India Tax Residency for NRI Startup Founders: IT Act 2025 & FEMA

An NRI founder with equity in an Indian startup sits at the intersection of two separate residency frameworks, two tax regimes, and a set of FEMA compliance obligations that most general NRI taxation guides do not adequately cover. The Income Tax Act 2025, which came into force on 01/04/2026, introduced changes to deemed residency thresholds and ESOP deferral windows that materially affect how you structure your salary, your equity, and your time in India. Getting the residency determination wrong does not just create a tax demand. It can alter your FEMA status, restrict your ability to hold shares in your own company, and trigger penalties of up to three times the amount in violation. This article maps every layer of the problem from first principles.

Two separate residency frameworks: why founders must track both

India tax residency for a startup founder is not a single determination. Two laws define it, and they define it differently, for different purposes, with different consequences when you get it wrong.

The Income Tax Act 2025 (IT Act 2025), which replaced the Income Tax Act 1961 from 01/04/2026, determines your residential status for tax purposes, that is, what income India can tax and at what rate. It looks exclusively at physical days spent in India during a financial year (01 April to 31 March), plus a rolling lookback over prior years. It does not care why you were in India or what you intended.

The Foreign Exchange Management Act (FEMA) 1999 determines your status for all foreign exchange transactions, including whether you can hold shares in a foreign entity, whether your Indian company’s share allotment to you triggers an FDI reporting requirement, and what bank accounts you are permitted to operate. FEMA residency is intent-based, not day-count-based. A person becomes a FEMA non-resident from the date they leave India with the intention of remaining outside for an uncertain period, even if their physical days in India have not crossed any threshold yet.

The critical consequence: you can simultaneously be a FEMA non-resident (because you relocated to San Francisco with indefinite intent in August last year) and an income tax resident (because you spent 190 days in India in that same financial year before you left). Under this split status, your global income is taxable in India for that year, but your share transactions are governed by the FEMA rules applicable to a person resident outside India. These two positions create parallel obligations that must be managed independently.

What each law governs

Dimension	Income Tax Act 2025	FEMA 1999
Basis of status	Physical days in India	Intention of stay
Changes when	At year-end assessment	From date of departure/arrival
Governs	Taxable income, applicable rates	FX transactions, share holdings, bank accounts
NRI threshold	Less than 182 days in FY (general rule)	Left India with intent to stay outside for uncertain period
Key consequence	Tax on India-source income only (NRI) or global income (Resident)	FDI/ODI compliance, NRE/NRO account eligibility, repatriation limits

Most NRI founders track their income tax for NRI in India reasonably well. FEMA residency is where the compliance gaps appear, particularly around equity.

How the IT Act 2025 determines your tax residency status

Under Section 6 of the IT Act 2025, an individual is a tax resident of India if they satisfy either of two conditions:

Condition 1 (primary rule): Present in India for 182 days or more in the financial year.

Condition 2 (extended lookback rule): Present in India for 60 days or more in the current financial year, and 365 days or more in the four preceding financial years combined.

If neither condition is met, the individual is a non-resident (NRI) for that year. For Indian citizens leaving India for employment, or for crew members of Indian ships, only Condition 1 applies, the 60-day rule does not apply to them. This carve-out does not extend to founders working remotely from abroad on their own company.

What is RNOR status and why does it matter for returning founders?

A resident who meets either condition above is further classified as either Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR). RNOR is the classification that gives returning founders a planning window.

You qualify as RNOR if you meet either of these conditions under the IT Act 2025:

• You were a non-resident in 9 out of the 10 preceding financial years, or
• You spent 729 days or fewer in India across the 7 years immediately preceding the relevant year

An RNOR is taxed like an NRI in one important respect: only income earned or accrued in India, or income received in India, is taxable. Foreign income is not taxable during the RNOR window. This means a founder who spent a decade in the US or UK, returns to India, and crosses the 182-day threshold will typically qualify as RNOR for two years before crossing into full ROR status, at which point global income becomes taxable. That two-year buffer is material if you hold foreign assets, offshore salary, or vested equity in a foreign entity.

What changed under IT Act 2025 for high-income NRIs

The IT Act 2025 carries forward the deemed residency provision introduced by the Finance Act 2020. Under Section 6(7) of the IT Act 2025 (successor to Section 6(1A) of the 1961 Act), an Indian citizen who earns total income from Indian sources exceeding ₹15 lakh in a financial year will be treated as a deemed resident if they are not liable to pay tax in any other country.

