Residential Status for Companies & Shipping Companies: POEM, Article 8 and DTAA Explained (AY 2026–27)

 By CA Surekha Ahuja

Part 1 of this series addressed residential status for NRIs, seafarers and individual taxpayers. This part addresses the other half of the picture: companies and shipping companies.

For individuals, residency comes down to counting days. For companies, the question is more fundamental — and more consequential. A foreign company with genuine operations abroad pays tax in India only on Indian-source income. The same company, if India determines that its real management happened here, can face taxation on its entire global income as an Indian resident.

For shipping companies, a separate treaty provision — Article 8 of the DTAA — largely overrides the standard residency tests and assigns taxing rights based on where the enterprise is located, not where its ships call port.

Before filing ITR-6 for AY 2026–27, companies with cross-border structures, foreign holding arrangements or international shipping operations must undertake a careful residential status review. The consequences of getting it wrong are significant.

Why Company Residency Is Not Simply About Where You Are Registered

The most important principle: place of incorporation alone does not determine a company's tax residency in India.

An Indian citizen who sets up a company in Singapore, Dubai or Mauritius does not automatically keep that company outside the Indian tax net. If real management and control of that company operates from India, Indian tax law treats it as an Indian resident — and taxes its global income accordingly.

Equally, a company incorporated in India with genuine management abroad may, through treaty tie-breaker provisions, be treated as a foreign resident for tax purposes, limiting India's taxing rights to Indian-source income only.

Taxability for companies flows entirely from this residency determination.

Residential Status and Its Tax Consequences

Residential Status	Global Income Taxable in India?	Indian-Source Income Taxable?
Resident (Indian company, or foreign company with POEM in India)	✅ Yes	✅ Yes
Non-Resident (foreign company, no POEM in India)	❌ No	✅ Yes

Key rule: Residential status is determined every financial year independently. Prior-year status does not carry forward automatically.

Section 6(3): How Indian Law Determines Company Residency

Under Section 6(3) of the Income-tax Act, a company is resident in India if either condition is satisfied:

Condition 1 — Place of Incorporation A company incorporated in India is automatically and unconditionally a resident in India. This applies regardless of where its management sits, where its directors are based, or where its operations are conducted.

Condition 2 — Place of Effective Management (POEM) A company incorporated outside India is treated as resident in India if its Place of Effective Management (POEM) is in India during the financial year.

This second condition is where the most significant risks and planning opportunities arise for businesses with cross-border structures.

Place of Effective Management (POEM): The Test That Matters Most

POEM is defined as the place where key management and commercial decisions that are necessary for the conduct of the business as a whole are, in substance, made.

The CBDT issued detailed guidelines on POEM determination through Circular No. 6/2017. The assessment is substantive — it looks at where decisions are actually made, not where they are formally documented.

Indicators That POEM Is in India

• Board of Directors meetings predominantly held in India
• Key executives — CEO, CFO, Managing Director — are based in India and exercise decision-making authority from here
• Accounting, legal, HR and compliance functions managed from India
• Board resolutions are signed abroad but decisions were effectively taken in India

Indicators That POEM Is Outside India

• Board meetings held outside India with genuine deliberation and directors physically present
• Senior management based and operating outside India on a day-to-day basis
• Strategic and commercial decisions documented as made abroad with supporting evidence
• Indian operations are purely execution of decisions made by the foreign board

The Safe Harbour for Passive Income Companies

Where a company's gross income consists predominantly of passive income — dividends, interest, or royalties from related parties — POEM is presumed to be where assets are held or where shares are held, rather than where management meets. This provision was introduced to address passive holding company structures.

The Practical Risk for Indian Promoters

This is not a theoretical concern. Indian promoters who incorporate holding companies in Singapore, Dubai or Mauritius but continue to manage those companies from India face a genuine POEM risk. If the board consists entirely of India-based directors, meetings are conducted via calls from Mumbai, and the foreign entity's only function is to hold Indian investments — the Income Tax Department has the grounds and the precedent to assert POEM in India.

Registering a company abroad is a legal step. Genuinely relocating management and decision-making is a substantive one. The two are not the same.

Shipping Companies: Why Article 8 of DTAA Changes the Analysis

For companies engaged in the operation of ships in international traffic, the standard POEM and incorporation tests are substantially displaced by a specific DTAA provision: Article 8.

What Article 8 Provides

Under most of India's comprehensive DTAA treaties, profits from the operation of ships in international traffic are taxable only in the country where the enterprise is located — not where the ships happen to call port, and not where the company's management may sit.

"Enterprise" means the country where the shipping company is genuinely registered and operated from as its home jurisdiction.

This is a material carve-out. A Dubai-registered shipping company whose vessels regularly transit Indian ports is not taxable in India on those voyage profits. Article 8 assigns that taxing right exclusively to Dubai.

What "International Traffic" Means

International traffic covers any voyage by a ship except where the voyage operates solely between ports within India. A vessel on a Mumbai–Chennai–Kolkata coastal route is not in international traffic. A vessel on Mumbai–Dubai–Singapore is.

The distinction matters for profit attribution — only international traffic profits fall within Article 8's protection.

