In this guide
An NRI working abroad may ask the employer to credit salary directly to an NRE account in India. Does the Indian bank credit itself make the foreign salary taxable in India?
A February 2026 Ahmedabad ITAT ruling provides important support for NRIs. In Kaushal Ganpatbhai Patel v. ITO, the taxpayer was a non-resident employed in Seychelles and ₹44.24 lakh of salary was credited to his NRE account in India. The tax department treated the amount as taxable because the money reached an Indian bank account.
The Tribunal rejected that approach on the facts and deleted the salary addition. But the ruling should not be misunderstood as saying that every credit to an NRE account is automatically tax-free.
What Does Indian Tax Law Say About an NRI’s Foreign Salary?
For AY 2026-27, the Income-tax Act, 1961 continues to govern FY 2025-26. The Income Tax Act, 2025 applies prospectively to tax years beginning on or after 1 April 2026.
Under the 1961 Act, a non-resident’s Indian tax exposure broadly covers income that:
- Is received or deemed received in India; or
- Accrues, arises or is deemed to accrue or arise in India.
For salary, where the employment services are actually performed is crucial. Under the new Income Tax Act, 2025 as well, salary is deemed to accrue in India when it is earned for services rendered in India, subject to specified rules.
Thus, salary for employment genuinely performed outside India does not become Indian-source salary merely because the employee later moves the money to India.
The Important Concept: First Receipt vs Remittance
The central issue is whether the Indian bank credit represents the first receipt of income or merely a later remittance of money already received or constructively received abroad.
In the 2026 case, the taxpayer argued that his employment and services were outside India and the NRE credit represented the application/remittance of foreign salary rather than first receipt of income in India. The Tribunal accepted that reasoning and held that the ₹44.24 lakh credited to the NRE account was not taxable under Section 5(2)(a) on those facts.
This distinction is critical:
| Situation | Broad tax position |
|---|---|
| NRI performs employment entirely outside India and later remits already-earned salary | Generally stronger case for non-taxability |
| Foreign salary first received abroad, then transferred to NRE | Usually a remittance of existing money |
| Salary arises from services performed in India | Can be taxable in India |
| Residential status is actually resident/ROR | Worldwide-income rules may apply |
| Facts do not establish where income was first received | Greater litigation risk |
CBDT Has Already Recognised the Principle for Seafarers
CBDT Circular No. 13/2017 specifically addresses non-resident seafarers.
It clarifies that salary for services rendered outside India on a foreign ship should not be included in total income merely because the salary is credited to an NRE account with an Indian bank.
The circular itself concerns seafarers, so it should not simply be quoted as a blanket exemption for every overseas employee. The significance of the February 2026 ruling is that the Tribunal examined the underlying Section 5 principle rather than treating the seafarer circular as the sole basis for relief.
NRE Account Does Not Make All Income Tax-Free
An NRE account is not a tax-exemption machine.
The nature and source of the underlying receipt remain important. For example, merely routing an otherwise taxable Indian income through an NRE account will not convert it into exempt foreign income.
Separate rules govern interest earned on the NRE account itself. The Income Tax Department confirms that the NRE-interest exemption continues under Schedule IV of the Income Tax Act, 2025 for eligible individuals satisfying the FEMA/RBI conditions.
Therefore, distinguish between:
foreign salary transferred into an NRE account, and
interest generated by the NRE account.
They involve different tax provisions.
Four Conditions NRIs Should Check
Before relying on the foreign-salary position, verify four matters.
1. Your Residential Status
You must actually qualify as non-resident for the relevant year.
For AY 2026-27, the basic Section 6 tests include the 182-day test and the 60-day plus 365-day test, subject to special rules for Indian citizens and PIOs.
Do not determine NRI status simply from employment visa, citizenship or the fact that you usually live overseas.
2. Where You Performed the Work
The employment services should genuinely have been performed outside India.
If substantial work was performed while physically present in India, the analysis can change.
3. Where the Salary Was First Received
Maintain evidence showing whether the salary was first received or constructively received outside India before being remitted.
4. Complete Banking and Employment Evidence
The 2026 case highlights why facts matter as much as the legal principle.
Useful documents include:
- Passport and travel history;
- Residential-status calculation;
- Overseas employment agreement;
- Employer confirmation of work location;
- Foreign payslips;
- Foreign bank statements, where applicable;
- SWIFT/remittance advice;
- NRE bank statements; and
- Employer remittance confirmation for direct NRE credits.
What if the Income Tax Department Adds the NRE Credit?
Do not respond merely by saying, “NRE money is exempt.”
Instead establish:
- Your non-resident status;
- The foreign employment relationship;
- Location where services were performed;
- Salary computation and payslips;
- The first-receipt/remittance trail; and
- Why the Indian credit does not represent Indian-source income.
The February 2026 ruling can be relevant authority where the factual pattern matches, but a favourable precedent cannot substitute for missing documentation.
Frequently Asked Questions
Is foreign salary credited directly to an NRE account always tax-free?
No. The result depends on residential status, where services were rendered, the source of salary and whether the Indian credit represents first receipt or later remittance.
Did the Ahmedabad ITAT allow the ₹44.24 lakh foreign salary claim?
Yes. In the February 2026 decision, the Tribunal held that the NRE credit did not amount to taxable receipt of salary in India on the facts before it.
Does citizenship decide whether foreign salary is taxable in India?
No. India generally determines the scope of taxation using tax residential status rather than citizenship alone.
Is NRE account interest exempt?
It can be exempt where the holder satisfies the statutory FEMA/RBI eligibility conditions. The exemption continues under the Income Tax Act, 2025.
What is the biggest mistake NRIs make in these cases?
Relying on the label “NRE account” without maintaining evidence of non-resident status, overseas services and the salary-remittance trail. The legal argument becomes much stronger when the underlying facts can be demonstrated with documents.
