Salary earned overseas, deposited in Indian NRE a/c:
Why ITAT Ahmedabad quashed tax department’s notice

Feb 23, 2026

Synopsis
An NRI man earned Rs 44 lakh salary abroad and deposited it in his NRE account. The Income Tax Department issued a notice, but the Income Tax Appellate Tribunal (ITAT) Ahmedabad ruled in his favor. The tribunal stated that salary earned overseas and credited to an NRE account is not taxable in India. This decision provides significant relief to non-residents.

On February 9, 2026, the Income Tax Appellate Tribunal (ITAT) Ahmedabad held that salary received by an employee in his NRE Account does not tantamount to receipt of salary income and is therefore, not liable to tax in India by virtue of Section 5(2)(a).

This judgement came against the background of a tax dispute wherein the tax department had sought to make the salary of Mr Patel, an employee working for a Seychelles based company, taxable in India as he deposited the amount in his Indian NRE bank account.

Mr Patel, being a non-resident, earned a salary of Rs 44.24 lakh from his job with the Seychelles-based company, which he deposited in his NRE account. The tax department considered this amount taxable in India under Section 5(2)(a), which states that all income of a non-resident that is received or deemed to be received in India is subject to tax there.

The Income Tax Department argued that receiving salary in his NRE Account was equivalent to receiving salary in India, and therefore, according to Section 5(2)(a), it should be taxed in India.

On February 9, 2026, Mr Patel won the case in ITAT Ahmedabad. Dhinal Shah represented him in ITAT Ahmedabad.

According to Mihir Tanna, associate director, S.K Patodia LLP, in case of non residents, income received or income accrued in India is usually taxable in India. If the income is received in India, the matter is litigative and if income is received in India for the sake of convenience, it cannot be taxed in India as it is not accrued in India.

Tanna says that accordingly, in the given case, the ITAT Ahmedabad has made a a very important remark that an employee has legal right to receive this money, as an employee, at the place of employment.

Tanna says: “Accordingly, if the constructive receipt of salary took place at the place of rendering employment and the deposit of the same in the NRE bank account in India was only an application of the salary received outside India, it was held that It cannot be taxed in India.”

Summary of the judgement

Chartered Accountant Suresh Surana, said to ET Wealth Online: In the given case, Patel, a non-resident individual for the purposes of the Income-tax Act, 1961, for Assessment Year 2019-20 was employed with a Seychelles based company, and rendered services entirely outside India.

During the relevant year, salary aggregating to Rs 44.24 lakh was credited to his Non-Resident External (NRE) bank account maintained in India.

The Assessing Officer, following reassessment proceedings under section 147 read with section 144C, treated the said salary as income “received in India” under section 5(2)(a) of the Act solely on the ground that the amount was credited to an Indian bank account, and accordingly brought it to tax.

Consequential additions were also made on account of alleged unexplained investment in foreign currency and unexplained credits in the bank account, on the premise that the source of funds was not satisfactorily explained.

According to Surana, the primary issue before the Ahmedabad Bench of the Income Tax Appellate Tribunal was whether salary earned by a non-resident for services rendered outside India, but credited to an NRE account in India, could be regarded as income received in India and thus taxable under section 5(2)(a). The taxability of the other additions was admitted to be consequential and dependent on the outcome of the salary income issue.

The Tribunal held in favour of the taxpayer by drawing a clear distinction between the 'receipt of income' and the 'subsequent remittance or application of income'. Relying extensively on earlier judicial precedents, particularly the Agra Bench decision in the case of Arvind Singh Chauhan, the Tribunal reiterated that “receipt” for the purposes of section 5(2)(a) refers to the first occasion when the assessee obtains control over the income, whether real or constructive.

In the given case, the Tribunal observed that the salary accrued and was constructively received at the place where the services were rendered, i.e., outside India. The credit of salary to the NRE account in India was held to be merely an application of income already received outside India and did not constitute a fresh or independent receipt in India.

The Tribunal rejected the Revenue’s argument that credit to an Indian bank account automatically results in receipt in India, clarifying that an income cannot be regarded as received multiple times. It also dismissed the attempt to distinguish earlier rulings on the basis of the nature of employment (such as seafarers), noting that the principle applied was based on statutory interpretation rather than on any specific CBDT circular.

Surana says: "In the absence of any contrary ruling from higher judicial authorities, the Tribunal followed the settled legal position that salary for services rendered outside India by a non-resident is not taxable in India merely because it is remitted to an NRE account."

Accordingly, the Tribunal held that the salary of Rs 44.24 lakh credited to the assessee’s NRE account did not amount to income received in India and was not chargeable to tax under section 5(2)(a). Since the foundational addition on salary was deleted, the consequential additions relating to unexplained investment in foreign currency and unexplained bank credits were also deleted.

Surana says: "The appeal was thus allowed in full, with the taxpayer succeeding on the core issue of non-taxability of foreign salary income."

