Why This Matters Right Now
If you are an Indian citizen living abroad and you earn income from Indian sources (think rental income, capital gains from stocks, mutual fund redemptions, dividends, interest on NRO deposits, or business income), understanding your tax residency status is more critical than ever. The government uses your residency classification to decide how much of your worldwide income it can tax.
For Assessment Year 2025-2026 (Financial Year 2024-2025), the core residency rules under Section 6 of the Income Tax Act, 1961 remain as they were, but the ₹15 lakh Indian source income threshold continues to be a game changer for many NRIs. Let us walk through the rules, what they mean for your portfolio, and what you need to do right now.
The Current Rules (In Effect for AY 2025-2026)
Under the Income Tax Act, 1961, you qualify as a resident if either of these is true:
- You stayed in India for 182 days or more during the financial year, or
- You stayed for 60 days or more in the current year and you clocked 365 days or more in India over the preceding four years
This ₹15 lakh income test is crucial. It means that if you earn less than ₹15 lakhs from Indian sources (rental income, dividends, capital gains, interest, business income combined), you can stay in India for up to 181 days without triggering resident status. But if you cross ₹15 lakhs in Indian source income, the 60-day threshold kicks in, and you become a resident if you spend 60 or more days in India during the year.
Resident but Not Ordinarily Resident (RNOR) Status
If you do become classified as a resident, you may still qualify for RNOR status, which is a sweet spot for many NRIs. You get RNOR status if you were non-resident in 9 out of the preceding 10 years or if you were present in India for 729 days or less in the preceding 7 years.
RNOR status means you pay tax only on Indian source income. Your foreign salary, overseas capital gains, and international investment returns stay outside India's tax net. This is a meaningful advantage over full resident status, where the government taxes your global income.
The Deemed Residency Trap (Watch Out if You Live in a Tax Free Country)
This rule catches a lot of people off guard. If you are an Indian citizen earning ₹15 lakh or more from Indian sources and you are not liable to pay tax in any other country, the government treats you as a full resident of India regardless of how many days you actually spent in the country.
Who does this affect? Primarily NRIs living in jurisdictions with zero personal income tax, including the UAE, Saudi Arabia, Bahrain, Kuwait, Qatar, and Oman.
The logic from the government's perspective is straightforward: if no country in the world is taxing your income, India wants to make sure it can.
The escape hatch here is a tax residency certificate (TRC) from your country of residence. If you can prove you are a tax resident of another country (even one with zero tax), you may be able to argue against deemed residency. But this area is still evolving, and you should absolutely get professional advice if you fall into this category.
Quick Reference: Your Tax Status at a Glance
| Your Situation | Tax Status | What Gets Taxed | |---|---|---| | Stayed fewer than 60 days in India, Indian income under ₹15 lakh | NRI | Only Indian source income | | Stayed fewer than 182 days in India, Indian income under ₹15 lakh | NRI | Only Indian source income | | Stayed 60 to 181 days, Indian income ₹15 lakh or more, and 365 plus days in preceding 4 years | Resident (possibly RNOR) | Indian source income (RNOR); global income if full resident | | Stayed 182 days or more in India | Full Resident | Global income, everything worldwide | | Live in a tax free country, Indian income ₹15 lakh or more, not taxable anywhere else | Deemed Full Resident | Global income, everything worldwide |
How This Hits Your Investment Portfolio
Let us connect the dots between residency status and the investments NRIs typically hold in India.
Stock Market and Equity Mutual Funds
If you trade Indian equities through a PIS (Portfolio Investment Scheme) account or hold equity mutual funds, your capital gains are Indian source income. Short term capital gains (holding period under 12 months for listed equity) get taxed at 15%, and long term gains above ₹1 lakh get taxed at 10%. These rates apply regardless of whether you are NRI or RNOR.
But here is the kicker. If your total Indian source income (including these capital gains, plus dividends, plus rental income, plus NRO interest) crosses ₹15 lakh, you suddenly fall into the 60-day threshold bucket. A big redemption year or a bumper dividend season could push you over the line without you realizing it. This means you could accidentally trigger resident status if you spend 60 or more days in India that year.
REITs, InvITs, and Dividend Income
Distributions from REITs (like Embassy Office Parks or Mindspace Business Parks) and InvITs (like IndiGrid or IRB InvIT) are Indian source income. Dividends from Indian listed companies are also Indian source income, taxed at your applicable slab rate with TDS deducted at source for NRIs.