What India Can Still Tax

Article 8 does not eliminate India's taxing rights entirely. India retains the right to tax:

• Income sourced in India that falls outside Article 8 — port agency fees, Indian subsidiary income, onshore services
• Profits on domestic-only Indian routes
• Profits attributable to a Permanent Establishment (PE) in India where one exists outside the Article 8 scope

Enterprise Location vs. Place of Incorporation

For shipping companies, the operative concept is Enterprise Location — the country where the company is genuinely registered and operated from. This differs from the general company test of Place of Incorporation (PIU). A shipping company whose enterprise is in Dubai is covered by Article 8 regardless of whether it has an Indian liaison office or Indian port operations.

Company Type	Primary Residency Test	Governing DTAA Article	Profits Taxable In
General company	Place of Incorporation / POEM	Article 7	Where PE is located
Shipping company	Enterprise location	Article 8	Enterprise's country

Dual Residency for Companies: When Two Countries Both Claim You

A company can simultaneously be a tax resident in two countries — for example, incorporated in India (making it a resident here) while also establishing POEM in the UAE (making it a UAE resident under UAE tax rules).

When two countries both assert residency, the DTAA tie-breaker rule under Article 4 resolves the conflict.

How the Article 4 Tie-Breaker Works for Companies

For companies, the tie-breaker under most Indian DTAAs operates on a single test:

A company is treated as a resident of the country where its Place of Effective Management is located.

If a company incorporated in India has its genuine management in Dubai, the India-UAE DTAA tie-breaker resolves residency in favour of UAE. India's taxing rights are then limited to Indian-source income only — global profits are taxable in UAE.

Article 8 and the Tie-Breaker for Shipping

For shipping companies, Article 8 generally operates independently of the standard residency tie-breaker. The enterprise's home country retains taxing rights on international traffic profits regardless of how the residency tie-breaker resolves. Article 8 is effectively self-contained.

Where No DTAA Exists

If there is no DTAA between India and the other country asserting residency, there is no treaty tie-breaker available. Both countries can independently tax the company as a resident. Relief is then limited to the unilateral provisions under Section 91 of the Income-tax Act, which are less favourable than treaty protection.

DTAA Articles That Apply to Companies

Income Type	DTAA Article	Applicable To	Tax Treatment
Business profits	Article 7	All companies	Taxable only where PE exists
Shipping profits (international traffic)	Article 8	Shipping companies	Taxable in enterprise's country
Dividends	Article 10	Holding companies	Split between source and residence
Interest	Article 11	Finance companies	Reduced rate in source country
Royalties and fees	Article 12	IP and service companies	Reduced rate in source country
Directors' fees	Article 16	Company directors	Company's country of residence
Capital gains	Article 13	All companies	Generally source country

Permanent Establishment: The Trigger for Article 7

Under Article 7, India can tax a foreign company's business profits only if the company has a Permanent Establishment (PE) in India. A PE is generally constituted by:

• A fixed place of business — office, branch, factory, workshop
• A construction or installation project exceeding the treaty threshold (typically six to twelve months)
• A dependent agent in India who habitually concludes contracts on the company's behalf

Where no PE exists, India cannot tax business profits — only withholding taxes on specific payment types such as interest, royalties and dividends apply.

Article 8 Removes Shipping Profits from Article 7

Where shipping profits fall within Article 8, they are entirely outside Article 7's scope. Article 8 is self-contained. Even if a shipping company has a PE in India, its international traffic profits remain taxable only in the enterprise's country. The PE does not bring those profits back into India's taxing jurisdiction.

Country of Residence Field in ITR-6: How to Fill It Correctly

Companies filing ITR-6 must declare their country of residence. Incorrect reporting here leads to inconsistencies in treaty claims and can attract scrutiny.

Company Type	Situation	Residential Status in India	Country of Residence in ITR-6
Indian company	Incorporated in India	Resident	India
Foreign company	No POEM in India	Non-Resident	Country of incorporation
Foreign company	POEM in India	Resident	India (or treaty country post tie-breaker)
Shipping company	Enterprise in Dubai, no Indian PIU	Non-Resident	United Arab Emirates
Shipping company	Enterprise in Dubai, PIU in India	Dual resident	United Arab Emirates (Article 8 / tie-breaker)
Dual-resident company	PIU in India, POEM in UAE	Dual resident	United Arab Emirates (tie-breaker)

The key point for shipping companies: Regular Indian port calls and an Indian liaison office do not override Article 8. If your enterprise is genuinely registered and operated from Dubai and your vessels are in international traffic, profits are taxable in Dubai. Country of Residence in the ITR should reflect your enterprise location — not your Indian operational presence.

Four Case Studies

Case 1: Shipping Company with Dubai Enterprise and Indian Port Operations

Dubai Maritime Ltd is registered and operated from Dubai. Its vessels operate on India–UK–Singapore routes. It has a Mumbai liaison office that coordinates port logistics but does not conclude contracts independently. Global profits: ₹100 crore. India-sourced segment: ₹20 crore.

Point	Result
Enterprise location	Dubai
Place of Incorporation	Dubai — not an Indian company
POEM in India?	No — board and management in Dubai
Indian residential status	Non-Resident
DTAA applicable	✅ India-UAE DTAA, Article 8
Mumbai liaison office — PE?	No — no independent contracting authority

Tax outcome: Global profits of ₹100 crore taxable in Dubai under Article 8. India taxes only the India-attributable portion of approximately ₹20 crore. Liaison office does not constitute a PE and does not trigger Article 7 exposure.

