For over two decades, an Oman-based NRI has called Muscat home, building a career in a country that levies zero personal income tax.
In India, he filed his tax returns dutifully, claimed NRI status and availed the concessional rates that came with it, including the 5-20% flat tax on interest and dividend income, which would otherwise be taxed at slab rates for residents. It was meant to be a watertight benefit under the Double Taxation Avoidance Agreements (DTAA).
Then, last year, the income tax department came knocking. The assessing officer opened the NRI's assessment and labelled him a deemed resident of India under Section 6 (1A) of the Income Tax Act, stripping away all non-resident benefits in one move.
Section 6 (1A), introduced via the Finance Act 2020, targets a very specific profile: an Indian citizen, not resident in India and not liable to pay tax in any other country by reason of domicile or residence. If the income from India of such an individual exceeds ₹15 lakh in a financial year, they are treated as a deemed resident and classified as Resident but Not Ordinarily Resident (RNOR).
“An RNOR is exempt from paying tax on foreign income in India but must pay tax on Indian income as a resident, and more importantly, will be devoid of any DTAA benefits,” said Bhawna Kakkar, chartered accountant and founder of Kakkar & Company.
This Oman-based NRI qualified on all counts as his interest and dividend income combined exceeded ₹15 lakh consecutively for a few years. Despite never setting foot in India in those years, he was deemed a resident.
"As a non-resident, I was getting a beneficial taxation rate of 20% on interest income from NCDs I had bought in India. But now this benefit on interest income has been removed," he said on condition of anonymity.
Lost benefits
The fallout goes beyond interest income. As an RNOR, he also lost access to the concessional 10% dividend tax rate available under the India-Oman DTAA. Every benefit he had relied upon for years, including reduced withholding rates, treaty-capped taxation and concessional treatment, was gone. He is now taxed as a resident on all Indian income, at slab rates that can reach 30%.
"My trouble didn't begin because I didn’t comply with tax laws or made a mistake – instead, it was because of a law I didn't know applied to me," he said.
What makes this rule particularly alarming is how easily the ₹15 lakh threshold can be breached. For NRIs with meaningful Indian investments, this is not a high amount. A single property sale generating capital gains above ₹15 lakh, which is routine in the real estate market, is sufficient to trigger deemed residency. Similarly, even a moderately sized dividend-paying portfolio in Indian equities can push an NRI past the limit.
However, the deemed residency provisions are not equally alarming across all West Asian countries where several Indians live in tax-free or low-tax jurisdictions. Harshal Bhuta, partner at P. R. Bhuta & Co, said NRIs based in the UAE have a structural advantage.
“The India-UAE DTAA recognizes an individual as a UAE tax resident if they spend 183 days there in a calendar year. So, even if you don’t pay tax, this criterion alone creates dual residency, which triggers the treaty's tie-breaker tests, like checking the taxpayer’s permanent home, centre of vital interests, habitual abode and nationality. Most long-term UAE residents break this tie decisively in the UAE's favour, effectively neutralizing India's deemed residency claim,” Bhuta said.
Residency article
While residents of the UAE may enjoy the structural advantage, Oman, Bahrain and some other tax-free countries may leave you at the mercy of Indian domestic law and hence be stripped of any tax advantages if income crosses ₹15 lakh. This is because these countries only tax companies and not individuals.
Since NRIs in these countries bear no tax liability there, they cannot qualify as tax residents under the DTAA's residency article, and without that qualification, they cannot access the treaty at all.
If Indian-source taxable income from property sales, equity gains, dividend or interest crosses ₹15 lakh in any financial year, deemed residency kicks in and every treaty benefit disappears. Tax experts advise such NRIs to audit their Indian income immediately, restructure investments and consider proactively filing updated returns before the department comes knocking.