Recently, due to the ongoing COVID19 pandemic, many NRIs got stranded in India, which triggered them to worry about their residential status in the country. Certainly, it is imperative to check residential status of a person for every financial year because this is one of the factors based on which his/her taxability of income is decided. The term residential status has been minted under the Income Tax Act of India and has got nothing to do with a person’s citizenship in India. An individual might be an Indian citizen but maybe a non-resident in India for a particular financial year. Similarly, a foreign citizen may become a resident of India for Income Tax purposes for a specific year. Let us read the below article to have an insight on NRI taxation, and how and why the residential status of an individual is determined.
The taxability varies for each of the above categories of assessees. Before we dive into the taxability, let us first understand how a taxpayer becomes an ROR, an RNOR or an NR.
Who is a Resident in India?
As per section 6(1), an individual would be a resident in India in any previous year if he/she satisfies either of the conditions mentioned below:
a) He/she has been in India during the previous year for a total period of 182 days or more, or
b) He/she has been in India during the 4 financial years immediately preceding the previous year for a period of 365 days or more, and for a minimum of 60 days in the relevant previous year.
Who is a non-resident in India?
An individual satisfying neither of the conditions stated in (a) and (b) above would be a non-resident for the relevant previous year.
Exceptions
The following categories of individuals will be considered residents in India only if they stay in India in the relevant previous year amounts to 182 days or more.
1: Indian citizen, who leaves India in any previous year as a crew member of an Indian ship or for employment purposes outside India, or
2: Indian citizen or a person of Indian origin who, being outside India, visits India during the relevant previous year.
However, such person having the total income, other than the income from foreign sources exceeding Rs. 15 lakhs in the previous year, will be considered as resident in India if –
a) the period of his/her stay in India during the relevant previous year amounts to 182 days or more, or
b) he/she has been in India during the 4 financial years immediately preceding the previous year for a period of 365 days or more and has been in India for minimum 120 days in the relevant previous year.
Note: An individual is considered of Indian origin if he/she or either of his/her parents or any of his/her grandparents was born in undivided India.
Deemed Resident (Section 6(1A))
An individual, being an Indian citizen, having a total income, other than the foreign source income, of more than Rs. 15 lakhs during the previous year would be deemed to be a resident in India in that previous year, if he is not required to tax in any other country or territory because of his residence or domicile or any other criteria of similar nature, even if he does not satisfy any of the conditions mentioned under section 6(1).
Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR)
A resident person can further be classified as ‘resident and ordinarily resident’ or ‘resident but not ordinarily resident’. According to section 6(6) of the Act,a resident but not ordinarily resident person for a particular previous year is the one who satisfies any one of the following conditions:
a) If such individual was a non-resident in India in any 9 out of the 10 previous years immediately preceding the relevant previous year, or
b) If such individual stays during the 7 previous years immediately preceding the relevant previous year in India for 729 days or less, or
c) If such an individual is an Indian citizen or a person of Indian origin having a total income, other than the income from foreign sources, over Rs. 15 lakhs during the previous year, and who has been in India for a period of 120 days or more but less than 182 days during that previous year, or
d) If such an individual is an Indian citizen, who is deemed to be resident in India under section 6(1A).
If a resident individual does not fall in any of the 4 categories mentioned above, he will qualify as ‘Resident and Ordinarily Resident’ in India for the relevant previous year.
Some important points to be noted
* It is not mandatory that the period of stay of the individual must be continuous or active, nor is it compulsory that the stay is at the usual place of residence, business or employment of the individual.
* To count the number of days stayed in India, both the date of departure and the date of arrival are considered in India.
* The residential status of an individual must be ascertained with reference to each previous year. A resident and ordinarily resident in Income Tax in one year may become non-resident or resident but not ordinarily resident in another year or vice versa.
* Income from foreign sources means income that accrues or arises outside India(except the income derived from a business controlled in or a profession set up in India) and is not deemed to accrue or arise in India.
Let us see the following examples to have a better understanding of the provisions stated above:
1) Mr. Mohan, a citizen of Belgium, visits India for the first time in the Previous Year, 2016-17. During the previous years, 2016-17, 2017-18, 2018-19, 2019-20 and 2020-21, he was in India for 54 days, 61 days, 93 days, 146 days and 68 days, respectively. Ascertain his residential status for the Assessment Year 2021-22.
Answer
During the previous year 2020-21, Mr. Mohan was in India for 68 days, and during the 4 years immediately preceding the financial year, 2020-21, he was in India for 354 days (i.e., 54+61+93+146 days).
Thus, he does not satisfy either of the conditions stated u/s 6(1) as his stay during the previous year, 2020-21, is less than 182 days and during the4 years preceding the previous year, 2020-21, is less than 365 days. Hence, he is a non-resident in India for the previous year, 2020-21.
2) Mr. John, a non-resident residing in the U.S. since 1990, returned to India on 1st April 2019 for permanent settlement. Determine his residential status for A.Y. 2021-22.
Answer
Mr. John is a resident in A.Y. 2021-22 since he has stayed in India for a period of 365 days (over 182 days) during the P.Y. 2020-21.
Now, we’ll check whether he is ‘Resident and ordinarily resident’ or ‘Resident but not ordinarily resident’.