Country of Residence in ITR-6: United Arab Emirates Action required: File Form 10F + UAE TRC + cite Article 8 of India-UAE DTAA

Case 2: Indian-Incorporated Shipping Company with Genuine Foreign Management

India-UAE Shipping Pvt Ltd is incorporated in Mumbai. Its CEO and CFO are based in Dubai. Board meetings are held in Dubai with directors physically present, genuine deliberation occurs, and minutes are maintained abroad. The company operates both Indian and international routes.

Point	Result
Incorporated in India	✅ — Automatically Indian resident
POEM in India?	❌ — Management genuinely in Dubai
UAE resident?	✅ — POEM in UAE under UAE rules
Dual residency	✅ — Resident in both India and UAE
Tie-breaker (India-UAE DTAA, Article 4)	POEM = UAE — UAE residency prevails
Treaty residency	United Arab Emirates

Tax outcome: Treated as UAE resident for treaty purposes. India taxes only Indian-route profits and any Indian PE income. Global profits taxable in UAE.

The critical point: Board minutes evidencing genuine Dubai deliberation are the primary defence if POEM is challenged. If the Income Tax Department establishes that real decisions were made from India, the tie-breaker fails and India claims taxation on global profits.

Case 3: Foreign Holding Company with POEM in India

SingaporeHolding Pte Ltd is incorporated in Singapore. All three directors are Indian promoters based in Mumbai. Board meetings are conducted on calls from Mumbai. The company's sole function is to hold investments in Indian subsidiaries. Income: dividends from Indian subsidiaries.

Point	Result
Incorporated in Singapore	✅ — Foreign company
POEM in India?	⚠️ Yes — all directors India-based, decisions made from India
Indian residential status	Resident (POEM in India)
Global income taxable in India?	✅ Yes — treated as Indian company
DTAA relief	Partial — India-Singapore DTAA applies to specific income types

Tax outcome: Deemed an Indian resident on account of POEM. Global income — including non-Indian dividends and capital gains — becomes taxable in India. This is a frequently overlooked risk for Indian promoters who hold foreign structures without genuinely relocating management.

Prevention: Appoint at least some non-India-based directors. Hold board meetings outside India with directors physically present. Document that strategic decisions are made by the foreign board — not directed from India. Substance must match structure.

Case 4: Indian Shipping Company Protected by Article 8

Coastal Lines Ltd is incorporated in India and operates vessels on Mumbai–Colombo–Singapore routes (international traffic) as well as a Mumbai–Chennai domestic route. Global profits: ₹50 crore (₹40 crore international, ₹10 crore domestic).

Income Segment	DTAA Article	Taxable In
International traffic profits — ₹40 crore	Article 8	India (enterprise's country)
Domestic route profits — ₹10 crore	Domestic provisions	India
Sri Lanka's potential claim on Colombo port profits	Article 8, India-Sri Lanka DTAA	India (enterprise's country)

Tax outcome: As an Indian company, India is both the incorporation country and the enterprise country — all ₹50 crore is taxable in India. However, Article 8 operates in India's favour here: it prevents Sri Lanka and Singapore from asserting taxing rights on voyage profits earned by an Indian enterprise in international traffic. The protection runs both ways.

AY 2026–27 Pre-Filing Compliance Checklist

For All Companies

• Confirm place of incorporation — Indian or foreign
• If foreign company: assess whether POEM is in India by reviewing where board meetings are held and where key decisions are substantively made
• If POEM may be in India: gather and document evidence that management is genuinely conducted abroad
• Determine residential status: Resident or Non-Resident
• If dual residency exists: identify the applicable DTAA and apply Article 4 tie-breaker
• Obtain Tax Residency Certificate (TRC) from foreign country if claiming DTAA benefits
• File Form 10F on the Income Tax portal
• Identify all India-sourced income and ensure it is correctly captured in ITR-6
• If PE exists in India: compute PE-attributable profits correctly and declare them
• File ITR-6 by 31 October 2026

Additional Steps for Shipping Companies

• Confirm enterprise location — country of genuine registration and operation
• Classify each route: international traffic or domestic-only
• Identify the applicable DTAA between India and the enterprise country
• Confirm Article 8 coverage for international traffic profits
• Identify any India-sourced income falling outside Article 8 scope — port fees, Indian subsidiary income, onshore services
• Assess whether any Indian office constitutes a PE — if yes, compute attributable profits
• Cite Article 8 in ITR-6 and attach TRC and Form 10F
• Maintain voyage logs and route documentation to support international traffic classification

Six Mistakes That Frequently Trigger Tax Issues for Companies

1. Assuming foreign incorporation eliminates Indian tax exposure — Registration abroad is a legal step. If real management happens from India, POEM overrides the foreign incorporation and India taxes the company as a resident on global income.

2. Board meetings conducted from India — A board meeting held "in Dubai" over a video call while all directors are physically in India does not establish POEM outside India. Directors must be genuinely present outside India for the meeting to count as held abroad.

3. Confusing a registered address with genuine enterprise location — A brass-plate office in Dubai with all operations directed from Mumbai does not satisfy the enterprise location requirement for Article 8. Substance is assessed, not just form.

