non-resident or foreign company | 5% |
| Interest on long-term bonds or rupee-denominated bonds listed only on IFSC exchange | Any non-resident or foreign company | 4% (bonds issued 1st April 2020 to 30th June 2023); 9% (bonds issued from 1st July 2023) |
| Interest from infrastructure debt fund | Any non-resident or foreign company | 5% |
| Distributed income (rental nature) from business trust to non-resident unit holder | Non-resident unit holder | 5% (Schedule V, Sl. No. 3 B(a) income); 10% (Schedule V, Sl. No. 3 B(b) income) |
| Income from units of mutual fund (Section 209 context) | Non-resident | 10% (per Note 2) |
| Long-term capital gains on units (Section 208) | Offshore fund | 12.5% |
| Interest or dividends on bonds or GDRs (Section 209) | Non-resident | 10% |
| Long-term capital gains on bonds or GDRs (Section 209) | Non-resident | 12.5% |
| Income from securities for FII (Section 210 Table Sl. No. 1) | Foreign Institutional Investor | 20%, or lower treaty rate if TRC and Form No. 41 furnished (Note 2) |
| Income from securities for specified fund (Section 210 Table Sl. No. 1) | Specified fund | 10% |
| Any other interest (not being interest in items 2 to 5 above) or any other sum chargeable under this Act, not being salary income | Any non-resident (not being a company) or foreign company | Rates in force |
Note on FII TDS rate: For income from securities paid to a Foreign Institutional Investor under item 15, TDS is at 20% OR at the lower rate under the applicable DTAA if the payee has furnished the certificate referred to in Section 159(8) (i.e., Tax Residency Certificate and Form No. 41) [Note 2 to Section 393(2) Table].
Critical note on residual category (item 17): The obligation to deduct TDS on any other interest or sum chargeable under the Act applies to ALL persons, whether resident or non-resident, regardless of whether the non-resident has any residence, place of business, business connection, or any other presence in India [Note 3(b) to Section 393(2)].
5.2 Application for Proportionate TDS: Section 395(2)
(Corresponding to Section 195(2) and 195(3) of the Income Tax Act, 1961)
The payer who believes that the entire sum payable to a non-resident would not be chargeable to tax in India may apply to the Assessing Officer under Section 395(2) for determination of the appropriate proportion of the sum that is actually chargeable. TDS is then deducted only on that determined proportion.
5.3 Lower or Nil Deduction Certificate: Section 395(1)
(Corresponding to Section 197 of the Income Tax Act, 1961)
The payee (non-resident recipient) may apply to the Assessing Officer for a certificate for deduction at a lower rate or nil deduction. On being satisfied that the total income of the payee justifies it, the Assessing Officer issues such a certificate, and the payer deducts at the rate specified in the certificate.
5.4 Recovery of Tax from Non-Resident Assets: Section 422
(Corresponding to Section 173 of the Income Tax Act, 1961)
Where a non-resident is entitled to income arising in India under Section 9(2), tax chargeable on that income, whether in the non-resident’s name or in the name of the agent as representative assessee, may be: (a) recovered by TDS deduction under Chapter XIX-B, and (b) in case of tax arrears, recovered from any assets of the non-resident that are, or may at any time come, within India [Section 422]
Part 6: Special Provisions for Non-Resident Indians (NRI)
Sections 212 to 217 of the Income Tax Act, 2025 (corresponding to Sections 115C to 115I of the Income Tax Act, 1961, as applicable) contain dedicated provisions for NRIs.
6.1 Who is an NRI Under These Provisions?
Section 212(d) defines NRI as an individual who is not a resident AND is: (i) a citizen of India, or (ii) a person of Indian origin
6.2 No Deductions on Investment Income [Section 213(1)]
No deduction for any expenditure or allowance is allowed under any provision of the Act in computing the investment income of an NRI.
6.3 No Chapter VIII Deductions on Investment and Capital Gain Income [Section 213(2)]
If the gross total income of an NRI consists only of investment income or long-term capital gains from foreign exchange assets, no deduction under Chapter VIII (equivalent to Chapter VI-A of the 1961 Act, covering deductions under 80C to 80U) is allowed. Where other income is also present, the Chapter VIII deductions apply only to the reduced income after removing investment income and long-term capital gains.
6.4 Capital Gains Rollover Exemption for NRIs [Section 215]
(Corresponding to Section 115F of the Income Tax Act, 1961)
Where an NRI earns long-term capital gains from transfer of a foreign exchange asset and within 6 months reinvests the net consideration in any specified asset:
- If cost of new asset is at least equal to the net consideration: the entire capital gain is not charged to tax under Section 67
- If cost of new asset is less than net consideration: the exempt amount is computed as follows:
Exempt gain (A) = Total gain (B) x Cost of new asset (C) / Net consideration (D)
“Net consideration” means the full value of consideration received minus expenditure incurred wholly and exclusively in connection with the transfer [Section 215(2)(b)].