This provision was designed for Indian citizens in zero-tax jurisdictions: UAE, Saudi Arabia, Bahrain, and similar countries. If you are an NRI founder based in Dubai, drawing a director’s remuneration or salary from your Indian company of more than ₹15 lakh a year, and the UAE does not impose income tax on you, you are a deemed resident of India under the IT Act 2025. Deemed residents are classified as RNOR, which means only Indian-source income is taxable, but the deemed resident status itself still has compliance implications: ITR filing is mandatory, and income from Indian operations must be fully disclosed.

The IT Act 2025 also modified the RNOR 120-day rule for individuals with high Indian income. Where an individual’s Indian-source income exceeds ₹15 lakh, they become RNOR (not NRI) if they spend 120 days or more in India in the financial year, down from the earlier 182-day threshold. For a founder who visits India for board meetings, investor meetings, and operational reviews, 120 days arrives faster than most people expect, roughly four months of cumulative presence.

How a founder earning above ₹15 lakh hits 120 days without realising it

The table below shows a realistic India visit pattern for a Singapore-based NRI founder drawing ₹20 lakh per annum director’s remuneration from their Indian startup. Each visit has a legitimate business purpose. None of them individually looks like a residency risk.

FY 2026-27 day-count example: Singapore-based founder, Indian income ₹20 lakh

Quarter	Purpose of India visit	Days in India	Cumulative days
Q1 (Apr-Jun 2026)	Board meeting + investor LP update	14 days	14
Q1 (Apr-Jun 2026)	Customer onboarding, Mumbai	10 days	24
Q2 (Jul-Sep 2026)	Series A due diligence, Delhi	18 days	42
Q2 (Jul-Sep 2026)	Family visit, extended	20 days	62
Q3 (Oct-Dec 2026)	Product sprint, Bengaluru	22 days	84
Q3 (Oct-Dec 2026)	Hiring interviews + team offsite	15 days	99
Q4 (Jan-Mar 2027)	Board meeting + regulatory filing review	12 days	111
Q4 (Jan-Mar 2027)	Festive visit, extended family	15 days	126 days

At 126 days and Indian income of ₹20 lakh, this founder crosses the 120-day threshold and is classified as RNOR for FY 2026-27, not NRI. The practical consequences: the founder’s Indian ITR must now disclose all Indian-source income (unchanged), but the founder can no longer file as NRI; Form 26AS mismatches become visible; bank accounts classified as NRI accounts are technically misclassified under FEMA for the period after status change; and any DTAA claim requires updated TRC documentation. None of this is catastrophic, but correcting it mid-year or after filing takes 8-12 weeks. Tracking cumulative days in a shared calendar against the 120-day limit is the simplest preventive measure.

Residency status summary for founders: FY 2026-27 onwards

Status	Days in India (FY)	Indian income threshold	Tax on foreign income
NRI	Less than 182 days (or less than 120 days if Indian income >₹15 lakh)	Any amount	Not taxable in India
RNOR	Qualifies as resident but meets RNOR conditions	Any amount	Not taxable in India
ROR	Qualifies as resident, does not meet RNOR conditions	Any amount	Fully taxable in India
Deemed Resident (RNOR)	Any number of days; not a tax resident elsewhere	>₹15 lakh Indian income	Not taxable in India

How salary from your Indian startup is taxed if you are an NRI

The taxability of a founder’s salary from their own Indian company depends on one question: where are the services rendered?

Under Section 9 of the IT Act 2025 (carrying forward the source rule from Section 9 of the 1961 Act), salary is deemed to arise in India if services are performed in India. If a founder based in Singapore holds the title of Managing Director of an Indian private limited company, draws a monthly salary from the Indian company, but performs the bulk of their work from Singapore, only the portion of salary attributable to services rendered in India is taxable in India. The portion attributable to services rendered in Singapore is not, because the founder is an NRI.

In practice, two complications arise here that founders consistently underestimate.

The physical attendance problem: Every day you attend an office, a board meeting, or a client meeting in India is a day on which services are arguably being rendered in India. If you are visiting frequently and your employment contract does not clearly apportion duties between India and abroad, the Indian tax authority may take the position that the full salary is for Indian services. The safest structure is an employment agreement that explicitly specifies the role’s offshore duties, with the Indian company paying a management fee or consulting fee for India-specific services rather than a single undivided salary.

TDS without apportionment: Your Indian company is required to deduct TDS on salary under Section 392 of the IT Act 2025 (Section 192 under the old Act). If the company deducts TDS on the full salary without applying a DTAA rate or treaty exemption, the founder must file an Indian ITR to claim a refund on the excess TDS. Filing Form 10F and providing a Tax Residency Certificate (TRC) from your country of residence before TDS is deducted allows the company to apply the treaty rate from day one, substantially reducing the cash-flow drag of a large TDS deduction followed by a refund claim that takes 12-18 months to process.

