The Income Tax Appellate Tribunal (ITAT) Bangalore recently provided relief to an employee who got a tax notice for receiving salary on his NRE (Non-Resident External) account from his foreign employer.
Mr Akka, a resident of Humnabad Road in Gandhi Nagar, Karnataka, emigrated to South Korea to work for Greece-based Ocean Rig UDW Inc, which had secured a big project from Samsung Heavy Industries in South Korea.
As per the arrangement between Samsung and Ocean Rig UDW Inc., Akka would work from September 2014 to June 30, 2016, as a supervisor in Samsung’s shipyard to oversee the construction work of a vessel. So, Akka’s employment contract was drafted accordingly; it was clearly mentioned that Akka would be given the designation of supervisor and that he would work as an electrician at the project site in South Korea. His salary was fixed in USD and directly paid to his Axis Bank NRE account back in India.
However, the Income Tax Assessing Officer (AO) from Bangalore highlighted the issue with Akka’s arrangement in the tax notice. The AO observed that Akka had received the credits into his NRE account in USD; therefore, he concluded that Akka is working with a foreign company.
The AO further stated that despite his employment with a foreign company, Akka has not filed the Foreign Tax Returns and has also not furnished the copy of the TRC (Tax Residency Certificate). Consequently, the AO added the salary income received to his total income. The AO also added the differential amount in the interest income received. Thus, Akka became liable to pay income tax on his foreign salary received in the NRE account.
In the draft order, the AO made the observation that Akka had not also declared his received salary income in his Indian income tax return (ITR).
The Dispute Resolution Panel (DRP) agreed with the AO and rejected Akka’s objections on the ground that he had failed to submit the TRC, foreign tax returns, and proof of the payment of taxes in Congo. The DRP also observed that the salary paid by the employer into a bank account in India is deemed to arise and accrue in India and should be taxed in India.
Feeling aggrieved, Akka filed an appeal with the ITAT Bangalore. Advocate Ms Sahana T.H.M. represented him before the tax tribunal. On September 23, 2026, Akka won relief from the ITAT Bangalore.
Money in NRE bank account is taxable?
An NRI’s global income is not taxable in India. An NRI is liable to pay income tax in India only upon the following under the following circumstances:
- Income is received or deemed to be received in India, or
- Income accrues/arises in India, or
- Income is deemed to accrue/arise in India.
However, there is no general exemption from taxation in respect of credits of income to NRE account.
Khurana says that the Income-tax Act creates a charge of taxation in respect of incomes received in India and the general law should also apply to incomes received in Indian NRE account. However, the understanding is subject to certain exceptions.
Khurana says: "In case of individuals entitled to benefit of tax treaties, mere receipt of income in India may generally not confer a right of tax in India where the income is otherwise not taxable in India as per the double taxation avoidance agreement (DTAA)."
Position gets blurry in cases of individuals who are not entitled to benefit of tax treaty (owing to place of residence in country which does not have tax treaty with India or compliance issues such as failure to produce a Tax Residency Certificate). In such cases, Khurana says that incomes could potentially be taxed in India (owing to lack of benefit of tax treaty) on receipt basis.
However, in this regard, various benches of the ITAT have interpreted the provisions liberally in respect of salary received by a non-resident in an NRE account maintained in India.
Khurana says that the reasoning adopted is that an employee’s lawful right to receive salary arises at the place of employment, and that the subsequent deposit of such salary into an NRE account in India at the employee’ direction constitutes a mere application of income already received outside India, rather than its first receipt in India.
In support of this position, ITAT in the past has relied on Circular issued by the Central Board of Direct Taxes (CBDT) (Circular No. 13/2017). This Circular which was otherwise issued specifically in relation to non-resident seafarers rendering services on foreign ships, has been relied upon by the ITAT to conclude that salary accrued for services rendered outside India shall not be included in total income merely because it has been credited to the seafarer's NRE account maintained with an Indian bank.
Khurana says: "Accordingly, the prevailing judicial view is that salary accrued outside India does not become taxable in India merely because it is credited to an NRE account."
How did Akka win the case in ITAT Bangalore?
Karanjot Singh Khurana, Partner, DMD Advocates, said to ET Wealth Online in this case Akka worked for a Greece-based company that deputed him as an electrician/supervisor on a project in South Korea. For the AY 2016-17, Akka filed his ITR and was assessed as a non-resident.
Khurana says: "However, his salary in USD was credited to his NRE account held with Axis Bank in India. Subsequently, reassessment proceedings were initiated against Akka."
During the course of such proceedings, Akka submitted his bank statements, passport copy, payslips etc. but could not furnish his foreign tax return, tax residency certificate (‘TRC’), or proof of payment of tax outside India.
Since Akka could not furnish TRC, foreign returns, and foreign tax payment details, the income tax department treated the salary received by Akka in his NRE account in India and taxed it, along with a differential interest addition.
Upon appeal to the ITAT Bangalore, it was held by ITAT that the income tax department had applied the wrong test as the entire basis for taxing the salary on the premise that Akka hadn't produced the documents mentioned above including TRC.
Thus, ITAT Bangalore held that Akka had already proven the facts that actually matter for Indian taxability as his passport entries and NRE bank statements established he was a non-resident during the year, and the documentary evidence showed he was employed by a Greece-based company, working in South Korea, and salary was paid in USD in his NRE account.
So on the basis of these facts, Khurana says that Akka's foreign salary wasn't taxable in India at all, regardless of whether he could produce a TRC or prove payment of tax outside India. Summarising the position, ITAT Bangalore stated that payment of tax abroad is not the test for whether income is taxable in India.
However, it is imperative to note that the reassessment order was set aside by ITAT Bangalore and remitted back to the assessing officer for fresh adjudication, with a direction to decide based on the passport entries and NRE account of Akka without insisting on TRC, foreign tax return and payment details of tax in foreign country.
ITAT Bangalore discussion
The ITAT Bangalore observed that the bank statement copy filed by Akka vouched for the said facts mentioned by him, and if Akka’s passport copy is seen, it is proved that he was a non-resident during the relevant period. Thus, on this ground, the ITAT Bangalore said that the question of levying tax on the salary income received by Akka would not arise.
The ITAT Bangalore ruled that whether Akka had paid the tax in the foreign country or not is not a ground for treating the income earned by the assessee as taxable in India.
The ITAT Bangalore also observed that despite the fact that Akka had produced the copy of the passport and the copy of the bank statements, the AO had not considered the same for the only reason that the documents such as tax returns, TRC, and tax paid details in the foreign country were not produced by Akka.
The ITAT Bangalore disagreed with the AO and said that they do not think that the said finding is correct when Akka is able to demonstrate that he was a non-resident during the relevant period.
The ITAT Bangalore said: “The NRE account also establishes the fact that the assessee (Akka) had received the salary in USD. In such circumstances, the assessment order passed by the AO is not in accordance with the provisions of the Act.”
The ITAT Bangalore ruled that non-filing of the said documents (tax returns, TRC, and tax paid details in the foreign country) could not be a reason for rejecting Akka’s claim when the facts remain that he is a non-resident and earned the income in USD.
Thus, the ITAT Bangalore set aside the assessment order framed by the AO and remitted the same to the file of the AO for fresh adjudication and also directed the AO to consider the passport entries and the NRE account details and decide the issue based on the said documents without insisting the copy of the tax return filed in foreign country, TRC, and tax paid details in foreign country.