4. Failing to separate domestic and international route profits — Article 8 covers international traffic only. Profits on purely domestic Indian routes remain taxable in India under ordinary provisions. Route-by-route profit attribution records are essential.

5. Skipping the PE analysis for Indian operations — A foreign shipping company with an Indian branch office, India-based staff who conclude contracts, or a long-term Indian project may have a PE here. This triggers Article 7 for non-Article-8 income. Many companies overlook this analysis and face unexpected assessments.

6. Not filing Form 10F — DTAA benefits under any article — Article 7, Article 8 or otherwise — require Form 10F to be filed online with a valid TRC. An otherwise valid treaty claim is invalidated without it.

Summary: Key Rules at a Glance

Residency Determination

Entity	Primary Test	Secondary Test	Global Income Taxable in India?
Indian company	Place of incorporation	—	✅ Yes
Foreign company	POEM	Place of incorporation	✅ Yes, if POEM is in India
Shipping company	Enterprise location	PIU / POEM	Only in enterprise's country (Article 8)

DTAA Articles That Matter

Article	Covers	Key Rule
Article 4	Dual residency tie-breaker	POEM country = treaty residence
Article 7	Business profits	Taxable only where PE exists
Article 8	Shipping, international traffic	Taxable only in enterprise's country
Articles 10–12	Dividends, interest, royalties	Reduced withholding in source country

Conclusion

For companies with cross-border structures, foreign holding arrangements or international shipping operations, residential status is not a formality in the return. It is the legal foundation that determines whether global income is taxable in India or protected from it.

Place of incorporation establishes automatic Indian residency for Indian companies. For foreign companies, Place of Effective Management is the operative test — and it looks at substance, not structure. Shipping companies operate under a separate and largely self-contained framework under Article 8, which assigns international traffic profits to the enterprise's country regardless of where ships call port.

Before filing ITR-6 for AY 2026–27, every company with cross-border exposure should determine its residential status with care, assess POEM where applicable, identify the correct DTAA provisions, and ensure that Form 10F and TRC compliance is in place before the return is filed.

As with individuals, the most important tax question for a company is not how much income was earned. It is whether that company was a resident or non-resident in India — and which country's taxing rights govern each stream of income. Every other tax consequence follows from that determination.

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Residential Status for NRIs & Seafarers: Section 6, RNOR, Deemed Residency and DTAA Explained (AY 2026–27)

By CA Surekha Ahuja

For most taxpayers, tax planning begins with deductions and exemptions.

For NRIs, Merchant Navy officers, seafarers and overseas professionals, it begins with a far more important question:

What is your residential status under Section 6 of the Income-tax Act?

The answer determines whether your foreign salary remains outside Indian taxation entirely — or whether your global income becomes fully taxable in India.

A taxpayer earning ₹50 lakh abroad may legally pay tax in India only on Indian-source income if he qualifies as a Non-Resident. Another taxpayer with identical earnings may face an entirely different outcome because of one error in residential status determination.

For AY 2026–27, this means carefully evaluating day-count rules, RNOR eligibility, deemed residency under Section 6(1A), DTAA availability, Tax Residency Certificates, Form 10F compliance and the Country of Residence field in the return — before filing.

This guide explains the law, its practical application and the mistakes that most commonly trigger demand notices.

Why Residential Status Matters More Than Citizenship

The most important principle to understand upfront: taxability under Indian law depends on residential status — not citizenship.

An Indian citizen can be a Non-Resident for tax purposes. A foreign national can become a tax resident of India if the statutory conditions are met. Citizenship, passport, or domicile do not determine tax liability.

The Three Statuses and Their Tax Consequences

Residential Status	Foreign Income Taxable in India?	Indian Income Taxable?
Resident and Ordinarily Resident (ROR)	✅ Yes — global income taxed	✅ Yes
Resident but Not Ordinarily Resident (RNOR)	❌ Generally no	✅ Yes
Non-Resident (NR)	❌ No	✅ Yes

Practical Income-by-Income View

Income Type	NR	RNOR	ROR
Foreign salary earned abroad	Not taxable	Generally not taxable	Taxable
Foreign bank interest	Not taxable	Generally not taxable	Taxable
Foreign investments	Not taxable	Generally not taxable	Taxable
Indian rental income	Taxable	Taxable	Taxable
Indian FD interest	Taxable	Taxable	Taxable
Indian capital gains	Taxable	Taxable	Taxable

Key rule: Residential status is determined every financial year independently. Last year's status does not govern the current year.

Section 6: The Basic Residency Rules

An individual becomes resident in India under Section 6 if either condition is satisfied:

Condition 1 — Stay in India for 182 days or more during the financial year.

Condition 2 — Stay in India for 60 days or more during the year, AND 365 days or more during the preceding four financial years combined.

Special provisions modify these thresholds for Indian citizens, Persons of Indian Origin, NRIs and seafarers. Those modifications are covered below.

Merchant Navy Officers and Seafarers: Special Rules

Residential status for seafarers requires separate analysis because services are performed across international waters and multiple jurisdictions simultaneously.

The 184-Day Benchmark

For Merchant Navy officers serving on foreign-going ships, the operative threshold is 184 days outside India (185 in a leap year):

Days Outside India	Residential Position
184 days or more	Generally Non-Resident
Less than 184 days	Further examination required

Where Non-Resident status is established, foreign salary earned for services rendered outside India generally falls entirely outside Indian taxation.