Directors’ remuneration vs salary: NRI founders often hold both director and employee positions simultaneously. Director’s sitting fees and commission are taxed differently from salary. Directors’ remuneration is treated as income from other sources (or business income, depending on structure), not employment income. The source rule still applies, but the characterisation affects which DTAA article governs, Article 15 (dependent personal services) for employment income versus Article 16 (directors’ fees) or Article 21 (other income) depending on the treaty. The India-US DTAA and the India-Singapore DTAA treat directors’ fees differently, and the applicable article changes the withholding rate.

NRI founder equity: what FEMA requires when you hold shares in your own startup

This is where the compliance failures in cross-border startups concentrate. An NRI founder holding equity in their Indian private limited company is not a passive investor. They are a person resident outside India (PROI under FEMA) holding shares in an Indian entity. Every transaction that alters the equity holding has FEMA implications.

Is it FDI or NRI investment?

Under the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (NDI Rules), as amended by the FEMA (Non-Debt Instruments) (Third Amendment) Rules, 2026 (notified 12/06/2026), NRIs and Overseas Citizens of India (OCIs) can invest in Indian companies on either a repatriation basis (equivalent to FDI, subject to sectoral caps and automatic/government route conditions) or a non-repatriation basis (treated as domestic investment under Schedule 4 of the NDI Rules). The 2026 amendment expanded Schedule III language from “NRI or OCI” to “individual person resident outside India including NRI or OCI,” widening participation in listed securities. For unlisted startup equity, the NRI/OCI repatriation and non-repatriation framework under Schedule 1 and Schedule 4 remains the operative route and is unchanged. This choice affects whether the investment is counted against sectoral foreign investment limits and whether the eventual sale proceeds can be freely repatriated.

Most NRI founders choose the repatriation basis because they want to eventually take proceeds out of India without restriction. However, this means their shareholding is counted as foreign investment, and any increase in their stake (through new rounds, founder-reserved shares, or ESOP exercise) is subject to FDI pricing guidelines, the shares must be issued at or above Fair Market Value (FMV) as determined under the Discounted Cash Flow method for unlisted companies, per the valuation rules under FEMA.

FC-GPR filing after any allotment

When an NRI founder receives shares in their Indian company, whether at incorporation, at a subsequent round, or through ESOP exercise, the company must file Form FC-GPR through the Reserve Bank of India’s FIRMS portal within 30 days of allotment. This is a mandatory FEMA reporting requirement under Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019.

Startups routinely miss FC-GPR at the founding stage because they focus on company incorporation and ignore the FEMA layer. A missed or delayed FC-GPR is a FEMA contravention. The penalty under Section 13 of FEMA 1999 is up to three times the amount of the transaction, or ₹2 lakh (whichever is higher), plus a continuing penalty of ₹5,000 per day. Compounding is available through the Reserve Bank of India (RBI), but compounding fees are non-trivial and the process adds 6-12 months to a cap table cleanup exercise during due diligence. For a full breakdown of FEMA compliance in India obligations for foreign-invested companies, including FC-GPR timelines and compounding procedures, see Treelife’s compliance guide.

Convertible notes issued to NRI founders

A DPIIT-recognised startup can issue convertible notes (CNs) to a person resident outside India for an amount of ₹25 lakh or more in a single tranche, under the NDI Rules. CNs must be converted or repaid within 5 years of issuance. This route is occasionally used when a returning NRI founder wants to put in capital before full incorporation formalities are complete, but the FEMA reporting and banking channel requirements still apply: consideration must be received through inward remittance via SWIFT or from NRE/FCNR(B) accounts.

Annual Performance Report: the FEMA obligation most founders miss entirely

FC-GPR covers the inbound leg: reporting shares allotted to the NRI founder. The Annual Performance Report (APR) covers the outbound leg, and it is almost universally missed.

Under the Foreign Exchange Management (Overseas Investment) Rules 2022, any person resident in India who holds an investment in a foreign entity (an ODI or OPI position) is required to file an APR with the RBI by 31 December each year for the preceding financial year. The APR is filed through the RBI’s FIRMS portal under the ODI/OPI reporting module.

This obligation is directly relevant to two categories of NRI founders:

First, founders who return to India permanently, become FEMA-resident again, and hold equity in a foreign entity, a Delaware parent company, a Singapore holdco, or a Cayman Islands vehicle set up for an earlier fundraise. From the date of their FEMA residency restoration, those holdings are classified as ODI (if they hold 10% or more with control) or OPI (if below 10% without control). The APR becomes due each year until the foreign holding is divested or reclassified.