Clawback rule [Section 215(3)]: If the new asset is transferred or converted into money within 3 years of acquisition, the capital gain originally exempted reverts to being taxable as a long-term capital gain in the year of such transfer or conversion.
6.5 Exemption from Filing ITR [Section 216]
(Corresponding to Section 115G of the Income Tax Act, 1961)
An NRI does not need to file an ITR under Section 263(1) if: (a) Total income for the tax year consists only of investment income or long-term capital gains from foreign exchange assets, or both, AND (b) Tax has been deducted at source under Chapter XIX-B from such income
6.6 Continuation of NRI Benefits After Becoming Resident [Section 217(1)]
(Corresponding to Section 115H of the Income Tax Act, 1961)
Where an NRI subsequently becomes assessable as a resident and furnishes a declaration to the Assessing Officer with the ITR to the effect that provisions of Sections 212 to 216 should continue to apply, those provisions continue to apply in relation to investment income from foreign exchange assets (other than shares in Indian companies) for that year and every subsequent year until the asset is transferred or converted to money [Section 217(1)].
6.7 Option to Opt Out of NRI Provisions [Section 217(2)]
(Corresponding to Section 115I of the Income Tax Act, 1961)
An NRI may choose not to be governed by Sections 212 to 216 for any tax year by declaring so in the return of income under Section 263. In that case: (a) Sections 212 to 216 do not apply for that tax year, and (b) Total income is computed under the normal provisions of the Act
Note: The Finance Act, 2026 substituted the original Sections 217 and 218 of the Income Tax Act, 2025 with a new Section 217 that combines the continuation benefit (old Section 217) and the opt-out right (old Section 218) into sub-sections (1) and (2) respectively.
Part 7: Double Taxation Avoidance Agreement (DTAA)
7.1 Legal Basis: Section 159 of the Income Tax Act, 2025
(Corresponding to Section 90 of the Income Tax Act, 1961)
The Central Government may enter into agreements with other countries or specified territories for: (a) Granting relief on income taxed in both countries (b) Avoidance of double taxation without creating opportunities for non-taxation or reduced taxation through treaty shopping or evasion (c) Exchange of information to prevent tax evasion (d) Recovery of taxes
Treaty Override Rule [Section 159(4)]: Where a DTAA exists and has been notified, the provisions of the Act apply to the assessee to the extent they are more beneficial to that assessee. The non-resident always gets the benefit of whichever is lower, the Act or the treaty.
Anti-Treaty-Shopping [Section 159(3)(b)]: Agreements are not to create opportunities for non-taxation or reduced taxation through treaty-shopping arrangements aimed at obtaining reliefs for the indirect benefit of residents of a third country.
GAAR Override [Section 159(6)]: The provisions of Chapter XI (General Anti-Avoidance Rules, equivalent to Chapter X-A of the 1961 Act) apply even if a DTAA exists and even where GAAR is not beneficial to the assessee. DTAA benefits cannot override GAAR provisions.
Term interpretation [Section 159(7)]: A term defined in the agreement is interpreted as defined there. If not defined in the agreement but defined in the Act, the Act’s definition applies. If undefined in both, it takes the meaning under any Act of the Central Government related to taxes, and then any other Central Government law.
7.2 How to Claim DTAA Benefits: TRC and Form No. 41
Under Section 159(8) of the new Act, a non-resident can claim DTAA relief only when: (a) A Tax Residency Certificate (TRC) is obtained from the Government of the country where the non-resident is a resident, AND (b) Other documents and information as prescribed are provided
Under Rule 75(1) of the Income Tax Rules, 2026, the documents and information required under Section 159(8)(b) must be furnished in Form No. 41.
Under Rule 75(2), the assessee must maintain all documents necessary to substantiate the information provided in Form No. 41. The income tax authority may call for those documents at any time.
For Indian residents seeking a certificate of residence from India for purposes of a DTAA, an application must be made in Form No. 42, and the Assessing Officer issues the certificate in Form No. 43 [Rule 75(3) and (4)].
Note: Under the Income Tax Rules, 1962 (applicable to the 1961 Act), this information was furnished in Form 10F under Rule 21AB. Under the Income Tax Rules, 2026, it is now Form No. 41 under Rule 75.
7.3 Countries Without DTAA: Unilateral Relief Under Section 160
(Corresponding to Section 91 of the Income Tax Act, 1961)
Where no DTAA exists and a resident proves that income accruing outside India was also taxed in that foreign country, relief is available as a deduction from Indian tax. The deduction is the lower of: (a) The Indian rate of tax, or (b) The foreign country’s rate of tax [Section 160(1)]
This Section 160 relief is available to residents (including RNOR) who paid tax abroad on income that also suffers Indian tax. It is not a provision that applies to non-residents directly.
