An Indian employee in Saudi Arabia or Kuwait where salary is untaxed: residence, salary, end-of-service pay and NRE interest under Indian tax law

A citizen of India employed in Saudi Arabia or Kuwait, on the premise that neither taxes his salary, is a non-resident for Indian tax unless one of the day tests in section 6 of the Income-tax Act, 2025 is met or the deemed-residence rule in section 6(7) applies, which needs total income above INR 15 lakh other than income from foreign sources and no liability to tax in any other country. A non-resident is charged only on income received or accruing in India, so a salary and an end-of-service benefit earned and paid abroad stay outside the charge, and interest on a Non-Resident (External) (NRE) account is excluded under Schedule IV because the holder is resident outside India under the Foreign Exchange Management Act, 1999 (FEMA).

What does this note assume?

A citizen of India takes a job in Saudi Arabia or Kuwait. The premise is that neither state taxes an employee's salary. The note asks what the Income-tax Act, 2025 (No. 30 of 2025), in force from 1 April 2026, the Reserve Bank of India's deposit regulations and the two treaties say about him.

How is residence decided for this employee?

The day tests in section 6(2) to 6(6), including the rule for a citizen who leaves India for employment, are set out in the separate note on the tax residence of an Indian citizen abroad and are not repeated here.

What is the deemed-residence rule, and who does it reach?

Section 6(7) applies irrespective of sections 6(2) to 6(6). An individual is deemed resident in India for a tax year if he is a citizen of India, "is not liable to tax in any other country or territory due to his domicile, residence, or similar criteria", and has total income exceeding INR 15 lakh in the year, other than income from foreign sources. Section 6(8) keeps the rule for a person not already resident under sections 6(2) to 6(6), and section 6(13)(c) makes him not ordinarily resident (NOR).

On the premise, the second condition may be met for a Gulf employee, and the third does the work. Section 6(14) defines "income from foreign sources" as income accruing or arising outside India, other than income from a business controlled in India or a profession set up in India. His salary for work in Riyadh or Kuwait City is foreign-source income and does not count towards INR 15 lakh. What counts is Indian-source income: rent from a flat in Bengaluru, interest on a Non-Resident (Ordinary) (NRO) account, a gain on Indian shares.

Why is salary earned and received abroad outside the charge?

Section 5(2) charges a non-resident only on income received or deemed received in India, and on income accruing or arising, or deemed to accrue or arise, in India. Salary paid in Riyadh for work in Riyadh is not received in India. Section 9(3) answers whether it accrues in India: income under the head "Salaries" is deemed to accrue in India if it is earned in India, and income payable for services rendered in India, or for a rest or leave period "preceded and succeeded by services rendered in India", counts as earned in India.

The exclusion has edges. Days worked in India are services rendered in India, and section 9(3)(b) reaches salary payable by the Government to a citizen of India for services rendered outside India. Home leave from a job performed wholly abroad is not, on the words, a leave period preceded and succeeded by services rendered in India, and we have not seen guidance on that point.

What of the end-of-service benefit?

Section 16 counts "any gratuity" and "profits in lieu of, or in addition to, any salary or wages" as salary. Section 18(1) adds compensation from an employer at or in connection with the termination of employment. The note uses "end-of-service benefit" for a lump sum paid on leaving a Gulf job. On those words it sits in the head "Salaries". Section 9(3) asks where it was earned. A benefit built over years of work in Saudi Arabia or Kuwait is earned abroad, and paid abroad to a non-resident it is neither received in India nor deemed to accrue there.

The result changes with residence in the year of receipt. A returning employee who is resident and ordinarily resident in the year the benefit is paid is charged under section 5(1) on income accruing outside India, while a NOR is confined to income from a business controlled in India or a profession set up in India. Section 18(2) takes four entries out of this head: Schedule II serial numbers 3, 4 and 8, which exempt payments from certain provident funds, from a recognised provident fund and from an approved superannuation fund, each on stated conditions, and Schedule III serial number 11, which exempts a special allowance for rent actually paid on accommodation the employee does not own. None is written for an employer's end-of-service lump sum as such.

Why is Non-Resident (External) interest excluded?

Regulation 5(1)(i) of the Foreign Exchange Management (Deposit) Regulations, 2016 lets an authorised dealer in India accept deposits under the Non-Resident (External) Account Scheme from a non-resident Indian, which regulation 2(vi) defines as a person resident outside India who is a citizen of India. The Reserve Bank's circular of 5 May 2016 describes a rupee account, including a fixed deposit, to which inward remittances from outside India are permitted credits.