Second, founders who, while FEMA-resident in India, made investments in foreign entities through the Liberalised Remittance Scheme (LRS), up to USD 250,000 per financial year, and then relocated abroad. Their FEMA status may have changed to PROI, but if they re-establish FEMA residency, the APR obligation resumes. Gaps in APR filing during FEMA-resident years are contraventions under Section 13 of FEMA 1999 and attract the same penalty structure as other FEMA violations. Treelife’s international tax compliance team handles APR filings and multi-year FEMA compliance reviews for returning founders.

The APR requires the entity to report: name and jurisdiction of the foreign entity, nature of investment, current carrying value, dividends received, and whether the entity is active. For an early-stage startup holding a dormant Delaware C-Corp, this is a straightforward filing, but missing it for two or three years creates a backlog that requires compounding before the founder’s FEMA compliance record can be considered clean. This matters at the point of a secondary transaction, a buyback, or any event that triggers RBI scrutiny of the founder’s overall FEMA position.

How ESOP taxation works for NRI founders under IT Act 2025

India taxes Employee Stock Option Plans (ESOPs) at two distinct events: exercise and sale.

Stage 1: Exercise (perquisite tax)

When an option is exercised, the difference between the Fair Market Value (FMV) of the share on exercise date and the exercise price is a perquisite, it is added to the employee’s salary income for that financial year and taxed at the applicable slab rate under Section 17(2) of the IT Act 2025. For most senior founders and employees at the 30% slab, the effective rate including surcharge and health and education cess runs between 31.2% and 42.7% depending on total income.

The employer (the Indian startup) is required to deduct TDS on this perquisite under Section 392 of the IT Act 2025 in the month of exercise. If the option holder is an NRI at the time of exercise, the Indian startup (or its Indian subsidiary acting as employer) still carries TDS responsibility.

A critical point: if the founder was a resident when the options were granted and became an NRI before exercise, the full perquisite remains taxable in India, because the shares are in an Indian company and the income is sourced in India. Residential status at grant is not the relevant date. What matters is the character of the income (India-sourced) and the nature of the asset (Indian company shares).

Stage 2: Sale (capital gains)

When the exercised shares are sold, capital gains arise. The classification as short-term or long-term depends on the holding period from exercise date (not grant date):

• Listed shares: held more than 12 months = long-term, taxed at 12.5% under Section 112A of the IT Act 2025 on gains above ₹1.25 lakh (for FY 2026-27 onwards, as updated by Finance Act 2024). Short-term gains on listed equity are taxed at 20% under Section 111A (effective from 23/07/2024 per Finance Act 2024).
• Unlisted shares: held more than 24 months = long-term, taxed at 12.5% without indexation. Short-term gains are taxed at slab rate.

For NRI founders selling shares in their Indian startup, capital gains are always taxable in India regardless of residential status at the time of sale, because the asset (shares in an Indian company) is situated in India. The FIRMS-linked NRI demat account must be used for any listed ESOP share sale, and FEMA repatriation rules apply to the proceeds.

The 60-month perquisite tax deferral: what changed under IT Act 2025

The most significant ESOP change in the IT Act 2025 for startup founders is the extension of the perquisite tax deferral window from 48 months to 60 months, effective for shares allotted on or after 01/04/2026.

Under Section 392(3) read with Section 289(3) of the IT Act 2025, an employee of an eligible startup can defer the perquisite tax at exercise until the earliest of:

• 60 months from the end of the tax year in which shares were allotted (for shares allotted on or after 01/04/2026)
• The date the employee sells the shares
• The date the employee ceases to be an employee of the startup

This is material for pre-IPO startups where the liquidity timeline extends past four years. A founder exercising options in 2026 in a startup without near-term secondary or IPO liquidity can now defer the perquisite tax payment for five years, without interest accrual during the deferral period. The tax rate applied is the slab rate in the year of allotment, not the year the deferral trigger occurs, which protects against future rate increases.

Who qualifies for the deferral?

DPIIT recognition alone is not sufficient. The company must also hold a valid Inter-Ministerial Board (IMB) Certificate confirming eligibility under Section 140 of the IT Act 2025 (equivalent to Section 80-IAC eligibility under the old Act). The eligibility conditions for IMB certification include: incorporated as a private limited company or LLP between 01/04/2016 and 31/03/2030; annual turnover in any prior financial year has not exceeded ₹100 crore. Note that the DPIIT 2026 notification (G.S.R. 108(E), dated 04/02/2026) raised the general DPIIT recognition turnover ceiling to ₹200 crore. The ₹100 crore cap here applies specifically to Section 80-IAC/IMB eligibility and remains unchanged. As of October 2025, approximately 4,147 startups out of 1.97 lakh DPIIT-recognised entities hold IMB certification. For founders considering holding company and LLP structures alongside ESOP planning, see Treelife’s guide on startup tax structuring in India.