7.4 Foreign Tax Credit: Rule 76 of the Income Tax Rules, 2026
(Corresponding to Rule 128 of the Income Tax Rules, 1962)
A resident is entitled to credit for foreign tax paid in a country outside India, in the year in which the corresponding income is offered to tax in India.
Key rules under Rule 76:
- Credit is the lower of Indian tax payable on such income or the foreign tax paid [Rule 76(7)(a)]
- Currency conversion at the telegraphic transfer buying rate on the last day of the month immediately before the tax was paid [Rule 76(7)(b)]
- Credit is available against income tax, surcharge, and cess, but NOT against interest, fee, or penalty [Rule 76(4)]
- Disputed foreign tax is not eligible for credit until the dispute is settled, after which credit must be claimed within 6 months of settlement [Rule 76(5) and (6)]
- Statement of foreign income and tax in Form No. 44 must be filed within 12 months from the end of the tax year in which the income was offered to tax, provided the ITR was filed on time [Rule 76(12)]
- Form No. 44 must be verified by a CA (as defined in Section 515(3)(b)) where the assessee is a company or where foreign tax paid equals or exceeds Rs. 1,00,000 [Rule 76(16)]
- For disputed tax settlements, intimation in Form No. 45 is required [Rule 76(15)]
Part 8: Representative Assessee and Agent of Non-Resident
8.1 Representative Assessee: Section 304 of the Income Tax Act, 2025
(Corresponding to Section 160 of the Income Tax Act, 1961)
A representative assessee is liable to the same duties, responsibilities, and liabilities as the non-resident itself in respect of the income for which he is a representative assessee.
8.2 Agent of Non-Resident: Section 306 of the Income Tax Act, 2025
(Corresponding to Section 163 of the Income Tax Act, 1961)
“Agent” in relation to a non-resident includes any person in India who is:
- Employed by or on behalf of the non-resident
- Has a business connection with the non-resident (as defined in Section 9(9)(a))
- From or through whom the non-resident receives any income, directly or indirectly
- The trustee of the non-resident
Also includes any person (whether resident or non-resident) who has acquired by transfer a capital asset situated in India [Section 306(1)(b)].
Protection for independent brokers [Section 306(2)]: A broker who does not deal directly with the non-resident principal but only through a non-resident broker is not treated as an agent, provided both are acting in the ordinary course of their respective businesses.
No person is treated as an agent without being given an opportunity of being heard by the Assessing Officer as to his liability to be treated as such [Section 306(3)].
Part 9: Permanent Establishment (PE)
The concept of Permanent Establishment is used in DTAAs and in several provisions of the new Act. Under Section 173(c) of the Income Tax Act, 2025, “permanent establishment” means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
A non-resident company with a PE in India is taxed in India on income attributable to the PE. Interest paid by the Indian PE of a non-resident bank to its head office or other branch is deemed to arise in India and is taxable as a separate item [Section 9(5)(b)].
For specified funds, Section 210 applies only to income attributable to units held by non-residents who are not a PE in India [Section 210(2)].
Part 10: Filing and Compliance for Non-Residents
10.1 When Must a Non-Resident File an ITR?
The general rule under Section 263(1) requires every person to file if their income exceeds the basic exemption limit. Specific statutory exemptions exist for non-residents where all income has suffered adequate TDS:
| Situation | Section | Exemption from ITR Filing |
| Total income consists only of dividends, interest, royalties, FTS under Section 207(1) and (2); AND TDS deducted at not less than prescribed rates | Section 207(8) | No ITR required |
| Total income consists only of interest on bonds and dividends on GDRs under Section 209(1) Table Sl. Nos. 1 and 2; AND TDS deducted | Section 209(4) | No ITR required |
| Total income of sportsman or entertainer consists only of Section 211 income; AND TDS deducted | Section 211(3) | No ITR required |
| NRI’s total income consists only of investment income or LTCGs on foreign exchange assets; AND TDS deducted | Section 216 | No ITR required |
In all other cases, a non-resident whose income in India exceeds the basic exemption limit must file an ITR.
Where a non-resident wishes to claim a refund of excess TDS, filing an ITR is necessary regardless of the above exemptions.
10.2 ITR Form
Non-residents generally file using ITR-2 for income from capital gains, salary, house property, or other sources. Where business income is involved, ITR-3 applies. Due dates are as per Section 263(1): 31st July for most individuals, 31st August for business and profession not requiring audit, and 31st October for audit cases.