ITAT Ahmedabad analysis and discussion

Mr Dhinal Shah, the authorised representative of Mr Patel, argued before ITAT Ahmedabad that various high courts and ITAT benches in India have passed orders which effectively said that salary earned from services rendered outside India, accrued outside India and was to be treated as received outside India and the deposit of the salary in the NRE Account was a mere application of the salary received outside India and not receipt of income of the assessee, to qualify for taxation In India under Section 5(2)(a).

Case law cited:
   

ITAT Ahmedabad said that of the cases cited by Mr Shah, their attention is drawn to the decision of ITAT Agra in the case of Arvind Singh Chauhan vs. Income Tax Officer 42 taxmann.com 285 (Agra – Trib.), where it was pointed out that the tribunal had lucidly dealt on this aspect of income accruing outside India and explained when it is to be treated as received in India.

ITAT Ahmedabad said that in that ITAT Agra case, it was pointed out that the assessee, a Non-Resident, had received salary for services rendered outside India and the salary cheques were credited to his account in HSBC, Mumbai.

Mr Shah had pointed out to ITAT Ahmedabad that ITAT Agra noted that Section 5(2)(a) refers to receipt of income and clarified that receipt of income refers to the first occasion when the assessee gets the money in his own control, real or constructive.

Mr Shah also told ITAT Ahmedabad that what is material is the receipt of income in its character as income and not what happens subsequently once the income in its character as such is received by the assessee or his agent.

He pointed out that the ITAT Agra had noted that the assessee had legal right to receive this money as an employee at the place of employment and it is a matter of convenience that the money is therefore transferred to India.

He also said that these monies were at the disposal of the assessee outside India and it was in exercise of his right to dispose of the money it was transferred to India. Thus it was pointed out before ITAT Agra that the salary amount was received in India but salary income was received outside India.

Mr Shah thus argued that ITAT Agra’s decision is similar to Mr Patel’s as he had also rendered services outside India by virtue of his employment in a company outside India.

The salary earned on account of the services rendered had therefore accrued outside India and acording to the ITAT Agra Bench ruling, the assessee (Mr Patel) had constructively received salary outside India. He contended, therefore, that the issue was squarely covered by the decision of the ITAT Agra Bench in the case of Arvind Singh Chauhan vs. ITO, Ward-1(2), Gwalior 42 taxmann.com 285 (Agra – Trib.) and the order of the Assessing Officer, therefore, treating salary to have been received in India and hence taxable in India needs to be set-aside.

The Income Tax Department’s lawyer argued that the decision of ITAT Agra which Mr Shah was relying on was distinguishable as in that Agra case the assessee was being employed on a merchant vessel which plied on international routes. He contended that the CBDT also had clarified vide Circular No.13/2017 that in the case of non-resident seafarers for services rendered outside India on a foreign ship, salary credited to NRE Account shall not be included in the total income of the assessee.

ITAT Ahmedabad judgement

ITAT Ahmedabad said that they agree with Mr. Shah, the authorised representative of Mr Patel (the NRI employee), that the issue stands covered in favour of the assessee by the decision of the ITAT Agra Bench in the case of Arvind Singh Chauhan.

ITAT Ahmedabad said that as rightly pointed out by Mr Shah, the ITAT in its decision was seized with an identical issue and interpreted the term “income received in India” in section 5(2)(a), to mean the first occasion when the assessee gets the money in his own control-real or constructive.

ITAT Ahmedabad said that the ITAT Agra had held that the assessee was in lawful right to receive this money, as an employee, at the place of employment. Accordingly, ITAT Agra held that the constructive receipt of salary took place at the place of rendering employment and its deposit in the NRE bank account in India was only an application of the salary received outside India.

ITAT Ahmedabad said that the Income Tax Department’s representative’s tried to distinguish the decision of the ITAT Agra on the ground that it was related to the fact that the assessee was a seafarer and the CBDT had clarified such assessees to be not liable to tax in India on salary received in their NRE accounts in India, but the tribunal found it of no consequence.

ITAT Ahmedabad explained that this was because in the case of Arvind Chauhan, the coordinate Bench of ITAT Agra did not rely on the CBDT circular while giving relief to the assessee. On the contrary, it had interpreted the provision of law in this regard.

ITAT Ahmedabad said: “The Ld.DR was also unable to draw our attention to any decision of the Higher judicial authorities holding to the contrary.”

Judgement:

In view of the same, ITAT Ahmedabad said that they hold that the salary received by the assessee in his NRE Account amounting to Rs 44,24,000 does not tantamount to receipt of salary income and is therefore, not liable to tax in India by virtue of Section 5(2)(a).

The addition so made to the income of the assessee is directed to be deleted. The other two grounds raised by the assessee since it was common ground were made for the reason that the salary received by the assessee was not explained and since we have adjudicated the issue of salary above holding in favour of the assessee, the addition made on account of unexplained investment amounting to Rs 42,81,762 and cash deposit amounting to Rs 1,00,34,419 is directed to be deleted.

In effect, appeal of the assessee is allowed.

[The Economic Times]