The Finance Act 2020 and Finance Act 2021 have made far-reaching changes regarding the determination of residential status for Individuals. These changes which are effective from Financial Year (FY) 2020-21 and onwards have directly impacted the Non-Resident Indian (NRI) community. There are over 30 million NRIs across Middle East, USA, UK, Canada, Singapore and other countries.
Let us look at the amended criteria for determining the 'residential status' for NRIs.
Till the end of FY 2019-20 (i.e. financial year ended March 31, 2020), NRIs (covers Indian citizens and Persons of Indian Origin) included those individuals who being outside India visited India for less than 182 days in a financial year. The Finance Act 2020 reduced this period to 120 days in cases where the total taxable Indian income (i.e., income accruing in India) of such visiting individuals during the financial year is more than Rs 15 lakhs. Accordingly, visiting NRIs whose total income (which is defined as taxable income) in India is up to Rs 15 lakhs during the financial year will continue to remain NRIs if the stay does not exceed 181 days, as was the case earlier.
As such, besides monitoring the number of days present in India, the visiting NRIs are also required to keep tab of their Indian taxable income. This is because once the taxable Indian income exceeds Rs 15 lakhs, then provisions related to stay exceeding 120 days will be applicable.
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It may be noted that dividends distributed by Indian companies are now taxable in the hands of the shareholders and as such, would form part of the taxable income. On the other hand, since interest on FCNR and NRE deposits are exempt it will not form a part of taxable income.
Further, an NRI whose taxable Indian income exceeds Rs 15 lakhs and stays in India for 120 days or more, then such an individual further needs to check whether his stay in India is for 365 days or more in immediately preceding 4 financial years.
Let us assume a non-resident visits India in FY 2022-23 (having taxable income in the financial year exceeding Rs 15 lakhs) and stays for say 130 days. Further, during the preceding 4 financial years (i.e., FY 2020-21, 2019-20, 2018-19, 2017-18) he was in India for total of 365 days or more.
In such a case, he will be treated as a resident individual for income tax purposes. While this may ring alarm bells for many NRIs, but in a relief they will be treated as "Resident but Not Ordinarily Resident (RNOR)". This would be a relief as their foreign income (i.e., income accrued outside India) shall not be taxable in India.
RNOR Criteria liberalised
An individual is treated as 'Resident but Not Ordinarily Resident' (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 financial years preceding that year been in India for a period of or periods amounting in all to, 729 days or less.
Further, we have noted above that due to the amendment made, an individual whose taxable Indian income exceeds Rs 15 lakhs and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual will still be treated as "Resident but Not Ordinarily Resident (RNOR)".
In case of RNOR individuals, the foreign income (i.e., income accrued outside India) shall not be taxable in India. Foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
Indian Citizens, who are Global Non-Resident - Deemed Residential Status applicable based on Indian income criteria under section 6(1A)
An individual being a citizen of India, shall be deemed to be a resident in India in any previous financial year, if 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. However, this provision will be applicable only if his total taxable Indian income during the financial year is more than Rs 15 lakhs.
Till FY 2019-20, there was no such provision in the Income-tax Act. This provision of determining residential status for a stateless individual shall not be applicable for OCI (Overseas Citizen of India) card holders or foreign citizens or PIOs.
"Liable to Tax" defined by Finance Act 2021
The Finance Act, 2021 has defined this term "Liable to tax" in relation to a person and with reference to a country. It means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country.
The above provision has resulted in confusion in case of persons who are residing in Middle Eastern countries which do not impose any income-tax on individuals. As a relief to such NRIs working in such countries, the Central Board of Direct Taxes (CBDT) has issued a press release clarifying that the above provision is an anti-abuse provision and is not intended to tax bonafide workers in foreign countries. It is further clarified that in case a person becomes Resident under this Section 6(1A), no tax will be levied on foreign income unless it is derived from an Indian business or profession.
In most cases, this would not have any direct impact on taxable income in India as the status of such individuals would still be NR or RNOR and only Indian income shall be continued to be taxable in India and not the worldwide income.
However, several Indians who are residing outside India are not comfortable with RNOR status. The provision is also counter-productive as it discourages investments in India in shares and other securities, real estate and other income-yielding instruments resulting in taxable income in India. The recent geo-political developments and inflation have resulted in weakening of Indian Rupee and lowering of the growth forecast. NRIs have always been a major source of foreign remittances and investment in India. Hence, the unfavourable tax treatment of NRIs having Indian taxable income above Rs.15 lakhs should be done away with and permitting stay up to 181 days during the financial year should be considered for non-resident tax status.
Scope of taxation in India based on Residential Status
