The 120-Day Rule: How High-Income NRIs Can Lose Non-Resident Status

For most of the Indian diaspora, non-resident status feels permanent: you took a job in Dubai or New Jersey, you spend a few weeks a year in India, and you assume the tax authorities leave your overseas salary alone. Section 6 of the Income Tax Act 1961 does not work that way. Since the Finance Act 2020 tightened the counting rules, a single long visit home in a high-income year can reclassify you, and the cut-off that catches high earners is 120 days, not the 182 days most NRIs quote from memory.

The Income Tax Department's Non-Resident FAQ sets out the arithmetic plainly, and the stakes rise with income. An Indian citizen or person of Indian origin whose Indian-source income crosses Rs 15 lakh in a tax year loses the comfortable 60-day buffer and is judged against a 120-day line instead. Get the count wrong and you can convert a tax-free overseas year into one where India asserts a claim. This piece walks through where the law sits after the re-codification into the Income Tax Act 2025, what actually becomes taxable, how your double-tax treaty cushions the hit, and why your bank accounts do not necessarily follow your tax status.

FEMA / DTAA Position

Two separate statutes decide an NRI's status, and conflating them is the single most common error. The Foreign Exchange Management Act 1999 governs what accounts you may hold and how money moves across the border, while the Income Tax Act decides what India may tax. A person can be non-resident under FEMA yet resident for income tax in the same year, because the two use different tests: FEMA looks at the purpose and intention of your stay, whereas the Income Tax Act counts days.

The day-count test under Section 6 of the 1961 Act has two limbs, confirmed by the Income Tax Department's Non-Resident FAQ. An individual is resident in India if present for 182 days or more in the tax year, or present for 60 days or more in the tax year combined with 365 days or more across the four preceding years. For an Indian citizen or person of Indian origin whose total income excluding foreign-source income exceeds Rs 15 lakh, the second limb hardens: the 60-day figure is replaced by 120 days. That is the rule that quietly catches senior professionals, business owners and landlords who draw substantial Indian income while living abroad.

Crossing 120 days does not make your Dubai salary taxable in India overnight, because the law has a shock absorber built in. A person pulled in by the 120-day limb, or deemed resident under Section 6(1A), is classified Resident but Not Ordinarily Resident (RNOR). The Income Tax Department's FAQ confirms an RNOR is taxed only on Indian-source income and on income from a business controlled in or a profession set up in India. Your foreign employment income and your offshore investments remain outside the Indian charge. These residency provisions have now been re-codified in Sections 213 to 217 of the Income Tax Act 2025, effective for tax years from 1 April 2026, carrying the same 120-day and Rs 15 lakh tests across from the 1961 Act, as recorded on indiacode.nic.in.

Where a treaty applies, the India-side rate on your Indian income is capped by whichever is lower: the domestic rate or the Double Taxation Avoidance Agreement rate. But a treaty never makes capital gains disappear. Under both the India-US and India-UAE treaties, India retains the right to tax long-term capital gains on Indian assets at 12.5%; a treaty never zero-rates gains, and only reduces the rate on interest, dividends and royalties.

Tax Treatment in India

Once your status for the year is fixed, the mechanics follow. India taxes an NRI, and an RNOR, only on India-source income: rent from Indian property, interest on NRO balances, dividends from Indian companies, and capital gains on Indian securities and real estate. You can model your own position with the NRI income tax calculator before you file.

Payments to a non-resident are subject to withholding under Section 195, which the statute brief confirms requires TDS at the Income Tax Act rate or the DTAA rate, whichever is lower, against a valid Tax Residency Certificate. Capital gains carry their own schedule: listed-equity long-term gains are taxed at 12.5% above a Rs 1.25 lakh annual exemption under Section 112A, while short-term equity gains are taxed at 20%, both effective from 23 July 2024. Gains on property and unlisted assets acquired on or after 23 July 2024 are taxed at 12.5% without indexation; assets acquired before that date keep a grandfathered option of 20% with indexation.

On top of base tax, India layers a surcharge on higher incomes, followed by a 4% health and education cess on tax plus surcharge. The bands below come from Oquilia's central rate configuration.

The new regime's maximum surcharge is capped at 25%; the 37% top rate survives only in the old regime. The Section 87A rebate of up to Rs 60,000, which zeroes out liability for resident taxpayers with taxable income up to Rs 12 lakh in the new regime for FY 2025-26, is a resident-only relief and is not available to a non-resident. An RNOR who crosses the 120-day line is "resident" for that year, so the interaction between status, the rebate and the Rs 15 lakh threshold is worth checking carefully before you assume either outcome.

Rental income deserves its own note because it is the most common trigger. Indian rent is taxed in India regardless of where you live, after the standard 30% deduction on net annual value and a deduction for municipal taxes paid. The tenant is required to deduct TDS on rent paid to an NRI landlord under Section 195, not the lower resident rate. The NRI rental income tax calculator handles the 30% deduction and the gross-up.

Tax Treatment Abroad

The second half of the puzzle is how your country of residence taxes the same income, and whether it gives credit for the Indian tax you have already paid. This is where the 120-day reclassification can sting twice if you do not plan for it.

The United States taxes its citizens and tax residents on worldwide income, so Indian rent, dividends and gains are reportable on a US return irrespective of Indian residency. Relief comes through Article 24 of the India-US treaty, in force since 12 September 1991, which grants a foreign tax credit in the country of residence for tax paid in the source country. The treaty rates below are the India-side caps; the US then taxes the balance and credits the Indian tax.