The Government is considering extending the ESOP perquisite tax deferral to all DPIIT-recognised startups ahead of Union Budget 2026-27. As of 18/06/2026, no such amendment has been notified. Founders should not rely on this expansion being in force until official notification.

For NRI founders accessing the deferral: the deferral mechanism still applies. The TDS deduction is suspended during the deferral window. However, when the deferral trigger occurs (sale, departure from the company, or end of 60-month window), the NRI’s Indian TDS compliance and ITR filing obligations kick in. DTAA relief on any double-taxed gain requires filing Form 67 before the ITR due date, missing Form 67 results in a complete loss of Foreign Tax Credit for that year.

ESOP deferral: shares allotted before vs after 01/04/2026

Allotment date	Applicable deferral window	Governing provision
Before 01/04/2026	48 months	Section 192(1C), IT Act 1961
On or after 01/04/2026	60 months	Section 392(3), IT Act 2025
NRI at time of trigger	Full perquisite taxable in India	Section 9 source rule

Does the RNOR window change your ESOP and salary planning?

Yes, and significantly. A founder who returns to India after years abroad and qualifies as RNOR has a window during which foreign income is not taxable in India, but Indian-source income remains fully taxable. This creates a specific planning question: what income can be deferred into (or pulled into) the RNOR period to reduce the overall tax cost?

The useful moves:

• A founder returning to India can, if the ESOP vesting schedule allows, time exercise and sale of foreign company shares (where the gain is foreign-sourced) into the RNOR period. The gain is not taxable in India during RNOR years.
• Foreign salary received during RNOR years from a foreign employer for services rendered abroad is not taxable in India.
• Indian-source salary, Indian startup equity perquisite on exercise, and capital gains from Indian company shares are all still taxable in India during RNOR, the RNOR shield does not apply to India-sourced income.

The RNOR window typically runs two financial years for most returning founders. If you have been an NRI for 9 of the last 10 years, RNOR kicks in from year 1 of your return. Planning the sequence of income recognition around that two-year window is one of the most consistent tax-planning opportunities we work through with returning founders.

Common mistakes that cost NRI founders time and money

1. Treating FEMA residency and income tax residency as the same thing

The FEMA definition of a person resident in India is intent-based, it changes from the date you depart with the intent to remain abroad. The income tax definition is day-count-based, it is assessed at the end of the financial year on physical days in India. A founder who relocated to London in October 2025 but spent 200 days in India during FY 2025-26 is an income tax resident for that year, even though they are already a FEMA non-resident from October 2025. Missing this mismatch results in incorrect ITR filing, incorrect bank account classification, and potentially treating share transactions under the wrong FEMA schedule.

2. Not filing FC-GPR at incorporation

If an NRI co-founds an Indian private limited company and receives founder shares at incorporation, Form FC-GPR must be filed within 30 days. The FEMA requirement applies to the allotment of shares to a person resident outside India, which includes NRI founders on repatriation basis. Late FC-GPR filing results in compounding proceedings at the RBI. The penalty can reach three times the transaction amount. Startups discover this omission during Series A due diligence, at which point a retroactive compounding application must be filed before the deal can close, adding cost and delay.

3. Missing the 120-day threshold for founders earning above ₹15 lakh from India

Under the IT Act 2025, an individual earning more than ₹15 lakh from Indian sources (salary, director’s remuneration, interest from NRO accounts, rental income, dividends from Indian companies) becomes RNOR (not NRI) if they spend 120 days or more in India in the financial year. Founders who conduct quarterly India visits for investor and customer meetings can accumulate 120 days faster than expected: four visits of 30 days each. Once the threshold is crossed, foreign income is not taxable (as RNOR), but the ITR filing obligation shifts and the DTAA documentation requirements change. Founders who assume they are NRI and file incorrectly create mismatches in Form 26AS that the income tax department flags.

4. Applying the full salary from the Indian company as non-taxable

An NRI founder drawing a salary from their Indian startup and performing any portion of services while physically in India must apportion that salary. Salary attributable to India-side services is taxable in India. Without clear contractual apportionment and documented time-tracking, the income tax department may assess the full salary as India-sourced. A well-drafted employment agreement distinguishing overseas management services from India-side operations, combined with a management services agreement if appropriate, reduces this exposure.