How Days Are Counted

The primary document is the Continuous Discharge Certificate (CDC), which records sign-on date, sign-off date, vessel details and voyage particulars. In any scrutiny or dispute, CDC records carry greater evidentiary weight than passport entries.

One critical point many officers miss: days spent in Indian territorial waters are treated as days spent in India. This single error routinely causes seafarers to miscalculate their 184-day count — and lose Non-Resident status they believed they had.

Budget 2025: Formal Employment Contract Now Required

From AY 2026–27, a formal employment contract is mandatory to claim the seafarer's residential status exemption. An offer letter, informal arrangement or verbal understanding no longer qualifies. If your contract is not formalised, do this before filing.

What Is Taxable Once Non-Resident Status Is Established?

Income	Taxable in India?
Foreign salary earned outside India	❌ Not taxable
Foreign bank interest	❌ Not taxable
Foreign investments	❌ Not taxable
Indian rental income	✅ Taxable
Indian FD interest	✅ Taxable
Indian capital gains	✅ Taxable

Documentation Every Seafarer Should Maintain

Proper documentation is the deciding factor when foreign salary claims face scrutiny:

• Formal employment contract
• CDC records (complete, unbroken)
• Wage slips and salary statements
• Salary remittance records to NRE account
• NRE account bank statements
• Employer certification where available

The 60-Day, 120-Day and 182-Day Rules for General NRIs

For non-seafarers — NRI employees, returning professionals, investors and Persons of Indian Origin — residential status requires a careful review of both physical presence and Indian income.

Days in India	Indian Income	Likely Status
Below 60 days	Any amount	Non-Resident
60–119 days	Any amount	Generally Non-Resident*
120–181 days	Above ₹15 lakh	RNOR
120–181 days	Up to ₹15 lakh	Generally Non-Resident
182 days or more	Any amount	Resident (ROR)

*Subject to the four-year look-back rule.

The Four-Year Look-Back Rule

Many taxpayers focus only on their current year stay. The law also examines physical presence during the preceding four financial years. If you have spent 365 or more days in India over those four years and you are in India for 60 or more days in the current year, you may become Resident regardless of this year's stay alone.

This is the rule that most commonly catches NRIs returning for extended family visits.

RNOR: The Valuable Middle Status

RNOR sits between Non-Resident and fully taxable Resident. For returning NRIs and overseas professionals relocating to India, it provides a transition period during which foreign income generally remains outside the Indian tax net.

Income Type	RNOR Treatment
Foreign salary earned abroad	Generally not taxable
Foreign investment income	Generally not taxable
Indian income (all types)	Taxable

Section 6(1A): The Deemed Resident Provision

Section 6(1A) was introduced specifically to address Indian citizens who were not considered tax residents anywhere in the world — most commonly those working in zero-tax jurisdictions such as Dubai, Bermuda, Panama or the Cayman Islands.

When Deemed Residency Applies

All three conditions must be satisfied simultaneously:

1. The taxpayer is an Indian citizen
2. Indian income exceeds ₹15 lakh in the financial year (foreign salary is excluded from this calculation)
3. The taxpayer is not liable to tax in any other country or territory

What "Not Liable to Tax" Means in Practice

This is where many taxpayers make a critical error. A residence visa, work permit or Emirates ID does not establish foreign tax residency. The only document that reliably demonstrates foreign tax liability is a Tax Residency Certificate (TRC) issued by the foreign country's tax authority.

Document	Proof of Tax Residency?
UAE Residence Visa / Emirates ID	❌ No
Work Permit	❌ No
Foreign Bank Account	❌ No
Tax Residency Certificate (TRC)	✅ Yes

The Important Relief Most People Don't Know

A common and costly misconception: deemed residency automatically results in global taxation. That is incorrect.

A taxpayer covered by Section 6(1A) is treated as Resident but Not Ordinarily Resident (RNOR) — not as a fully taxable Resident.

Particulars	Position
Foreign salary earned and received abroad	Generally not taxable
Foreign investments	Generally not taxable
Indian income	Taxable
Global taxation	❌ Does not apply

The deemed resident rule means India acknowledges you procedurally as a resident — but your foreign income remains protected as long as it is earned and received outside India.

ITR Field	Your Entry
Residential Status	Resident but Not Ordinarily Resident (RNOR)
Country of Residence	India
DTAA claim	Not applicable — no foreign tax residency to invoke

DTAA: When It Is Relevant and When It Is Not

A Double Taxation Avoidance Agreement becomes relevant only when the same income faces taxation in two jurisdictions simultaneously.

If you are a Non-Resident in India and your foreign salary is already exempt under domestic law, DTAA is not required — the exemption operates independently.

Situation	DTAA Required?
NR in India + foreign salary already exempt	❌ No
NR in India + income taxable in both India and abroad	✅ Yes
RNOR with valid TRC from a treaty country	May be relevant
ROR claiming foreign tax credit on income taxed abroad	✅ Yes
RNOR with no foreign tax residency	❌ No — no treaty to invoke

What You Need to Claim DTAA Protection

1. Tax Residency Certificate (TRC) — issued by the foreign country's tax authority, not the embassy
2. Form 10F — filed online on the Income Tax portal before or alongside the ITR
3. DTAA article reference — cited correctly in the return

India has comprehensive treaties with 89+ countries including UAE, UK, USA, Singapore, Canada, Germany, Australia and Mauritius.

