Foreign salary in NRE account not taxable for NRIs, ITAT quashes ₹12 lakh tax demand

Can salary earned overseas become taxable in India simply because it is credited to a Non-Resident External (NRE) account or because tax has been deducted using an Indian Tax Deduction and Collection Account Number (TAN)? The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has answered this in the negative while granting relief to a non-resident Indian (NRI).

The Tribunal set aside revision proceedings initiated under Section 263 of the Income-tax Act against taxpayer Pralay Pradyotkanti Ghosh, holding that the tax department cannot reopen a completed assessment merely because it holds a different view from the Assessing Officer (AO), provided the AO had conducted proper enquiries.

Why did the tax dispute arise?

For Assessment Year 2016-17, Ghosh declared taxable income of about ₹1.16 lakh and claimed exemption on ₹45.66 lakh received as salary from Oceaneering International GmbH. He argued that the income was earned while working outside India in international waters and, as a non-resident, it was not taxable in India.

The Assessing Officer accepted the claim after scrutiny under Section 143(3). However, the Principal Commissioner of Income Tax (PCIT) later invoked Section 263, contending that the AO had failed to adequately verify the taxpayer‘s employment agreement, work location, passport records and other supporting documents. The PCIT also questioned whether the salary could be treated as foreign income since tax had been deducted using a Mumbai TAN.

What did the ITAT rule?

The Tribunal found that the Assessing Officer had, in fact, carried out detailed verification during assessment by seeking documents including the employment contract, passport, travel records, bank statements, Form 26AS and proof of residential status. Since these enquiries had already been made, the assessment order could not be termed erroneous simply because the PCIT disagreed with its conclusion.

Importantly, the Tribunal observed that salary earned outside India does not become taxable merely because it is remitted to an NRE account in India. It also held that deduction of tax using an Indian TAN is not, by itself, determinative of either the taxpayer’s residential status or the taxability of foreign income. The Bench relied on earlier judicial precedents involving NRIs and seafarers to reinforce this principle.

The ruling is significant for NRIs, seafarers and overseas employees, as it reiterates that the taxability of foreign salary depends on the provisions of the Income-tax Act and the place where services are rendered, rather than the mode of remittance. It also underscores the importance of preserving documents such as employment contracts, passport records, travel details and bank statements to substantiate exemption claims during tax scrutiny.