5. Missing Form 67 when claiming DTAA relief on ESOP gains

NRI founders living in the US, UK, or Singapore who exercise Indian company ESOPs and report the perquisite or capital gain in both India and their country of residence can claim Foreign Tax Credit (FTC) under the applicable DTAA. The FTC claim in India requires filing Form 67 on the Income Tax portal before the due date of the ITR (typically 31/07 or 31/10 for audited entities). Missing Form 67 results in a complete loss of the FTC for that assessment year, a provision the courts have upheld strictly. The credit can be substantial: on a ₹1 crore ESOP perquisite, the Indian tax at 30% plus surcharge can approach ₹35-40 lakh. If the US also taxes the same gain (as it typically does under IRC rules), the FTC eliminates the double-tax exposure, but only if Form 67 is filed on time. For a deeper look at how ESOP scheme design interacts with the capital gains holding period and FMV valuation requirements, see Treelife’s scheme design guide.

6. Not filing the Annual Performance Report after returning to India

A founder who spent years abroad, held equity in a foreign entity (a Delaware parent, Singapore holdco, or Cayman vehicle), and then returned to India becomes FEMA-resident again from the date of their return with intent to stay. From that point, their foreign equity holding is an ODI or OPI position under the FEMA Overseas Investment Rules 2022, and an APR must be filed with the RBI through the FIRMS portal by 31 December every year for the preceding financial year. Missing one year is a contravention. Missing two or three years, which is common because the obligation is not widely known, creates a compounding backlog that must be resolved before any RBI-facing transaction (secondary sale, buyback, new fundraise) can proceed cleanly. The fix is straightforward if caught early; expensive if caught by a counterparty’s counsel during legal due diligence.

Case study

Situation: Pre-Series A B2B SaaS founder based in Dubai for the last 6 years. Indian private limited company, 60% founder stake, drawing ₹18 lakh per annum director’s remuneration. Planning to relocate to Bengaluru to scale the team before the Series A.

Challenge: (1) Founder’s Indian income exceeded ₹15 lakh from remuneration, triggering deemed residency under IT Act 2025 because UAE has no personal income tax. (2) FC-GPR for original founder allotment at incorporation 3 years prior had not been filed. (3) ESOP scheme had been drafted but the company lacked IMB certification, making the 60-month deferral unavailable.

What Treelife did: Filed a compounding application with RBI for the missed FC-GPR; prepared and filed the IMB certification application with the Department for Promotion of Industry and Internal Trade (DPIIT); restructured director’s remuneration to ₹14.9 lakh per annum pending the relocation decision, staying below the ₹15 lakh deemed residency trigger while the founder remained in Dubai; drafted apportionment language in the employment agreement.

Outcome: Compounding settled in 14 weeks at a fee of ₹1.8 lakh. IMB certification received 8 weeks before the Series A term sheet signing. ESOP scheme activated with 60-month deferral eligibility for grants made from 01/04/2026 onwards.

FAQ’s on India Tax Residency

Q: Am I an NRI under income tax and FEMA at the same time?
A: Not necessarily. The two laws use different criteria. Under the Income Tax Act 2025, residency is determined by physical days in India. Under FEMA, it is determined by your intent, you become a FEMA non-resident from the date you leave India with the intention of staying outside for an uncertain period, even if you have not completed the days test yet. In the same financial year, you can be a FEMA non-resident and an income tax resident simultaneously, or vice versa. Each status triggers a separate set of obligations.

Q: What are the tax implications of the deemed residency rule for UAE-based founders?
A: If you are an Indian citizen in a zero-tax jurisdiction (UAE, Saudi Arabia, Bahrain) and earn more than ₹15 lakh from Indian sources (salary from your Indian company, NRO interest, dividends, rent from Indian property), you are a deemed resident under Section 6(7) of the IT Act 2025. Deemed residents are classified as RNOR, so foreign income is not taxable in India. But your Indian-source income is fully taxable, ITR filing is mandatory, and your FEMA status as PROI remains unaffected (the income tax deemed residency does not change your FEMA classification). The most practical risk: directors drawing salary just above ₹15 lakh from their Indian company without realising they have triggered the deemed resident provision.

Q: Does my Indian company need to deduct TDS on salary paid to me as an NRI founder?
A: Yes. The Indian company is required to deduct TDS on salary under Section 392 of the IT Act 2025 in the month of payment. For NRI employees, TDS applies on the portion of salary attributable to services rendered in India. If a DTAA is applicable (India-US, India-Singapore, India-UK etc.), the company can apply the treaty rate rather than the standard slab rate, but this requires you to submit a Tax Residency Certificate (TRC) from your country of residence and Form 10F to the Indian company before the payment is made.

Q: Can I structure my compensation as a consulting fee instead of salary to reduce Indian tax exposure?
A: Yes, but the tax treatment depends on substance. If you are effectively performing employment functions, exclusive engagement, direction and control by the company, fixed monthly payment, the income tax department may recharacterise consulting fees as salary under Section 17 of the IT Act 2025, regardless of how the contract is labelled. Consulting arrangements work best where the founder retains genuine independence, serves multiple clients, and carries commercial risk. A genuine management services agreement with proper apportionment of time and duties is more defensible than a relabelled employment contract.