Part 11: Section Cross-Reference Table: Income Tax Act 2025 vs Income Tax Act 1961
| Subject | Income Tax Act 2025 | Income Tax Act 1961 |
| Scope of total income for non-residents | Section 5(2) | Section 5(2) |
| Residential status | Section 6 | Section 6 |
| Income deemed to accrue or arise in India | Section 9 | Section 9 |
| Indirect transfer | Section 9(10) | Section 9(1)(i) Explanation 5 |
| Significant economic presence | Section 9(9)(d) | Section 9(1) Explanation 2A |
| Special rates for non-resident or foreign company (dividend, interest, royalty, FTS) | Section 207 | Section 115A |
| NRI definitions, foreign exchange asset, specified asset | Section 212 | Section 115C |
| No deduction on NRI investment income | Section 213 | Section 115D |
| Tax on NRI investment income and LTCGs | Section 214 | Section 115E |
| NRI capital gains rollover exemption | Section 215 | Section 115F |
| NRI exemption from filing ITR | Section 216 | Section 115G |
| NRI continuation of benefits after becoming resident | Section 217(1) | Section 115H |
| NRI opt-out option | Section 217(2) | Section 115I |
| Offshore fund | Section 208 | Section 115AB |
| Bonds and GDR income | Section 209 | Section 115AC |
| FII and specified fund income | Section 210 | Section 115AD |
| Sportsmen and entertainers | Section 211 | Section 115BBA |
| Presumptive income for non-resident businesses (shipping, aircraft, mineral oil) | Section 61 | Sections 44B, 44BB, 44BBA, 44BBB |
| Head office expenditure deduction | Section 60 | Section 44C |
| DTAA | Section 159 | Section 90 |
| Unilateral relief (no DTAA) | Section 160 | Section 91 |
| Foreign tax credit | Rule 76, Income Tax Rules 2026 | Rule 128, Income Tax Rules 1962 |
| Documents for DTAA claim (Form No. 41) | Rule 75(1), Form No. 41 | Rule 21AB, Form 10F |
| Certificate of residence from India (Form No. 42 and 43) | Rule 75(3) and (4), Forms No. 42 and 43 | Rule 21AB |
| TDS on non-resident payments | Section 393(2) | Section 195 |
| Proportionate TDS application by payer | Section 395(2) | Section 195(2) |
| Lower or nil deduction certificate | Section 395(1) | Section 197 |
| Representative assessee | Section 304 | Section 160 |
| Agent of non-resident | Section 306 | Section 163 |
| Recovery of tax from non-resident assets | Section 422 | Section 173 |
Part 12: Practical Compliance Checklist
- If you are an Indian citizen working abroad and visiting India: Count your days of stay carefully every tax year. Staying beyond 120 days when income excluding foreign sources exceeds Rs. 15 lakh can make you RNOR under Section 6(13)(b). Staying beyond 182 days in a year makes you a full resident, bringing worldwide income into Indian tax.
- If you are an Indian citizen living abroad with zero tax liability in your country of residence: The deemed resident rule under Section 6(7) may apply if your Indian-source income exceeds Rs. 15 lakh. Check this before assuming non-resident status.
- If you receive royalties or FTS from India: TDS at rates in force will be deducted under Section 393(2) item 17. If your country has a DTAA with India that provides a lower rate, obtain a Tax Residency Certificate and submit Form No. 41 to the Indian payer before the payment is made. This enables TDS at the lower treaty rate. Maintain all substantiating documents as required by Rule 75(2).
- If you are an NRI earning only investment income and LTCGs from foreign exchange assets and full TDS has been deducted: Filing an ITR is not required under Section 216. However, if your actual tax liability is lower than TDS deducted, file to claim a refund.
- If your foreign company holds significant assets in India: Obtain a valuation to check whether Section 9(10) indirect transfer applies. If Indian assets exceed Rs. 10 crore AND form more than 50% of the company’s total asset value, transfer of shares of that foreign company anywhere in the world triggers Indian tax on the capital gain.
- If you are a foreign company providing services to an Indian company: Even if you have no presence in India, FTS or royalty received from that Indian company is taxable in India under Section 9(7) read with Section 9(11). Ensure the Indian payer deducts TDS correctly. If a lower treaty rate is available, furnish Form No. 41 along with the TRC.
Non-resident taxation in India is a detailed but logical framework. The starting point is always residential status under Section 6, then the scope of income under Section 5, then what is deemed to arise in India under Section 9, then the applicable rate under Sections 207 to 217, and finally whether a DTAA provides relief under Section 159. When a DTAA applies, the more beneficial provision wins, but GAAR under Chapter XI cannot be bypassed through treaty reliance. Keep your TRC current, furnish Form No. 41 before treaty benefits are claimed, and document all foreign tax credits through Form No. 44 within the timeline prescribed in Rule 76.
