Clipped from: https://taxguru.in/income-tax/nris-tax-reform-treaty-issues-indias-tax-regime.html
This article examines how the recently introduced Income‑tax Bill, 2025 (and its successor Act), reshape India’s direct tax regime in relation to persons who are non-resident Indians (NRIs). It focuses on the nexus between domestic reform (resident-status rules, computation of income, withholding) and India’s treaty obligations under its double taxation avoidance agreements (DTAAs). The article argues that while the reform offers simplification, it also raises risks of increased tax burden and treaty-based controversies for NRIs—with issues of source/residence, treaty interpretation (including the role of the pre-existing treaties under Income‑tax Act, 1961) and India’s sovereign choice of regime. The article concludes by offering forward-looking suggestions to align NRI taxation with treaty fairness and international best practice.
1. Introduction
The tax treatment of NRIs has long been a sensitive issue for India’s direct‐tax framework. On one hand, India seeks to attract investment and diaspora capital; on the other, it seeks to preserve its sovereign taxing rights. This tension is amplified by recent reforms: the Income-tax Bill 2025 (and its imminent Act) introduces key changes to residential status rules, computation of income for non-residents and NRIs, and clarifies treaty-related provisions. For NRIs those changes are not mere housekeeping: they trigger questions of double taxation, treaty interplay, source/residence conflicts, and investor confidence.
In this article, I focus on three interlinked themes: (1) residence and scope of tax under the new regime as it affects NRIs; (2) treaty issues and double taxation risks arising from the domestic changes; and (3) the broader policy and reform implications, especially from a treaty‐alignment and international fairness perspective.
II. Sovereignty, Residence and Procedural Rigidity for NRIs
A. Residence rules
Under the Income-tax Act, 1961, ‘resident’ status is governed by Section 6: an individual becomes resident for a previous year in India if he is present for ≥ 182 days in India in that year, or ≥ 60 days in that year and ≥ 365 days in the previous four years.[1] Persons not satisfying these remain non-resident (NRIs). When resident, tax liability is much broader (see below). For NRIs (citizens of India living abroad or persons of Indian origin), this residence classification is determinative of Indian tax exposure.
The Income‐tax Bill 2025 introduces modifications targeted at “high-income NRIs/PIOs”: as clients of commentary note, the 60-day rule is replaced by 120 days for Indian citizens/PIOs earning ≥ ₹15 lakh and with certain stay conditions. Further, Clause 6 (Residence) in the Bill seeks to clarify definitions and bring high-income diaspora within resident ambit even if their stay is lower.
From an NRI’s viewpoint this means increased risk of being treated as resident (thus taxed on global income) even when part-year in India—eroding the “safe-harbour” of non-residence. The sovereignty concern arises: India chooses to extend its taxing net, arguably increasing its power vis-à-vis cross‐border persons.
B. Computation of Income for Non-residents/NRIs
Under Section 5 of the 1961 Act, a non‐resident is liable to tax in India only on income received or deemed to be received in India, or accrues/arises or is deemed to accrue/arise in India. For a resident, global income may be taxed. This difference underscores why residence status is so critical.
The Bill introduces Clause 213 (“Special provision for computation of total income of non-residents”) and Clause 216 (“Return of income not to be furnished in certain cases”) (per commentary) under the Bill. These clauses indicate explicit legislative attention to non-residents’ income computation and filing burdens. On one hand, Clause 216 aims to reduce compliance (a welcome relief). On the other hand, the special rules may complicate treaty claims and create differential treatment.
C. Procedural rigidity and costs for NRIs
The reforms position India’s tax law as more “globalised” (digital data access, simplified law) but simultaneously impose burdens: increased monitoring of stay days, higher risk of reclassification. For NRIs, compliance (e.g., obtaining TRCs, ensuring correct status) becomes more delicate. The “sovereignty versus alignment” tension is evident: India tightening rules domestically while offering treaty relief—but with conditions.
III. Treaty Issues, Double Taxation and NRIs in the New Regime
A. India’s DTAA framework
India’s website on DTAAs lists the Act, treaty charts and withholding tables. India has DTAAs with more than 90 countries & territories. For NRIs, the treaty benefits (reduced rates of TDS, elimination of double taxation) are central. For example, dividends, interest and royalties may be subject to lower withholding under a treaty than under the domestic law.
B. Source versus residence conflicts
A perennial difficulty for NRIs arises when a treaty allocates taxing rights: e.g., which state has right to tax salary for services rendered partly in India and partly abroad; or capital gains from sale of Indian asset by NRI. The domestic law via Sections 9, 9A (Income-tax Act) deem income to accrue or arise in India e.g., from business connection/property/assets situated in India. Thus, even as an NRI you may face tax in India on “Indian‐source income”, but the treaty may potentially give you relief. The NRI must navigate both domestic law and treaty text.
In the Bill, the Government has clarified in its commentary that Article 3(2) definitions in several treaties will align with domestic definitions (via Clause 159 of the Bill). This is significant: India will adopt in treaties its domestic scheme of definitions of residence, accrual, etc. While this increases clarity, it may also tilt the odds in favour of India as source state (which retains taxing right) rather than residence state (where NRI resides abroad).
