Residential Status for NRIs in India: Everything You Need to Know
As the ongoing COVID19 pandemic has forced many NRIs to stay in India, it has made them wonder about their residential status. It’s essential to check the residential status of a person every financial year as it is one of the factors based on which the taxability of income is decided. Residential status is a term coined under the Income Tax Act of India and is not related to a person’s citizenship in India. An individual might be an Indian citizen but may be a non-resident in India for a particular financial year, and similarly, a foreign citizen may become a resident of India for Income Tax purposes for a specific year.
Ahuja & Ahuja Chartered Accountants, a Full-Service Indian Chartered Accountants Firm in Delhi/NCR, India, provides expert advice on NRI taxation and how and why the residential status of an individual is determined.
Types of Residential Status
The taxability varies for each of the above categories of assessees. Before diving 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) of the Income Tax Act, 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 four 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 their stay in India in the relevant previous year amounts to 182 days or more.
- Indian citizen, who leaves India in any previous year as a crew member of an Indian ship or for employment purposes outside India, or
- Indian citizen or a person of Indian origin who, being outside India, visits India during the relevant previous year.
However, such a person having the total income, other than 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 four financial years immediately preceding the previous year for a period of 365 days or more and has been in India for a minimum of 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 pay 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).
Residential Status for NRIsResident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR)
The residential status of an individual for Income Tax purposes can be classified as either ‘resident and ordinarily resident’ or ‘resident but not ordinarily resident.’ Section 6(6) of the Income Tax Act lays down the criteria for determining an individual’s residential status as a resident but not ordinarily resident, which includes:
a) Being a non-resident in India in any 9 out of the 10 previous years immediately preceding the relevant previous year, or
b) Staying in India for 729 days or less during the 7 previous years immediately preceding the relevant previous year, or
c) Being an Indian citizen or a person of Indian origin with a total income, excluding income from foreign sources, over Rs. 15 lakhs during the previous year and staying in India for a period of 120 days or more but less than 182 days during that previous year, or
d) Being an Indian citizen deemed to be a resident in India under section 6(1A).
If an individual does not meet any of the above criteria, they are considered a resident and ordinarily resident in India for the relevant previous year.
It is important to note that the period of an individual’s stay in India need not be continuous or active, and both the date of departure and arrival are considered when counting the number of days stayed in India. Additionally, an individual’s residential status must be ascertained for each previous year, and it may change from year to year.
Income from foreign sources refers to income earned outside India (excluding income derived from a business controlled in or a profession set up in India) that is not deemed to accrue or arise in India.
To better understand these provisions, consider the following examples:
- Mr. Mohan, a citizen of Belgium, visited India for the first time in the previous year, 2016-17. He stayed in India for 54 days, 61 days, 93 days, 146 days, and 68 days during the previous years 2016-17, 2017-18, 2018-19, 2019-20, and 2020-21, respectively. Determine his residential status for the assessment year 2021-22.
Mr. Mohan’s stay in India during the previous year 2020-21 was 68 days, and during the four years immediately preceding that year, he was in India for 354 days (54+61+93+146 days). As his stay during the previous year and the preceding four years is less than 182 days and 365 days, respectively, he does not meet the criteria under section 6(1) and is therefore a non-resident in India for the previous year 2020-21.
- Mr. John, a non-resident who has resided in the US since 1990, returned to India on 1st April 2019 for permanent settlement. Determine his residential status for the assessment year 2021-22.
Mr. John is a resident in the assessment year 2021-22 as he stayed in India for more than 182 days during the previous year 2020-21. Based on the criteria mentioned in section 6(6), he would be considered a resident but not ordinarily resident for the previous year 2020-21, as he was a non-resident in 9 out of 10 previous years immediately preceding the previous year, and he stayed in India for less than 730 days during the 7 previous years immediately preceding the previous year.
In conclusion, determining an individual’s residential status for Income Tax purposes is crucial in understanding the tax implications on their income based on their residential status. A residential status calculator can be used to determine an individual’s residential status.
Scope of Total Income
Section 5 of the Income Tax Act defines the scope of total income for taxpayers, and it primarily depends on the individual’s residential status. The scope of total income is determined by three main factors: the residential status of the taxpayer, the place of receipt or accrual of income, and the timing of the accrual or receipt of income.
For residents, their global income is subject to taxation in India. Non-residents and residents but not ordinarily residents are only taxed on their Indian income, but RNORs may also be taxed on income accruing or arising outside India if it is derived from a business controlled in or profession set up in India.
It is important to understand the meaning of certain terms for a complete understanding of the scope of total income. Income accrued refers to the right to receive income. Income taxed on the accrual basis cannot be assessed again on a receipt basis to avoid double taxation. Income received or deemed to be received in India refers to the first occasion when the recipient gets the money under their control, while income deemed to accrue or arise in India includes certain types of income that are deemed to accrue or arise in India, even if they arise outside of India.
Examples of income deemed to accrue or arise in India include income from a business connection in India, property in India, sources of income in India, 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, and interest, royalty or fee for technical services received from the Indian Government or specified persons in certain circumstances.
The benefit of DTAA provisions
The Double Taxation Avoidance Agreement (DTAA) is a useful tool for individuals facing double taxation of their income, where the same income is being taxed in both India and abroad. By utilizing the DTAA provisions, which India has entered into with other countries, individuals can avoid paying taxes twice and minimize their tax liability.
Tax Planning for NRI in India
For NRIs in India, tax planning is essential to ensure that they maintain their non-resident status in the relevant financial year, as this status incurs the least tax liability. It is crucial to accurately determine one’s residential status, as it forms the foundation for understanding the tax implications of one’s income.
Frequently Asked Questions:
Why is it important to determine the residential status of a person for income tax purposes?
The residential status of a person is important for determining the taxability of income in their hands. The tax implications differ according to the residential status of the person.
Will a person holding Indian citizenship be treated as a resident in India for the purpose of charging income tax?
No, the citizenship of a person has no relevance for determining their residential status for income tax purposes. The residence of an individual for income tax purposes is determined based on the number of days they have stayed in India during a financial year.
However, 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 the 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 abroad to India, will it become taxable on account of receipt of such income in India?
No, the remittance of income received abroad by an NRI to India will not become taxable in India. The receipt of income refers only to the first event when the recipient gets the money under their control. Subsequent remittance of the same does not constitute receipt of income.
Can an NRI claim benefit under the Double Taxation Avoidance Agreement (DTAA)?
Yes, if an NRI is a resident of a country with which India has entered into a DTAA, they can claim benefits under the agreement to avoid double taxation of income.