The first year can be quite complicated from the tax perspective for non-resident Indians (NRIs) returning to India. Changes in residential status, taxation of foreign income, requirement of disclosure of foreign assets and Double Taxation Avoidance Agreement (DTAA) rules often catch returnees by surprise. However, the existing framework also provides for a structured ‘grace period’, allowing some of the challenges to be addressed.
First year for Non-Resident Indians (NRIs): Tax rules and challenges
After returning to India, the tax liability of non-resident Indians (NRIs) depends on their new residential status. It is important to understand the determination of residential status and taxation of foreign income in the first year. Many returnees end up with long-term tax problems due to mistakes made in this transition year, known as ‘tax shock’.
How is your residential status determined?
Your tax liability in India is primarily based on your residential status, which depends on the number of days you stay in India, and not on your intention. Your tax residential status changes gradually upon returning to India.
- If you stay in India for less than 182 days in the first year, you can usually Non Resident (NR) Are classified as.
- After this, you Resident but not ordinarily resident (RNOR) Get into a situation which can last for 2-3 years.
- Ultimately, you Resident and Ordinarily Resident (ROR) Become.
You get RNOR status if you have been an NRI for 9 out of the last 10 years or have stayed in India for 729 days or less in the last 7 years.
Residential status and rules for calculating days
| residential status | terms | validity period |
|---|---|---|
| Non Resident (NR) | Less than 182 days residence in India | 1 year |
| Resident but not ordinarily resident (RNOR) | NRI 9 out of last 10 years Or residence in India for 729 days or less in the last 7 years | usually 2-3 years |
| Resident and Ordinarily Resident (ROR) | If the conditions of NR and RNOR are not fulfilled | Permanent |
Tax rules on foreign income
Taxation on foreign income depends directly on your residential status:
- During NR or RNOR state: Foreign income remains largely exempt from Indian taxation. During the RNOR period, your global income is exempt from Indian taxation, except for income arising from a business or profession controlled from India. This grace period usually lasts for 2-3 years, giving you time to reorganize your finances.
- On receipt of ROR status: Once you have ROR status, your worldwide income becomes fully taxable in India, including foreign rental income, dividends, interest income and profits from sale of foreign assets. Many returnees assume that foreign income is always exempt from India’s tax net, which is wrong.
Disclosure of Foreign Assets and other important points
It is extremely important to follow the disclosure of foreign assets and banking related rules upon returning to India:
- Asset Disclosure: During NR and RNOR years, you are not required to report foreign assets in your Indian income tax return. This disclosure requirement only applies once you have obtained ROR status. Once the ROR is created, not disclosing foreign bank accounts, ESOPs, RSUs or other assets in the Schedule FA may be a compliance risk.
- Change of Bank Accounts: You have to convert NRE/NRO accounts into resident accounts immediately after becoming resident. FCNR deposits can be held till maturity and remain tax-free during your RNOR period. It is also important to update KYC and modify your residential status with banks, brokers and mutual funds. Continuing to claim NRE interest as exempt or ignoring FEMA requirements can lead to misreporting and penalties.
How to avoid mistakes in tax and compliance?
It is important to take a proactive approach to avoid common mistakes in the first year of returning to India:
- Keep track of housing status: Track days count carefully and reevaluate your residential status annually. It could be a big mistake to consider RNOR equivalent to NRI status and take the RNOR benefits for too long.
- Foreign Income and Assets Review: Review foreign income and assets before filing returns. After the implementation of ROR status, it is mandatory to report global income.
- Advance Tax Planning and DTAA: If you are planning to sell foreign assets or withdraw funds from foreign retirement accounts, it is advisable to complete these transactions before converting to ROR status so that you can avoid Indian taxation on those transactions. To claim Foreign Tax Credit (FTC) it is necessary to understand the steps like Form 67, Tax Residence Certificate or Treaty Analysis. Paying foreign tax does not mean that Indian tax liability is automatically eliminated.
Disclaimer: This article is for general information only and should not be construed as financial or tax advice. Readers are advised to consult a qualified tax advisor for personalized financial advice.
Last Updated: 19 January 2026
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