NRI Taxation: New Rule of Residency

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NRI Taxation: New Rule of Residency

Taxability of a person depends upon the residential status. An individual person could be (a) Residents and Ordinarily Residents (ROR), (b) Residents but Not Ordinarily Resident (RNOR) or (c) Non Resident. Non residents are liable for taxation only if the income is earned, accrued or arisen in India. In short, foreign income of Non Resident is not liable for taxation in India. In case of ROR, their global income is liable for taxation in India i.e., Indian income as well as foreign income is liable for taxation in India. For RONR, income from business controlled wholly or partly from India or profession which is set up in India is liable for taxation.

To determine the taxation of any person, it is important to know the residential status of a person. The norm of residential status has been widened by the Finance Act 2020 so as include lot many Indians who were able to arrange heir affairs in such a way that they maintain their tag of ‘Non-resident’ by “Stay Planning” route. Let us know about all the changes done from the perspective of NRI taxation:

Reduction in the number of days of stay in India:

  1. As per the provisions of the Income-tax Act 1961 till 31.03.2020, an individual is treated as Resident of India, if he triggers any of the following conditions:
    (a)    Stay in India is at least 182 days during the FY; or
    (b)   Stay in India is at least 60 days during the FY and at least 365 days during immediately 4 preceding FYs.

However, a relaxation is there to an Indian citizen or a Person of Indian Origin (PIO) who comes on a visit to India by providing an extended period of 182 days instead of 60 days as mentioned in point (b) above.
FA-2020 has reduced the said extended period of 182 days to 120 days for those Indian citizens or PIOs having total income, other than income from foreign sources, exceeding Rs 15 lakhs during the FY.  The change has been effected to catch those individuals who were carrying out substantial economic activities from India but were able to manage their period of stay in India to be less than 182 days to remain a Non-Resident (NR) in India.
In short, to retain the status of RNOR, Indians need to restrict their visits to India for a period not exceeding 119 days if their income is exceeding Rs. 15 Lakh.

  1. An individual was treated as RNOR if any of the following conditions are satisfied:
    (a) an individual who has been a non-resident in India in 9 out of 10 previous financial years preceding that year, or
    (b) has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less.
    The above 2 additional conditions have been retained as per the current law. Further, an additional condition has been added whereby an individual whose taxable income exceeds Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) will also be treated as RONR.
  1. Deemed Residency:
    One more important amendment is done by introducing the concept of “Deemed Residency” for all Indian citizens who used to enjoy the status of NR in India by shifting their stay in low or no tax jurisdiction. This is done by introducing sub section (1A) to section 6 to provide that all Individual being a citizen of India, shall be deemed to be a “Resident” in India in any previous financial year, if
    a) he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature and
    b) if his total taxable Indian income during the financial year is more than Rs. 15 lakh.
    The residential status of an Indian citizen who becomes deemed Resident by virtue of above provision shall be of RNOR. A suitable clarification was already provided by CBDT that this provision shall not be applicable to “bonafide workers” working outside India, like those working in UAE, Saudi & few other countries.
  2. As a result of above changes in the residency provisions, it become important for all Indian citizens and PIOs to carefully re- evaluate their residential status and assess their tax liability in India accordingly.
  3. Reckoning the limit of Rs. 15 Lakh:
    For reckoning the limit of Rs. 15 Lakh, dividends distributed by Indian companies would be taxable in the hands of the shareholders and as such, would form part of the taxable income. Similarly, interest on FCNR and NRE deposits are exempt & so it will not form a part of taxable income.
  4. Who are not affected by above amendment:
    The amendment is not going to affect the
    a) People of Indian origin (may be ex-citizens or otherwise) who have given up their Indian citizenship and are a citizen of some other country
    b) Foreign citizens (both of Indian origin as well as Non-Indian origin)
    c) People who have no connection with India whatsoever.
    d)  Indian citizens whose income from Indian sources does not exceed Rs. 15 Lakh.
  5. Precautions for Indians residing abroad:
  6. a)Indian Citizens residing abroad need to restrict their stay in India during the financial year to 119 days in any circumstances.
  7. b) To retain the status of RNOR or NR, Indian citizens living abroadmay ensure that their Indian income is not exceeding Rs. 15 Lakh
  8. c)Indians residing abroad must get a domicile/tax residency certificate from the government of the country where they stay during the relevant period.

Conclusions:

The residential status of an individual is a key factor to determine his or her income tax liability in India. FA-2020 will have far reaching as far as the taxation of NRI is concerned. It will be more difficult for lot may NRI to maintain their ‘Non-resident’ tag so as to keep their foreign income out of the tax net of Indian Income Tax Act-1961.

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