Country of Residence in ITR: The Most Frequently Mis-Reported Field

Incorrect reporting of Country of Residence is one of the most common errors in NRI returns — and one of the most consequential.

Your Situation	Country of Residence in ITR
NR with no foreign tax residency (no TRC)	Not Resident in Any Country
NR with UAE Tax Residency Certificate	United Arab Emirates
NR with UK Tax Residency Certificate	United Kingdom
NR with USA Tax Residency Certificate	United States
RNOR with no foreign tax residency	India
RNOR with UAE Tax Residency Certificate	United Arab Emirates
Resident (ROR)	India

The most expensive mistake: Non-Resident seafarers without a TRC selecting "India" as their country of residence because they are Indian citizens. Indian citizenship is not Indian tax residency. If you are Non-Resident with no TRC, the correct entry is "Not Resident in Any Country."

Four Case Studies

Case 1: Merchant Navy Officer with UAE TRC

Rajesh is a Merchant Navy officer on a UAE-flagged vessel. He was outside India for 255 days. Indian income: ₹9 lakh. Foreign salary: ₹24 lakh (credited to NRE account). He holds a UAE Tax Residency Certificate.

Point	Result
Days outside India	255 — exceeds 184-day threshold
Residential status	Non-Resident
Foreign salary taxable in India	❌ No
DTAA applicable	✅ Yes — India-UAE, Article 15
Country of Residence in ITR	United Arab Emirates
Action	File Form 10F + attach TRC

Tax payable in India: On ₹9 lakh Indian income only.

Case 2: Seafarer on Bermuda-Flagged Vessel (Section 6(1A) Applies)

Sameer served on a Bermuda-flagged vessel and was outside India for 235 days. Indian income: ₹17 lakh. Foreign salary: ₹26 lakh. Bermuda has no income tax. He has no TRC.

Point	Result
Days outside India	235 — would normally indicate Non-Resident
Indian income	₹17 lakh — exceeds ₹15 lakh threshold
Tax liability abroad	None — Bermuda is zero-tax
Section 6(1A) triggered	✅ Yes — all three conditions met
Residential status	Deemed Resident (RNOR)
Foreign salary taxable in India	❌ No — earned and received abroad
DTAA applicable	❌ No — no foreign tax residency
Country of Residence in ITR	India

Tax payable in India: On ₹17 lakh Indian income only. Foreign salary remains exempt.

The key lesson: The days count alone does not determine status. Section 6(1A) overrides the basic day-count test when Indian income exceeds ₹15 lakh and there is no foreign tax liability.

Case 3: NRI with US Green Card

Amit holds Indian citizenship and a US Green Card. He was in India for 100 days. Indian income: ₹11 lakh. Foreign salary: ₹35 lakh. Green Card holders are automatically treated as US tax residents by the IRS.

Point	Result
Days in India	100 — below 182
Residential status in India	Non-Resident
US status	Resident (Green Card)
Tie-breaker required	No — India says Non-Resident
Country of Residence in ITR	United States

Tax payable in India: On ₹11 lakh Indian income only. Salary taxable in USA.

Case 4: UK-Based NRI Investor Visiting India

Priya is a UK-based NRI investor who visited India for 95 days. Indian income: ₹6 lakh (FD interest and rental). UK income: ₹30 lakh. She holds a UK Tax Residency Certificate.

Point	Result
Days in India	95 — below 120-day threshold
Four-year look-back	No significant prior India residency
Residential status	Non-Resident
Country of Residence in ITR	United Kingdom
India-UK DTAA	Applicable for treaty-eligible income

Tax payable in India: On ₹6 lakh Indian income only.

AY 2026–27 Pre-Filing Compliance Checklist

For Merchant Navy Officers and Seafarers

• Verify day count using CDC — sign-on to sign-off
• Account for days in Indian territorial waters (these count as India days)
• Confirm formal employment contract is in place (Budget 2025 requirement)
• Check whether Indian income crosses ₹15 lakh threshold
• If taxed abroad — obtain Tax Residency Certificate from foreign authority
• Ensure foreign salary is credited to NRE account, not savings account
• Determine correct residential status: NR / RNOR / Deemed Resident
• Select correct Country of Residence using the matrix above
• File Form 10F if claiming DTAA benefit
• Disclose foreign salary in Schedule EI if NR or RNOR
• File ITR-2 by 31 July 2026

For General NRIs and Overseas Investors

• Calculate days in India accurately using passport entries
• Apply the four-year look-back test
• Examine RNOR eligibility if staying 120 days or more with Indian income above ₹15 lakh
• Obtain TRC from foreign tax authority where applicable
• File Form 10F for any DTAA claim
• Review foreign asset disclosure requirements
• Confirm residential status before filing — do not assume continuity from prior year
• File ITR-2 by 31 July 2026

Six Mistakes That Frequently Trigger Tax Issues

1. Incorrect day counting — Failing to count territorial waters days or using passport entries instead of CDC leads to wrong residential status and failed exemption claims.