All of this counts toward the ₹15 lakh threshold. If you hold multiple REITs or dividend-paying stocks, track your annual distributions carefully.
NRO Fixed Deposits and Interest Income
Interest earned on NRO accounts is Indian source income, and banks deduct TDS at 30% (plus surcharge and cess) for NRIs. This income also feeds into the ₹15 lakh calculation. If you have substantial NRO deposits earning interest, this can quickly push you over the threshold.
Rental Income from Indian Property
If you own property in India and earn rent, that is Indian source income. Many NRIs who own multiple properties in metro cities can easily generate ₹15 lakh or more in combined rental and investment income.
Private Placements and Unlisted Shares
Gains from selling unlisted shares or exiting private placements in Indian startups count as Indian source income. With the startup ecosystem booming, secondary sales and buybacks can generate substantial one-time income that tips you over the threshold.
Five Things You Should Do Before the New Financial Year
Track your days meticulously. Use a spreadsheet, an app, or even a simple calendar. Every entry and exit stamp in your passport matters. Immigration records are now digital, so the tax department can verify your stay independently. When you file your return (ITR-2 or ITR-3 as applicable), you will need to declare the exact number of days you spent in India.
Add up all your Indian source income streams. Do not just think about your salary or business income. Include capital gains, dividends, interest, rental income, and any other Indian source earnings. If the total is approaching ₹15 lakh, plan your transactions accordingly. A bumper year in one category (say, a large stock sale) could push you over the threshold and change your residency classification.
Get a Tax Residency Certificate from your country of residence. This is especially critical if you live in the UAE, Saudi Arabia, or any other zero tax jurisdiction. A TRC is your primary defense against deemed residency. Apply for it well in advance, as the process can take several weeks.
Review your investment structure. If you are close to the ₹15 lakh threshold, consider whether it makes sense to hold certain investments in NRE accounts (where interest is tax free for NRIs) rather than NRO accounts. Also evaluate whether your mutual fund redemptions and stock sales can be timed to manage your annual Indian income. Spreading large transactions across two financial years might help you stay below the threshold in either year.
Talk to a cross border tax advisor. The interaction between Indian tax law, your country of residence's tax law, and any applicable Double Taxation Avoidance Agreement (DTAA) is complex. A qualified advisor can help you structure your affairs to avoid double taxation and unexpected residency classification. They can also help you file your ITR correctly, declaring your residency status and days in India accurately.
Filing Your Return as an NRI
For Assessment Year 2025-2026, you will file your return using the updated Income-tax Rules, 2026, which came into force on April 1, 2026. The e-filing portal will guide you through determining your residential status based on your days in India and Indian source income.
If you are classified as an NRI, you file ITR-2 (if you have capital gains or foreign income) or ITR-3 (if you are self employed). You report only your Indian-sourced income. The return form will ask you to declare the number of days you spent in India during the financial year, and the system will auto-determine your status based on the rules outlined above.
Make sure you report all Indian source income accurately: salary, rental income, capital gains from Indian assets, dividends, interest on NRO accounts, and any other Indian income. TDS certificates (Form 26AS) will help you reconcile your income and TDS paid.
The Bottom Line
Your residency status directly determines how much of your worldwide income India can tax. For Assessment Year 2025-2026, the core rules remain unchanged: the 182-day threshold for all individuals, the 60-day threshold for Indian citizens and PIOs with Indian source income below ₹15 lakhs, and the deemed residency provision for those earning ₹15 lakhs or more in tax-free jurisdictions.
The ₹15 lakh income threshold is the real game changer. It affects whether you can use the relaxed 60-day rule, and it determines whether you fall into the deemed residency trap. With the government increasingly connecting PAN data, bank account information, and immigration records, the days of ambiguity are over.
Know your status, track your days meticulously, add up your Indian source income, get a TRC if you live in a tax-free country, and structure your investments accordingly. A little planning now can save you from unexpected tax bills and residency reclassifications later.
> Heads up: This article is based on the Income Tax Act, 1961 (as amended up to Finance Act 2020) and the Income-tax Rules, 2026, which came into force on April 1, 2026. The Income Tax Department has not yet released detailed implementation circulars addressing all edge cases, and specific scenarios may be clarified as the year progresses. Always check the official Income Tax Department portal at incometax.gov.in for the latest notifications and consult a qualified tax professional before making decisions. For AY 2025-2026 filings, the deadline is July 31, 2025 (or extended deadlines if applicable).