The United Arab Emirates sits at the opposite end. The UAE levies no personal income tax on individuals, so there is typically no foreign tax to credit and no double charge on the salary itself; the India-UAE treaty, effective 22 September 1993, matters mainly for the India-side rate on Indian income. Its treaty caps are 10% on dividends, 12.5% on interest and 10% on royalties and fees for technical services, and it expressly provides that capital gains on shares of an Indian company remain taxable in India at 12.5%. Claiming any treaty rate requires a Tax Residency Certificate, and for the UAE that certificate requires proof of a UAE establishment, which a purely passive expatriate may struggle to obtain. This matters directly to the Section 6(1A) deemed-resident rule: an NRI in the UAE who draws over Rs 15 lakh of Indian income and is not liable to tax anywhere is precisely the profile the deeming provision targets, landing them in RNOR status.

The practical lesson is that a foreign tax credit only neutralises double tax where both countries actually tax the income. In a zero-tax jurisdiction there is nothing to credit, so the Indian charge is the whole cost, and crossing 120 days does not add foreign-income tax but can expose Indian income you had structured to sit below the threshold.

Repatriation Mechanics

Reclassification for income tax does not, by itself, change what you may do with your money, because account eligibility runs on FEMA residency, which the 120-day income-tax test does not govern. The three NRI account types each carry distinct repatriation and tax features, and they are the backbone of moving funds home and abroad.

NRE and FCNR(B) balances are freely repatriable, and their interest is exempt from Indian income tax so long as the holder remains a person resident outside India under FEMA, per the Income Tax Department's guidance. The NRO account is the workhorse for Indian income, and its balances can be remitted abroad up to USD 1 million per financial year, net of applicable taxes, under RBI rules published at rbi.org.in. That USD 1 million window covers the sale proceeds of inherited property, maturing deposits and accumulated rent, and it requires Forms 15CA and 15CB certifying that tax has been paid before the bank will process the outward remittance.

The cross-over risk is subtle. NRE and FCNR interest exemptions depend on FEMA non-residency, not income-tax residency, so an individual who becomes RNOR under the 120-day rule may well remain non-resident under FEMA and keep the exemption, but the position must be checked for the specific year because a change in the purpose and length of stay can also shift FEMA status. If FEMA status flips to resident, NRE accounts must be redesignated as resident accounts or moved to an RFC account, and the tax exemption on future interest ends. Model the net sum you can actually send home, after the 30% rental deduction and any TDS, with the repatriation calculator.

A closing word on documentation. Every repatriation and every treaty rate hinges on paperwork: a current Tax Residency Certificate from your country of residence, Form 10F where required, and the 15CA/15CB pair for outward remittance. Because the 120-day test is decided on day counts, keep a dated record of every entry into and exit from India across the current year and the preceding four years. When Indian income is near Rs 15 lakh, a week either side of 120 days can decide whether an entire year of overseas earnings sits inside or outside the Indian tax net.

FAQ

What is the 120-day rule for NRIs?

Under Section 6 of the Income Tax Act 1961, an Indian citizen or person of Indian origin whose total Indian-source income exceeds Rs 15 lakh in a tax year becomes resident if present in India for 120 days or more in that year, combined with 365 days or more across the preceding four years, instead of the usual 60-day threshold. The Income Tax Department's Non-Resident FAQ confirms this tightened test.

Does crossing 120 days make all my foreign income taxable in India?

No. An individual caught by the 120-day test is classified Resident but Not Ordinarily Resident (RNOR). Per the Income Tax Department's Non-Resident FAQ, an RNOR is taxed only on Indian-source income and on foreign income derived from a business controlled in or profession set up in India. Salary earned and investments held purely abroad stay outside the Indian net.

What is the deemed-resident rule?

Section 6(1A) deems an Indian citizen a resident if total Indian-source income exceeds Rs 15 lakh and the person is not liable to tax in any other country by reason of domicile or residence. Such a person is treated as RNOR, so only Indian income is taxed. This mainly affects NRIs based in zero-tax jurisdictions such as the UAE.

What TDS applies to an NRI's Indian income?

Section 195 requires tax to be withheld on an NRI's India-source payments at either the Income Tax Act rate or the applicable DTAA rate, whichever is lower, provided a valid Tax Residency Certificate is furnished. Long-term capital gains on listed equity are taxed at 12.5% above the Rs 1.25 lakh annual exemption under Section 112A.

Can I still repatriate money if I become RNOR?

Yes. FEMA residency is tested separately from Income Tax Act residency, so RNOR status for tax does not automatically change your account eligibility. Balances in NRE and FCNR(B) accounts remain freely repatriable, while NRO balances can be remitted up to USD 1 million per financial year, net of taxes, under RBI rules.

Is NRE interest still tax-free for an RNOR?

NRE and FCNR(B) interest is exempt from Indian income tax only while the holder qualifies as a person resident outside India under FEMA, per the Income Tax Department's guidance. Because FEMA and the Income Tax Act use different tests, a person who is RNOR for income tax may still be non-resident under FEMA and retain the exemption; this should be confirmed for the specific year.

When do the new Income Tax Act 2025 residency sections take effect?

The residency provisions for NRIs have been re-codified in Sections 213 to 217 of the Income Tax Act 2025, effective for tax years from 1 April 2026. The substantive day-count tests and the Rs 15 lakh threshold carry over from Section 6 of the 1961 Act.