2. Treating a UAE resident visa as a TRC — Emirates ID and residence visas are immigration documents. A Tax Residency Certificate must be obtained separately from the UAE Federal Tax Authority.

3. Ignoring Section 6(1A) — Seafarers working in zero-tax jurisdictions with Indian income above ₹15 lakh often overlook this provision entirely and file with incorrect Non-Resident status.

4. Selecting "India" as Country of Residence without a TRC — Indian citizenship does not mean Indian tax residency. Without a TRC, Non-Residents must select "Not Resident in Any Country."

5. Foreign salary credited to a savings account — Salary in an NRE account carries a clear paper trail supporting the exemption. A savings account does not, and can invite scrutiny.

6. No formal employment contract — From AY 2026–27, this is a compliance requirement, not a suggestion. Formalise the contract before the filing deadline.

Summary: Key Rules at a Glance

Who You Are	Operative Threshold	Residential Status	Foreign Income Exempt?
Seafarer, 184+ days outside India	184 days outside	Non-Resident	✅ Yes
Seafarer, Indian income > ₹15L, no foreign tax	Section 6(1A)	Deemed Resident (RNOR)	✅ Yes
General NRI, under 60 days in India	60 days	Non-Resident	✅ Yes
NRI visitor, 120–181 days, Indian income > ₹15L	120 days	RNOR	✅ Yes
Any individual, 182+ days in India	182 days	Resident (ROR)	❌ No

 Conclusion

For NRIs, Merchant Navy officers, seafarers and globally mobile professionals, residential status is not merely a disclosure in the income tax return. It is the legal foundation upon which the taxation of every rupee of income rests.

The distinction between Non-Resident, RNOR and Resident determines the taxability of foreign salary, overseas investments and global income. Equally important are the implications of Section 6(1A), the availability of DTAA protection through a Tax Residency Certificate and Form 10F, and the accurate reporting of Country of Residence.

Before filing for AY 2026–27, undertake a careful residential status review — do not rely on assumptions based on citizenship, visas, passports or last year's filing.

The most important tax question for every NRI and seafarer is not how much income was earned. It is whether the taxpayer was a Non-Resident, RNOR or Resident under Section 6. Every other tax consequence follows from that single answer.

Special Incomes Under the Income-Tax Act, 2025: Tax Rates, Taxable Base, Permitted Deductions & Loss Set-Off Rules

 By CA Surekha Ahuja

A Complete Guide to Cryptocurrency, Online Gaming Winnings, Lottery Income, Patent Royalty, Carbon Credits, Unexplained Income and Other Special Tax Regimes

AY 2025–26 | Sections 190 to 195 of the Income-Tax Act, 2025

Most taxpayers focus on the tax rate. However, for special income categories under the Income-Tax Act, 2025, the rate is only one part of the computation. Equally important is determining the taxable base and understanding whether any deduction, allowance, expense claim, or loss set-off is permitted.

A taxpayer may know that a particular income is taxable at 30%, but the more important questions often are:

• 30% of what amount?
• Is any deduction permitted?
• Can losses be adjusted?
• Does TDS discharge the entire tax obligation?

The Income-Tax Act, 2025 answers these questions differently for different categories of special income. In most cases, the law not only prescribes a fixed tax rate but also restricts or completely prohibits deductions and loss adjustments.

As return filing for AY 2025–26 gathers pace and AIS, TDS and TCS reporting become increasingly data-driven, understanding these provisions correctly is critical to avoiding computation errors, notices and future tax disputes.

What Makes These Incomes Special?

Unlike salary, business income, house property income or most investment income that are generally taxed under normal slab rates, certain categories of income are subject to special taxation provisions.

These provisions generally prescribe:

• A fixed tax rate;
• A specific taxable base;
• Restrictions on deductions; and
• Restrictions on loss set-off and carry forward.

Accordingly, taxpayers should always follow the following sequence:

The Four-Step Rule

Step 1 – Identify the applicable section

Step 2 – Determine the taxable base

Step 3 – Allow only deductions specifically permitted

Step 4 – Apply the prescribed tax rate

Most computational errors arise at Steps 2 and 3.

Quick Reference Table: Special Income Tax Rates, Taxable Base, Deductions and Loss Rules

Section	Income Category	Tax Rate	Taxable Base	Deduction Allowed	Loss Set-Off
194(4)	Virtual Digital Assets (Crypto, NFTs)	30%	Sale consideration less cost of acquisition	Cost of acquisition only	Not permitted
194(5)	Online Gaming Winnings	30%	Net winnings as prescribed	None	Not permitted
194(1)	Lottery, Gambling and Betting	30%	Gross winnings	None	Not permitted
194(2)	Patent Royalty	10%	Eligible royalty income	None	Not applicable
194(3)	Carbon Credit Transfers	10%	Gross consideration	None	Not permitted
194(6)	Life Insurance Business Profits	12.5%	Profits of life insurance business	As provided	As applicable
195	Unexplained Income	60% plus surcharge	Entire unexplained amount	None	Not permitted
192	Block Assessment Income	60% plus surcharge	Undisclosed income assessed	None	Not permitted
193	GDR Income	10% / 12.5% / Slab	As specified	As specified	As applicable
191	Taxable RPF Balance	Special computation	Schedule XI mechanism	Special rules	As applicable
190	Average Rate Relief	Rate mechanism	For rate purposes	Not applicable	Not applicable

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Virtual Digital Assets (Crypto, NFTs & Other VDAs) – Sec.194(4)

(Corresponding to earlier Section 115BBH)

Particulars	Position
Tax Rate	30%
Taxable Base	Sale consideration less cost of acquisition
Deduction Allowed	Cost of acquisition only
Loss Set-Off	Not permitted
Carry Forward	Not permitted

The VDA taxation regime remains one of the strictest provisions under the Act.

