A tax notice says your NRE seafarer salary is taxable, and why it usually is not

The notice almost always turns on one idea. A non-resident is taxed in India only on income that is received in India or that accrues in India (Section 5(2)). The department reads your NRE bank statement, sees a large salary credit into an Indian account, and argues that the salary was therefore received in India and is taxable here.

It is an understandable reading of the bank statement, and it is the reason these notices are common, but it confuses two different things: where the money was earned, and where it happened to land. Put simply, a non-resident is taxed on money earned in India or first received in India; salary earned on a ship outside India and later sent to your bank is neither. Your salary was earned for work performed on a ship outside India. When your foreign employer later pays it into your Indian NRE account, that credit is a remittance of income you had already earned abroad, not the moment you first received it. The notice treats the remittance as the receipt, and that is the flaw the courts have corrected.

The position that defeats the notice is that the salary accrues outside India, so an NRE credit does not bring it into the Indian net. The Calcutta High Court settled this in Sumana Bandyopadhyay v. DDIT, decided on 13 July 2017, applying the CBDT circular below. The Court held that the salary was earned outside India while the seafarer was a non-resident, and that mere receipt of it in an NRE account in India does not make it taxable here. Put another way, the credit is a transfer of already-earned income, not the point of first receipt.

CBDT Circular 13/2017, issued on 11 April 2017 and corrected by Circular 17/2017 on 26 April 2017, says the same in the department's own words: salary accrued to a non-resident seafarer for services rendered outside India on a foreign-going ship (with Indian flag or foreign flag) is not to be included in total income merely because it has been credited to an NRE account with an Indian bank. So the answer to the notice is not an argument you have to invent; it is the department's own circular plus a High Court judgment, applied to your facts.

It helps to know that this was fought and settled, because it tells you how strong your ground is. The issue first went the wrong way. In Tapas Kumar Bandopadhyay v. DDIT, the Kolkata Tribunal in 2016 accepted the department's view and treated the NRE credit as salary received in India, and therefore taxable. That is the decision that alarmed the seafarer community.

It did not survive. While the appeal was pending, CBDT issued Circular 13/2017 in April 2017 adopting the taxpayer-friendly view. On appeal the Calcutta High Court then reversed the Tribunal in Sumana Bandyopadhyay in July 2017, applying the circular and holding the salary accrues outside India and is not assessable on a receipt basis. So the arc runs from an adverse Tribunal decision to a departmental circular that binds the assessing officers and a High Court reversal. A notice today is running against the settled position, not with it, which is exactly why it is answerable.

The protection is real but it is specific, and knowing its edges keeps you from over-claiming. Circular 13/2017 covers a precise case: a non-resident, services rendered outside India on a foreign-going ship, and salary credited to an NRE account. Move outside any of those and the clean shelter falls away.

The circular is silent on salary paid into an NRO account (or a savings account not yet redesignated from resident), so if that is where your salary landed you cannot simply cite the circular; the case has to be argued on the underlying accrual principle, which is harder without the circular's cover. The flag of the ship does not matter: Circular 17/2017 corrected the wording to a foreign-going ship with an Indian flag or a foreign flag. What falls outside is coastal service between Indian ports, or other services rendered in India. If your ship did both in the year, the coastal part sits outside the circular, so your CA works from the voyage record to separate the two. And it does not cover a seafarer who is resident for the year. A resident and ordinarily resident (ROR) is taxed on worldwide income, so the ship salary is in the Indian net whatever the account, subject to any treaty relief. A resident but not ordinarily resident (RNOR) is taxed on foreign income only if it is received in India or comes from a business controlled or profession set up in India, so the question becomes where the salary was first received, which the circular, written for non-residents, does not settle. If you are unsure of your status for the year, settle that first from your Continuous Discharge Certificate and passport (our seafarer residency guide, linked below, walks through it), because this page's defence assumes you were a non-resident. So the first thing to check before answering the notice is whether your facts sit squarely inside the circular. Where they do, the notice is weak; where they stray, the response has to be built more carefully.

Suresh, a marine engineer, was a non-resident last year, sailed foreign-going ships, and had his salary of about 28 lakh rupees paid into his NRE account in Chennai. Months after filing, he received a notice proposing to add the whole salary as income received in India.

His CA answers it on the settled position. The response sets out that Suresh was a non-resident for the year, established from his Continuous Discharge Certificate and passport with Rule 126 applied to his voyage days; that the salary was for services rendered outside India on foreign-going ships and so accrued outside India; and that the NRE credit is a remittance, not first receipt, relying on Sumana Bandyopadhyay and Circular 13/2017. The employer's salary advice and the NRE statement are attached to show the source and the account. On these facts the addition should not stand; if the officer persists, the appeal route is open. Had the salary gone to an NRO account, the same response would have had to work harder, which is exactly why the account it lands in matters so much.