One of the most valuable benefits granted to Indian merchant navy personnel who qualify as Non-Residents (NRIs) is the 100% tax exemption on foreign ship salary and interest earned on Non-Resident External (NRE) bank deposits under Section 10(4)(ii).
Understanding Territorial Sourcing of Income
Under Indian tax law (Section 5(2)), a Non-Resident is taxable only on income that is received in India, or deemed to be received in India, or accrues or arises in India. Since a seafarer provides physical services on the high seas or in foreign ports on foreign-going vessels, the source of income is situated outside India.
The Supreme Court & Calcutta High Court Precedents
In the landmark ruling of DIT (International Taxation) vs. Tapas Kr. Bandopadhyay, the Calcutta High Court affirmed that salary received by an NRI seafarer for services rendered outside India cannot be taxed merely because it was remitted directly to an Indian NRE bank account by the foreign shipping employer. The Central Board of Direct Taxes officially accepted this position through Circular 13/2017.
Critical Requirements to Claim Exemption
- Maintain verified Non-Resident status (182+ days outside India).
- Salary must be paid by a foreign shipping principal or agency for services on a foreign-going vessel.
- Deposit funds directly into an NRE (Non-Resident External) account, not an ordinary resident savings account.
- Properly disclose the exempt income under the Exempt Income (EI) schedule of ITR-2.