On the tax side, section 11 of the 2025 Act excludes from total income the items in Schedules II to VI, subject to their conditions, and serial number 1 of Schedule IV excludes "any income by way of interest". The eligible person is an individual resident outside India as defined in section 2(w) of the Foreign Exchange Management Act, 1999 (FEMA), which describes a person resident outside India as a person who is not resident in India, or one the Reserve Bank has permitted to hold the account.

The exemption therefore turns on the FEMA test, not on section 6. On the words of Schedule IV, an employee deemed resident in India for tax under section 6(7) but resident outside India for FEMA is within the eligible class.

What do the two treaties say?

The India-Saudi Arabia Convention was signed on 25 January 2006 and the India-Kuwait Agreement on 15 June 2006. We read the Ministry of External Affairs treaty database copies, which are scans with errors in the extracted text.

Article 4 of each defines a "resident of a Contracting State". For India it is a person liable to tax by reason of domicile, residence, place of management or a similar criterion. Each then adds a Gulf limb for an Indian national. In the Kuwait Agreement, Article 4(1)(b) makes a resident of Kuwait an individual who is a Kuwaiti national or an Indian national "present in Kuwait for a period or periods totaling in the aggregate at least 183 days in the fiscal year concerned". In the Saudi Convention, paragraph 4(b) of the Protocol provides the same for an Indian national present in Saudi Arabia for at least 183 days in the fiscal year.

An Indian national who works in either state for the year is thus a treaty resident of that state, and a dual-resident individual is placed by permanent home, centre of vital interests, habitual abode and then nationality. The dependent personal services article of each (numbered 15 in the scans) says salary of a resident of one state is taxable only in that state unless the employment is exercised in the other. For a Gulf treaty resident working in the Gulf, only the Gulf state may tax the salary.

What do the figures look like?

An illustration. The employee, the incomes and the history are hypothetical, and the interest rate is assumed. Rent is shown as income from house property after the deductions the Act allows, including the 30 per cent deduction in section 22(1)(a). He is a citizen of India working in Riyadh, was a non-resident in each of the ten preceding tax years, earns INR 30 lakh a year, and has an NRE fixed deposit of INR 40 lakh at an assumed 6 per cent, which is INR 2.4 lakh a year.

Case 1: 2026-27, 40 days in India, house property income INR 7 lakh, NRO
interest INR 1.5 lakh
  Section 6(2) not met                non-resident
  Section 6(7)(c): 7 + 1.5 = 8.5 lakh, not above 15 lakh   not deemed
  Charged in India: INR 8.5 lakh
  Outside the charge: salary INR 30 lakh (section 5(2)); NRE interest
  INR 2.4 lakh (Schedule IV, serial number 1)

Case 2: same year, house property income INR 13 lakh, NRO interest INR 3 lakh
  Section 6(7)(a) and (c): 13 + 3 = 16 lakh, above 15 lakh   met
  Section 6(7)(b), if liable to tax in a Gulf state    non-resident
  Section 6(7)(b), if liable to tax nowhere            deemed resident, NOR
  Charged on Indian income: INR 16 lakh in either label
  Salary INR 30 lakh: outside, as a NOR is charged on foreign income only
  from a business controlled in India or a profession set up in India

Case 3: 2026-27, he leaves the job, is in India 200 days, and is paid an
end-of-service benefit of INR 6 lakh in Riyadh
  Section 6(2)(a): 200 days           resident
  Non-resident in nine of ten preceding years    NOR (section 6(13)(a)(i))
  Benefit earned in Saudi Arabia      outside the charge (section 5(1)(c))

The label in Case 2 changes the status and the filing position, not the INR 16 lakh, on the assumption that no other rule differs.

What remains unsettled?

First, section 6(7)(b) asks whether a citizen is "not liable to tax in any other country or territory due to his domicile, residence, or similar criteria". The Act does not say whether residence in a state that levies no tax on salary makes him "not liable". The Gulf limbs of Article 4 treat an Indian national present for 183 days as a resident of the Gulf state for the treaty, but that is a treaty category, and we have not seen official guidance on whether it answers section 6(7)(b).

Second, the charge on a lump-sum end-of-service payment depends on residential status in the year of receipt and on whether the payment comes from a fund that Schedule II covers.