India’s New Tax Rules Widen Net for NRIs, Tighten Scrutiny of Offshore Income

63

India has formally notified the Income-tax Rules, 2026, marking a sweeping overhaul of direct tax procedures with far-reaching consequences for non-resident Indians (NRIs), as authorities expand oversight of cross-border income, offshore structures and digital economic activity.

The rules, issued by the Central Board of Direct Taxes through a gazette notification around March 20, will take effect from April 1, 2026, operationalizing the Income-tax Act, 2025 and completing India’s transition away from the six-decade-old 1961 tax framework.

Spanning over 1,000 pages and supported by more than 150 prescribed forms, the new rules do not alter tax rates but fundamentally reshape compliance, reporting and verification systems—tightening enforcement particularly in areas involving overseas income and investments.

For India’s diaspora, the shift signals a decisive move towards taxing economic linkage rather than physical presence.

Economic presence, not location

At the heart of the new framework is the formalization of “Significant Economic Presence” (SEP), which sets thresholds of ₹2 crore (about $240,000) in transactions or 300,000 users for digital businesses.

This means NRI entrepreneurs operating global digital platforms, consulting services or remote businesses could trigger Indian tax liability purely by virtue of their economic footprint in India.

“The rules signal a decisive shift towards taxing economic participation rather than physical presence,” said Rajat Mohan of AMRG & Associates, noting that the framework aligns India with global efforts to tax the digital economy.

Offshore deals under sharper lens

The rules introduce detailed mechanisms to tax indirect transfers and offshore transactions involving Indian assets—even where both counterparties are non-residents.

A formula-based method has been prescribed to attribute income linked to Indian assets in such deals, while expanded fair market valuation norms now cover listed and unlisted shares, foreign entities and partnership interests.

For diaspora investors holding Indian assets through layered global structures, this significantly raises reporting obligations and compliance risks.

Tax authorities have also been empowered to estimate income in cross-border cases using global profit ratios or other reasonable methods—tightening anti-avoidance provisions but potentially increasing disputes.

Dividend rules tighten capital flows

In a move likely to affect NRI shareholders, dividend distribution norms have been tightened. Companies must now maintain share registers, hold general meetings and ensure dividends are paid only within India, signaling stronger domestic control over capital flows and corporate governance.

Residency rules offer limited flexibility

Changes under the new Act provide some relief for high-income NRIs. Indian citizens or persons of Indian origin earning over ₹15 lakh (around $18,000) from Indian sources can now stay up to 120 days in a financial year—up from 60 days earlier—without automatically triggering full tax residency, provided other conditions are met.

This allows NRIs to spend more time in India for business or family without exposing their global income to Indian taxation. Full tax residency, however, continues to apply at 182 days or under other specified conditions.

Foreign income exemption to attract talent

In a bid to attract global professionals, the framework provides a five-year exemption on foreign-sourced income for eligible NRIs who return to work in India under government-notified schemes.

The benefit, aimed at specialized diaspora talent, shields overseas income such as salaries or pensions during the initial years of relocation, though its applicability is expected to remain limited to specific programs.

Compliance burden rises sharply

The rules impose a significantly more compliance-intensive regime. Stock exchanges must maintain audit trails for seven years, prevent deletion of transaction records and submit monthly reports on modifications.

For NRIs investing in Indian markets, this translates into enhanced transparency but also higher documentation and reporting requirements.

New certification rules introduce “hard thresholds” for professionals, including minimum experience of 10 years and revenue criteria, applicable even to foreign advisory firms.

Further, foreign tax credit (FTC) claims will face stricter scrutiny, with new forms requiring certification and detailed disclosures—tightening oversight on double taxation relief claims.

Simplified property transactions, PAN relief

In a procedural easing, buyers purchasing property from NRIs will no longer need to obtain a separate Tax Deduction Account Number (TAN). Instead, tax deducted at source can be processed through a simplified PAN-based system, reducing transaction delays.

Additionally, certain NRIs earning only passive income—already taxed at source—may be exempt from obtaining a Permanent Account Number (PAN), lowering entry barriers for small overseas investors.

However, new PAN application forms now require detailed identity disclosures, including passport and citizenship information, alongside stricter verification checks.

Amnesty window for undisclosed assets

The framework also includes a limited compliance window for voluntary disclosure of overseas assets, allowing NRIs and returning professionals to declare previously undisclosed holdings by paying tax on their fair market value—typically applicable to assets above around ₹1 crore (about $120,000).

The move is aimed at encouraging regularization amid growing global financial information sharing.

Clarity on investments and instruments

A new regulatory framework for zero-coupon bonds mandates approvals at least three months prior to issuance, dual investment-grade ratings and clearly defined timelines for fund utilization—impacting instruments often used by global investors.

The rules also clarify capital gains treatment in complex cross-border scenarios such as debenture conversions and restructuring, areas that have historically led to litigation.

Digital-first enforcement

The 2026 Rules formalize a digital-first compliance regime. Legacy forms such as Form 16 will be replaced by new filings like Form 130, while multiple TDS forms for property transactions are consolidated.

The window for correcting TDS/TCS errors has been sharply reduced to two years from six, underscoring the push towards real-time compliance.

Higher thresholds, revised allowances

While largely domestic, revised thresholds provide context for global taxpayers with Indian income exposure:

• Children’s education allowance increased to ₹3,000 per month (about $36), up from ₹100
• Hostel allowance raised to ₹9,000 per month (about $108), from ₹300
• Meal voucher exemption increased to ₹200 per meal (about $2.40), from ₹50

The SEP trigger of ₹2 crore (~$240,000) also sets a relatively low bar for global digital businesses interacting with India.

A broader tax net for diaspora

Overall, the Income-tax Rules, 2026 mark a structural shift in India’s tax philosophy. For NRIs, offshore income, digital services and even indirect transfers involving Indian assets could now fall within the Indian tax net.

Experts say the reforms strike a dual balance—offering flexibility in residency and select exemptions, while sharply increasing compliance, documentation and enforcement.

The message for the diaspora is unambiguous: India’s tax jurisdiction is expanding beyond borders, and managing exposure will now require far more proactive planning, robust documentation and careful alignment with global tax treaties.