Tax Exemptions for Non-Citizens and Non-Residents in India

Not every rupee earned in India ends up in the government’s tax net. When the earner is a non-citizen or a non-resident, the Income-tax Act, 1961 carves out a set of deliberate exceptions under Section 10. These exemptions cover everything from interest on special bank accounts to salaries paid to foreign staff working briefly in India. Understanding them is not just an exam requirement for commerce students; it explains how India balances its need for tax revenue with its interest in attracting foreign capital, foreign experts, and foreign missions.

Why residential status changes the tax equation 🔗

India taxes people differently depending on whether they are resident or non-resident, and separately, whether they are citizens or non-citizens. Residential status is determined under Section 6 of the Act based on the number of days a person stays in India during a financial year. A non-resident is generally taxed only on income earned or received in India, while a resident is taxed on worldwide income.

Even within income that is earned in India, Parliament has chosen to exempt specific categories connected to non-residents and non-citizens. The reasoning is practical: India wants foreign capital flowing into its bond markets and bank deposits, wants diplomatic missions to function without double taxation disputes, and wants foreign enterprises willing to send skilled staff to Indian projects without fearing an unpredictable tax bill for short stays.

Exemptions on interest income 🔗

A large share of the exemptions available to non-residents concerns interest income, since attracting foreign savings into India has long been a policy priority.

Interest on notified bonds and securities 🔗

Under Section 10(4)(i) of the Act, interest paid to a non-resident on government-notified bonds or securities is exempt, and this exemption extends to any premium received on redemption of such bonds. This route was historically used to channel foreign savings into instruments like specific National Defence Loan bonds. However, the exemption only applies to bonds notified before 1 June 2002, since the government stopped issuing fresh notifications under this clause after that date, as recorded in the text of Section 10.

Interest on Non-Resident (External) accounts 🔗

Section 10(4)(ii) exempts interest earned by an individual who is resident outside India, as defined under the Foreign Exchange Management Act, on balances held in a Non-Resident (External) or NRE account with an Indian bank. This is one of the more commercially significant exemptions still in active use, since it makes NRE savings and fixed deposits genuinely tax-free in India, as long as the account holder continues to qualify as a person resident outside India under FEMA. The conditions attached to this exemption require that the individual either qualifies as a non-resident under FEMA or has RBI permission to maintain the account. The moment the account holder’s status shifts to resident, the exemption stops applying to fresh interest earned.

Interest on savings certificates 🔗

Section 10(4B) exempts interest earned by a non-resident individual who is a citizen of India or a person of Indian origin, on notified savings certificates. This exemption is conditional on the certificates having been purchased using convertible foreign exchange remitted from outside India, and it applies only to certificates issued before 1 June 2002.

Notified bonds gifted or held by NRIs 🔗

A related provision under Section 10(15)(iid) exempts interest on certain notified bonds purchased by non-resident Indians in foreign exchange, provided the interest and principal cannot be repatriated out of India until maturity. Interestingly, this exemption survives even if the bondholder later becomes a resident, though it stops applying if the bonds are encashed before maturity. Like the other bond-related clauses, this window closed for fresh notifications after 1 June 2002.

Exemptions on remuneration and salary 🔗

Section 10(6) deals specifically with income earned by individuals who are not citizens of India. Several categories of remuneration are exempt here.

Diplomats and embassy staff 🔗

Officials or staff members of a foreign embassy, high commission, legation, consulate, or trade representation working in India are exempt on the remuneration received in that capacity. For trade commissioners and other official representatives, this exemption is reciprocal in nature: it applies only if India’s corresponding officials receive a similar exemption in that foreign country, as clarified in commentary on Section 10(6)(ii). Staff must also refrain from any other business, profession, or employment in India to retain this benefit.

Employees of a foreign enterprise 🔗

Section 10(6)(vi) exempts the remuneration of a non-citizen employed by a foreign enterprise for services rendered during a stay in India, but three conditions must all be met: the foreign enterprise must not be carrying on any trade or business in India, the individual’s stay in India must not exceed ninety days in the relevant previous year, and the remuneration must not be deducted as an expense against income taxable in India. This provision is aimed at short-term foreign specialists, such as engineers or consultants visiting for project work, rather than staff permanently based in India.

Crew on foreign ships 🔗

Under Section 10(6)(viii), salary paid to a non-resident foreign national for services on a foreign ship is exempt, again subject to the total stay in India not exceeding ninety days in the previous year.

Foreign government trainees 🔗

Section 10(6)(xi) exempts remuneration received by an employee of a foreign government while undergoing training in India, but only if the training takes place in a government establishment, a government-financed institution, or an entity substantially owned by the Central or State Government.

What happened to the foreign technician exemption 🔗

Older editions of income tax textbooks refer prominently to Section 10(5B), which once exempted the remuneration of a foreign technician employed by the government, an approved scientific research institution, or certain Indian businesses, up to a specified monthly limit for a defined period. According to an official government explanatory circular, this concession originally exempted up to Rs. 4,000 per month for a maximum of 24 months, extendable further, and even covered tax paid by the employer on the technician’s behalf as a non-taxable perquisite. The stated policy goal was to make it attractive for foreign specialists to work in India while the country built its own technical capacity.

This clause, along with a related provision for foreign technicians under Section 10(6)(vii), was withdrawn through subsequent Finance Acts, and Section 10(5B) itself was formally omitted with effect from assessment year 2003-04, as confirmed in the current statutory text of Section 10. Students encountering this topic in a textbook should treat it as an important historical illustration of tax policy rather than a currently claimable exemption. It is a useful example of how India’s tax incentives evolved once the immediate need to import foreign technical talent reduced.

A quick reference to the key provisions 🔗

Why this framework still matters 🔗

Taken together, these provisions show a consistent thread in Indian tax policy: the government is willing to give up tax revenue on categories of income that carry little risk of erosion to the domestic tax base but carry a real benefit in attracting foreign capital, foreign expertise, or maintaining diplomatic goodwill. NRE account exemptions keep foreign remittances flowing into Indian banks. Short-stay exemptions for foreign employees make it easier for multinational projects to bring in specialists without triggering complex withholding disputes. Even the now-withdrawn technician exemption reflects a moment when India needed outside expertise it could not yet produce domestically.

For a commerce student, the value of this topic lies less in memorising section numbers and more in recognising the underlying logic: source-based taxation, reciprocity in diplomatic contexts, and time-bound conditions like the ninety-day rule are recurring themes across many of India’s cross-border tax provisions, not just this one.

What do you think? Given how many of these exemptions are tied to a strict ninety-day stay or to instruments issued before 2002, do you think India’s approach to attracting foreign talent and capital needs a fresh set of exemptions suited to today’s remote and hybrid work arrangements? And should reciprocity conditions, like the one applied to trade officials, be extended to other categories of foreign professionals working in India?

References

1. https://www.incometaxindia.gov.in/w/section-10-6
2. https://indiankanoon.org/doc/1954990/
3. https://taxguru.in/income-tax/exemptions-towards-interest-non-residents-section-104-section-104b.html
4. https://sortingtax.com/section-10-of-income-tax-act-exempt-income-of-non-residents/
5. https://taxguru.in/income-tax/section-106-remuneration-received-individual-citizen-india.html
6. https://www.incometaxindia.gov.in/Communications/Circular/Others/910110000000000297/dtc457mx.htm