Q: What is FC-GPR and when does my company need to file it?
A: Form FC-GPR (Foreign Currency-Gross Provisional Return) is the RBI reporting form that must be filed by an Indian company within 30 days of allotting shares to a person resident outside India (including NRI founders). It is filed through the RBI’s FIRMS portal. The form documents the transaction: number of shares allotted, consideration received, mode of payment (SWIFT/NRE/FCNR), and valuation certificate. Missing or late FC-GPR is a FEMA contravention attracting a penalty of up to three times the transaction amount or ₹2 lakh, whichever is higher, plus ₹5,000 per day of continuing contravention.

Q: If I exercised ESOPs in India two years ago when I was a resident, and I am now an NRI, do capital gains on those shares get taxed in India?
A: Yes. Capital gains from the sale of shares in an Indian company are taxed in India regardless of your residential status at the time of sale, because the asset is situated in India. The gain is classified as long-term or short-term based on the holding period from the exercise date. As an NRI, you can claim DTAA relief if the same gain is taxed in your country of residence, but you must file Form 67 before the ITR due date to preserve the Foreign Tax Credit claim.

Q: What is the 60-month ESOP deferral and does it apply to NRI founders?
A: Under Section 392(3) of the IT Act 2025, an employee of an eligible startup (DPIIT-recognised and holding an IMB Certificate) can defer perquisite tax at ESOP exercise for 60 months (for shares allotted on or after 01/04/2026) from the end of the tax year of allotment, or until earlier of sale or departure from the company. The deferral applies equally to NRI employees, the TDS deduction is suspended during the deferral window. When the deferral trigger occurs, the NRI must file an Indian ITR, pay the deferred tax, and file Form 67 if claiming DTAA relief on any double-taxed gain.

Q: Can an NRI founder hold more than 50% equity in an Indian startup?
A: Yes, subject to sectoral FDI caps. Under the automatic route for most sectors (technology, SaaS, B2B services, fintech, excluding specifically regulated sectors), there is no ceiling on the percentage of foreign investment, including from NRIs. An NRI holding 100% of an Indian company under the repatriation basis is permissible in automatic-route sectors. For government-route sectors (defence, retail, media, certain financial services), prior government approval is required. The founder’s stake must be valued at FMV or above at every subsequent allotment, and FC-GPR must be filed for each allotment event.

Q: My Indian startup is DPIIT-recognised. Does that automatically unlock the ESOP perquisite tax deferral?
A: No. DPIIT recognition is a necessary but insufficient condition. You also need a valid Inter-Ministerial Board (IMB) Certificate, which confirms Section 80-IAC eligibility under the IT Act 2025 (Section 140 of the new Act). As of October 2025, approximately 4,147 of 1.97 lakh DPIIT-recognised startups held this certificate. IMB certification requires that the company be incorporated between 01/04/2016 and 31/03/2030 and have annual turnover not exceeding ₹100 crore in any prior financial year. Note: the DPIIT 2026 notification (04/02/2026) raised the general startup recognition turnover ceiling to ₹200 crore, but the ₹100 crore cap for Section 80-IAC/IMB eligibility is separate and unchanged. The application is made through the Startup India portal.

Q: Does the angel tax exemption still apply to NRI investors putting money into Indian startups?
A: Angel tax under Section 56(2)(viib) of the Income Tax Act 1961 was abolished from 01/04/2025 by the Finance Act 2024. It does not exist in the IT Act 2025. NRI investors (and foreign investors) can now invest at any valuation agreed between the parties without risk of the excess over FMV being treated as income of the investee startup. This change significantly reduces the structuring complexity around convertible notes and priced equity rounds involving NRI participants, including founders making follow-on investments.

Q: What bank accounts can I use as an NRI founder to receive salary from my Indian startup?
A: Salary from your Indian company for services rendered in India is Indian-source income and must be credited to an NRO (Non-Resident Ordinary) account. NRE accounts can only receive foreign-source income (income earned abroad). Receiving Indian salary in an NRE account is a FEMA violation, the interest on NRE accounts is tax-free only because the account is restricted to foreign income; mixing Indian salary into an NRE account taints the account and triggers a contravention. You may repatriate up to USD 1 million per year from NRO accounts (after tax) subject to Form 15CA/15CB certification from a chartered accountant.