C. Double taxation risk for NRIs
Despite the DTAA framework, NRIs face risks of double taxation: (i) Because they may pay tax in India on Indian‐source income; (ii) Abroad in their country of residence; (iii) Because treaty relief may be denied or delayed (for example non-submission of TRC/Forms, incorrect status). Many practitioner guides caution NRIs :
“If NRIs don’t follow DTAA rules, they could end up paying tax twice — in India and in their country of residence.”
For example, the domestic law still requires TRC, Form 10F etc., to claim treaty benefit (recognised in practice guides). The reforms in the Bill do not explicitly eliminate this procedural burden. So while India clarifies definitions and residence, the NRI may face domestic compliance risk before being able to rely on treaty relief.
D. Illustrative issue: property/capital gains by NRIs
One area of high relevance is capital gains on sale of property by NRIs in India. While the Bill does not yet finalise all changes publicly, media commentary suggest steep tax implications for NRIs selling property in India (after July 2024) due to loss of indexation benefits on long-term capital gains (LTCG). That raises questions of treaty fairness: if a treaty provides relief or discards residence state taxing rights, does domestic law undermine that relief?
E. Treaty interpretation and sovereignty choices
India’s move to clarify treaty definitions (e.g., Article 3(2) alignments) suggests a proactive choice to embed its domestic policy in its treaty network. Some might argue this realises sovereignty; others that it creates rigidity and may conflict with flexible treaty interpretation favouring taxpayers (the “beneficial interpretation” doctrine). The shift matters for NRIs because they operate at the intersection of two tax sovereignties.
F. Practical mismatch: timing of reform and treaty network
Another challenge: India’s Bill/Act will come into effect (proposed) from 1 April 2026 (for residence rules) and beyond. Meanwhile, NRIs often make decisions now based on pre-existing rules/treaty terms. The mismatch in transitional rules may give rise to uncertainty, treaty-claims disputes, and investor (diaspora) dissatisfaction—contrary to what a “reform” purports to achieve.
IV. Forward-Looking Reform Proposals
Given the above tensions, and mindful of your interest in both sovereignty and global alignment, the following proposals (pertinent to NRIs and treaty issues) appear important:
1. Enhanced clarity in transitional rules for NRIs – The Bill should clearly specify how changes to residence rules, capital gains, filing exemptions (e.g., Clause 216) apply to NRIs whose status spans the transitional period. A sunset‐clause or grandfathering for persons who have structured stay/ investments pre-reform would facilitate fairness.
2. Uniform standard of “tax residence certificate” and simplified forms for NRIs– Since treaty relief hinges on TRC/Form 10F, India (via CBDT) should issue a simplified, NRI-specific procedure, including digital verification, to reduce procedural barriers and avoid denial of relief on technicalities.
3. Treaty renegotiation focus with diaspora‐friendly jurisdictions – India’s network includes jurisdictions with large Indian diaspora (UAE, US, UK, Canada, Singapore). For each of these, India should review whether treaty withholding rates and capital gains provisions reflect current mobility and investment patterns of NRIs. For instance, a treaty with UAE (no tax jurisdiction) may need creative reliefs for NRIs.
4. Clearer delineation of “source” rules for digital and property income involving NRIs – As NRIs increasingly invest in Indian digital assets or hold real estate jointly, India should ensure that source rules (Sections 9/9A and treaty articles on income from immovable property/business) are calibrated to avoid double taxation or non-taxation, and align with the OECD model treaty commentary.
5. Leveraging Advance Pricing/Mutual Agreement Procedures (MAP) for diaspora disputes – India should bolster its MAP infrastructure (and treaty mutual agreement clauses) especially for NRI investors. Those cross-border taxpayers (NRIs) often fall into grey zones; MAP provides a negotiated resolution mechanism to reduce litigation and uncertainty.
6. Periodic review of NRI-specific compliance burden – Tax reform should regularly evaluate whether NRIs face disproportionate compliance burdens (filing returns, withholding, TRC) compared to residents, and whether a “diaspora tax charter” might be appropriate—i.e., a codified statement of rights and obligations of NRIs under India’s tax system.
V. Conclusion
The reform embodied in the Income-tax Bill 2025 (and its impending Act) marks a significant pivot in India’s direct tax architecture. For NRIs the changes are far from peripheral: they touch residence rules, computation of income, treaty definitions and compliance burden. India has clearly asserted its fiscal sovereignty and simultaneously attempted to bring clarity and simplification. However, from a treaty perspective and investor‐mobility lens the implications are mixed.
On one side, alignment of definitions and simplification promotes predictability for NRIs. On the other side, heightened residence‐risk, stricter source rules, and procedural hurdles may amplify tax burden and create treaty friction—especially if India’s treaty network does not evolve in tandem.
Given India’s global ambitions, and the growing role of its diaspora, a balanced approach that preserves sovereignty without impairing competitiveness is essential. For NRIs, the intersection of domestic reform and treaty rights must be navigated carefully. For scholars and policymakers alike, this reform offers an opportunity to rethink how a rising tax jurisdiction treats its mobile taxpayers—in a world where residency, source, investment and mobility increasingly overlap.
Referance
[1] https://incometaxindia.gov.in/tutorials/9.%20non-resident.pdf?
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Author- Shweta Upadhyay | Founder & Partner | Solace Law Practice | Shweta@solacelawpractice.com
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