Since he was a non-resident in 9 out of 10 previous years immediately preceding the P.Y. 2020-21, his status would be ‘Resident but not ordinarily resident’ for the previous year 2020-21.
He can be declared ‘Resident but not ordinarily resident’ for the previous year 2020-21 based on the second condition of Section 6(6) also as he has stayed in India for only 366 days (less than 730 days) during 7 previous years immediately preceding the Previous Year 2020-21.
A residential status calculator can also be considered to find out the residential status of a person.
Now that we have learned the various categories and the respective conditions thereof for the determination of residential status as per the Income Tax Act, let us look at the Income Tax rules for NRIs and implications of taxation on the individual’s income based on his residential status and comprehend why its determination is essential every year.
Scope of Total Income
Section 5 elaborates on the scope of total income in terms of the assessee’s residential status because tax incidence on any person depends upon his residential status under Income Tax Act. The scope of the total income of an individual depends upon the following three crucial considerations:
a) the residential status of the individual;
b) the place of receipt or accrual of income, whether actual or deemed; and
c) the point of time of accrual or receipt of income.
Whether the following incomes would be included in the Total Income taxable in India?
| Scope of Total Income | ROR | RNOR | NR |
| Income received or deemed to be received in India during the previous year | Yes | Yes | Yes |
| Income accruing or arising or deeming to accrue or arise in India during the previous year | Yes | Yes | Yes |
| Income accruing or arising outside India during the previous year | Yes | Yes, but only if such income has been derived from a business controlled in or profession set up in India; Otherwise, No. | No |
Hence, the taxability can be summarised for different categories of individuals as under:
Resident: A resident assessee’s global income will be charged to tax in India.
Non-Resident and Resident but not Ordinarily Resident: Their tax liability in India is restricted to their Indian income. They don’t need to pay any tax in India on their foreign income. However, in the case of RNOR, income accruing or arising outside India derived from a business controlled in or a profession set up in India during the previous year will be included in his total income to be taxed in India.
Therefore, the key takeaway from this discussion can be that the moment an NRI in Income Tax becomes a resident in India, his entire income, i.e., his global income, will become liable for tax in India and he will have to file Non Resident Indian Income Tax return in India.
It is essential to have a birds-eye view of the meaning of certain terms/phrases described below for a complete understanding of the above-discussed scope of total income:
Income accrued
Income accrued means the right to receive income.
Income taxed on the accrual basis cannot be assessed again on a receipt basis, as it will amount to double taxation.
Income received or deemed to be received in India
The receipt of income means only the first occasion when the recipient gets the money under his control.
Examples of Income deemed to be received in India include contribution over 12% of salary to Recognised Provident Fund, interest credited more than 9.5% p.a. in RPF, etc.
Income deemed to accrue or arise in India
Certain kinds of income are deemed to accrue or arise in India even though they may actually accrue or arise outside India.
Such categories of income that are deemed to accrue or arise in India are:
*Any income accruing or arising to an individual in any place outside India, whether directly or indirectly
a) through or from any business connection in India,
b) through or from any property in India,
c) through or from any source of income in India, or
d) through the transfer of a capital asset located in India
* Income from salary if the services are rendered in India
* Income from salaries payable by the Indian Government for services rendered outside India
* Dividend paid by an Indian company out of India
Interest, royalty or fee for technical services received from the Indian Government or specified persons in certain circumstances.
The benefit of DTAA provisions
It is important to note that in a situation of double taxation of income where the same income is getting taxed in India as well as abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India would have entered into with the other country to eliminate the possibility of paying taxes twice.
If an NRI Income Tax wants to visit India, he must plan his visit in such a way so that he/she can maintain his/her residential status of NRI in the relevant financial year, as the incidence of tax is the least in the case of a non-resident.
The residential status of an individual must be determined with utmost accuracy as it is the foundation upon which the tax implications on his/her income are based.
Frequently Asked Questions
- Why is it required to determine the residential status of a person?
The residential status of a person is important for determining the taxability of income in his hands. Tax implications differ according to the residential status of a person.
- Will a person holding Indian citizenship be treated as a resident in India for the purpose of charging Income Tax?
No, it’s not necessary that a person citizen of Indiawill also be a resident in India. The residence of an individual for Income Tax purposes has nothing to do with his citizenship, place of birth or domicile.
But it must be noted that an Indian Citizen earning a total income over Rs. 15 lakhs (other than income from foreign sources) in a previous year shall be deemed to be a resident in India if he is not liable to tax in any other country in such previous year.
- What is the basic exemption limit applicable to a non-resident under Income Tax?
The basic exemption limit applicable to a non-resident is Rs. 2,50,000 irrespective of the age of such non-resident.
- If I bring my past foreign untaxed income to India in a financial year, will it become taxable in India in that year?
No, any past year foreign income (whether taxed or not) remitted to India in a previous year will not be taxable in India in that year.
- If an NRI remits his income received in abroad to India, will it become taxable on account of receipt of such income in India?
No, it will not become taxable in India because the receipt of income refers only to the first event when the recipient gets the money under his control. Subsequent remittance of the same does not constitute receipt of income.