Q: What happens to my RNOR status if I return to India permanently mid-year?
A: RNOR status is assessed at the end of each financial year based on total days in India in that year and the prior year lookback conditions. If you return to India mid-year and cross 182 days of presence in the same financial year, you are a resident for that year. Whether you are RNOR or ROR depends on your prior year history. If you have been an NRI for 9 of the last 10 years, you will typically qualify as RNOR in the first two financial years after return, then transition to ROR. During RNOR years, your foreign income is not taxable in India, only Indian-source income is. Timing the sequence of foreign asset disposals and income recognition around this window can result in substantial tax savings.

Q: I am an OCI cardholder based in the UK, not technically an NRI. Does all of this apply to me?
A: Yes, for most purposes. OCIs are treated on par with NRIs under FEMA and the IT Act for investment, taxation, and compliance purposes. OCIs can invest in India on repatriation or non-repatriation basis under the NDI Rules, are subject to the same days-based residency test under the IT Act 2025, and must comply with FC-GPR and DTAA filing requirements. The primary difference is immigration, OCIs hold a permanent multiple-entry visa equivalent and are not subject to registration requirements on extended India stays. PIO cards were required to be converted to OCI by 31/12/2025; cards not converted are no longer accepted as valid travel documents at Indian immigration.

Regulatory references

• Income Tax Act 2025, Section 6(7), deemed residency for Indian citizens in zero-tax jurisdictions (successor to Section 6(1A), IT Act 1961; applicable from 01/04/2026)
• Income Tax Act 2025, Section 6, residential status criteria (successor to Section 6, IT Act 1961)
• Income Tax Act 2025, Section 9, income deemed to accrue or arise in India (successor to Section 9, IT Act 1961)
• Income Tax Act 2025, Section 17(2), perquisite on ESOP exercise (successor to Section 17(2)(vi), IT Act 1961)
• Income Tax Act 2025, Section 392, TDS on salary including ESOP perquisite (successor to Section 192, IT Act 1961)
• Income Tax Act 2025, Section 392(3) read with Section 289(3), 60-month ESOP perquisite tax deferral for eligible startups (successor to Section 192(1C), IT Act 1961; 60-month window for shares allotted on or after 01/04/2026)
• Income Tax Act 2025, Section 140, Section 80-IAC equivalent; eligibility for IMB certification
• Income Tax Act 2025, Section 111A, short-term capital gains on listed equity, 20% (Finance Act 2024 amendment, effective 23/07/2024)
• Income Tax Act 2025, Section 112A, long-term capital gains on listed equity, 12.5% above ₹1.25 lakh (Finance Act 2024)
• Income Tax Act 2025, Schedule IV, NRE account interest exemption (successor to Section 10(4)(ii), IT Act 1961)
• Foreign Exchange Management Act 1999, Section 13, penalties for FEMA contraventions
• Foreign Exchange Management (Non-Debt Instruments) Rules 2019, NRI/OCI investment routes, Schedule 1 (FDI) and Schedule 4 (non-repatriation basis)
• Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019, FC-GPR filing requirement within 30 days of allotment
• Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules 2026 (S.O. 3030(E), notified 12/06/2026), expanded Schedule III investor category from “NRI or OCI” to “individual person resident outside India including NRI or OCI”; individual listed equity investment limit 10%, aggregate cap 24%
• RBI Notification No. FEMA 395(4)/2026-RB, designated repatriable rupee account framework for NRI/OCI/overseas individual investments under revised FEMA Mode of Payment Regulations
• FEMA Overseas Investment Rules 2022, ODI and OPI framework for residents investing abroad; LRS ceiling of USD 250,000 per financial year; Annual Performance Report (APR) filing requirement by 31 December each year for FEMA-resident individuals holding foreign entity investments
• Rule 12, Companies (Share Capital and Debentures) Rules 2014, ESOP eligibility; 10-year founder exemption for DPIIT-recognised startups
• Section 62(1)(b), Companies Act 2013, enabling provision for ESOP issuance
• Finance Act 2020, introduction of deemed residency provision (Section 6(1A), IT Act 1961)
• Finance Act 2024, abolition of angel tax under Section 56(2)(viib) from 01/04/2025
• DPIIT Notification G.S.R. 108(E) dated 04/02/2026, supersedes 2019 startup framework; DPIIT recognition turnover ceiling raised to ₹200 crore (regular startups); Deep Tech Startup category introduced; Section 80-IAC/IMB ₹100 crore turnover cap unchanged
• CBDT notification dated 31/03/2026, confirmation that pre-01/04/2017 investment transfers remain outside GAAR scope

External sources

• Income Tax India, Non-Resident Individual
• Reserve Bank of India, FEMA regulations and master directions
• Startup India, DPIIT recognition and IMB certification
• Ministry of Corporate Affairs, Companies Act and Rules
• RBI FIRMS Portal, FC-GPR and other FEMA filings