Only the cost of acquisition is deductible. No deduction is available for exchange charges, gas fees, wallet fees, mining expenses, platform charges or other incidental expenditure.

Further, losses from VDA transactions cannot be adjusted against any other VDA gains or any other head of income and cannot be carried forward.

Online Gaming Winnings – Section 194(5)

(Corresponding to earlier Section 115BBJ)

Particulars	Position
Tax Rate	30%
Taxable Base	Net winnings as prescribed
Deduction Allowed	None
Loss Set-Off	Not permitted
Carry Forward	Not permitted

The taxable amount is the net winnings computed under the prescribed rules.

No deduction is available for entry fees, participation costs, subscriptions or platform charges.

TDS deducted by the gaming platform does not remove the obligation to disclose the income in the return.

Lottery, Gambling and Betting Winnings – Section 194(1)

(Corresponding to earlier Section 115BB)

Particulars	Position
Tax Rate	30%
Taxable Base	Gross winnings
Deduction Allowed	None
Loss Set-Off	Not permitted
Carry Forward	Not permitted

This provision taxes winnings on a gross basis.

No deduction is permitted for lottery tickets, betting stakes or participation expenses.

Patent Royalty – Section 194(2)

(Corresponding to earlier Section 115BBF)

Particulars	Position
Tax Rate	10%
Taxable Base	Eligible royalty income
Deduction Allowed	None
Option Requirement	Before return due date

The concessional rate substitutes the benefit of claiming related expenditure.

To qualify, the patent should generally be registered in India, developed in India and belong to the true and first inventor.

Carbon Credit Transfers – Section 194(3)

(Corresponding to earlier Section 115BBG)

Particulars	Position
Tax Rate	10%
Taxable Base	Gross consideration
Deduction Allowed	None
Loss Set-Off	Not permitted

The transfer of carbon credits is taxable on a gross basis and no expenditure is deductible.

Life Insurance Business Profits – Section 194(6)

Particulars	Position
Tax Rate	12.5%
Taxable Base	Profits of life insurance business
Applicability	Life insurance companies
Deduction Position	As provided under the section

This provision applies to life insurance companies and not to policyholders.

Unexplained Income – Section 195

(Corresponding to earlier Section 115BBE)

Particulars	Position
Tax Rate	60% plus surcharge
Taxable Base	Entire unexplained amount
Deduction Allowed	None
Loss Set-Off	Not permitted
Carry Forward	Not permitted

This provision generally covers:

• Unexplained cash credits;
• Unexplained investments;
• Unexplained money;
• Unexplained assets;
• Unexplained expenditure; and
• Certain hundi-related transactions.

The burden of explaining the nature and source lies on the taxpayer.

Other Important Special Provisions

Section 192 – Block Assessment of Undisclosed Income

• Tax Rate: 60% plus surcharge
• No deductions
• No loss set-off
• No carry-forward benefit

Section 191 – Taxable Recognised Provident Fund Balance

Taxation is governed by the special mechanism contained in Schedule XI.

Section 193 – GDR Income of Knowledge Sector Employees

• Dividend Income – 10%
• Long-Term Capital Gains – 12.5%
• Other Income – Slab Rates

Section 190 – Average Rate Relief

Provides a rate-computation mechanism where exempt income is considered for determining the applicable tax rate.

The Expense Question: Why Most Computation Errors Occur

The most common error is assuming that a genuine expense automatically becomes deductible.

That assumption is incorrect for special-income provisions.

Where the Act expressly prohibits deduction of expenditure or allowance, the restriction is absolute. Commercial necessity, actual payment or business purpose cannot override an express statutory prohibition.

This principle is particularly important for Virtual Digital Assets; Online Gaming Winnings; Lottery and Betting Income; and Unexplained Income.

Before Filing Your Return: Practical Compliance Checklist

Before filing the return, taxpayers should verify:

✓ Correct identification of the applicable provision.

✓ Correct determination of the taxable base.

✓ Whether any deduction is specifically permitted.

✓ Restrictions on loss set-off and carry forward.

✓ TDS and TCS credits reflected in AIS and Form 26AS.

✓ Proper disclosure of the income in the return.

Remember: TDS credit reduces tax payable. It does not eliminate the obligation to disclose the income.

Final Takeaway

For special incomes, the tax rate is often only the beginning of the analysis.

The more important questions are:

• What amount is taxable?
• What deductions are permitted?
• Can losses be adjusted?
• What compliance obligations remain despite TDS deduction?

The correct sequence remains:

Identify the income → Determine the taxable base → Allow only statutory deductions → Apply the prescribed rate → Report the income → Claim the TDS credit separately.

For AY 2025–26, following this sequence may be the most effective way to avoid notices, adjustments and future tax disputes.