How to determine Residential Status of NRIs | New Rules in NRI Taxation
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What are the new rules to determine the Residential Status of NRIs? Lets see the significant amendments to the criteria determining 'Residential Status' of an individual. The residential status of the individual plays a key role to determine his/her income tax liability in India.
Impact of Budget 2020 on NRIs– Residential Status for Income Tax FY2020-21
Introduction
What are the new rules to determine the Residential Status of NRIs? Lets see the significant amendments to the criteria determining ‘Residential Status’ of an individual. The residential status of the individual plays a key role to determine his/her income tax liability in India.
Residential Status of NRIs | NRI Taxation (FY2020-21)
Provisions of Section 6(1) of Income Tax Act, 1961
An Individual is said to Resident in India if he fulfills any of the following conditions :
He is in India in that year, for a period of 182 days or more OR
He is in India for 60 days or more in that year and 365 days or more in last 4 financial years immediately preceding the current financial year.
The condition of 60 days is replaced with 182 days in the following cases –
Where an individual is a Citizen of India OR person of Indian Origin (PIO) and
if he is leaving India for the purpose of –
Employment / Business / Profession OR
as a member of Crew of Indian Ship OR
If he is coming to India to pay a Visit
Amendment in Section 6(1) of Income Tax Act, 1961
The Finance Act, 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.
Thus, theRelaxation of 182 days in the exception mentioned above is reduced to 120 days, if :
An Individual is an Indian Citizen or a Person of Indian Origin (PIO) AND
His/her Indian Income is more than Rs.15 Lakh
This is an anti-abusive provision as it is noticed that many individuals, who are actually carrying out substantial economic activities from India, manage their period of stay in India to be less than 182 days to remain a Non-Resident (NR) in India.
To simplify :
New Rules to Determine the Residential Status of NRIs
What is Meant by Indian Income?
Indian Income as per the amendment in Section 6(1) of Income Tax Act, 1961 means,
Total Income earned in India + Income accrued or arisen outside India from the business controlled IN INDIA or profession set up IN INDIA.
Example : Mr. Yogesh is a Chartered Accountant in India, having practice established in the India. He visits London to provide the services. He received Rs.5 Lakh as professional fees.
Now, in this case, as his profession is set up in India, the professional fees of Rs.5 Lakh shall be treated as Indian Income.
If the service would have been provided from the branch located in London, then the professional fees received would not have been the part of the Indian Income of Mr. Yogesh.
Insertion of Section 6(1A) of Income Tax Act, 1961
To cover the loopholes of the existing sections, a new section has been introduced. If an individual fulfills the conditions provided in this section, then he will be treated as ‘Deemed Resident of India’ under Income Tax Act, 1961.
This section is applicable to the individuals who are :
Citizens of India AND
Having Indian Income of Rs. 15,00,000 or more AND
Who are not liable to pay any tax in any other country on the basis of his domicile, residence or any other such similar criteria?
This section covers individuals residing in Tax Haven Countries and NOMADS
Please note that,
Even if you don’t come to India for a single day, still you will fall under this category.
If all the above-mentioned conditions are fulfilled, you will be treated as ‘Deemed Resident of India’
To simplify,
Citizen of India?
Indian Income exceeding Rs. 15,00,000?
Liable to pay tax in any other country?
Deemed Resident of India under section 6(1A)?
Yes
Yes
No
Yes
Yes
Yes
Yes
No
Yes
No
No
No
Yes
No
Yes
No
No
Yes
Yes
No
Impact of being ‘Deemed Resident of India?’
An individual who becomes ‘Deemed Resident of India’ is considered as ‘Resident but Not Ordinarily Resident’. (R-NOR)
Taxability of Income of R-NOR
In case of R-NOR, following income is taxable.
Total Income earned in India + Income accrued or arisen outside India from the business controlled IN INDIA or profession set up IN INDIA.
It means,
Income Criteria
R-OR
R-NOR
Non-Resident
Income Received or deemed to be received in India
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. Even if such income is not received or brought into India during the previous year.
Yes, but only if such income is derived from a business controlled in or profession set up in India. Otherwise, No.
No
Taxability of Income of R-NOR
Forgo of benefits under Chapter XII-A
Every Non-Resident Indian can pay taxes at concessional rates to encourage foreign exchange in Indian Assets. Being R-NOR, deemed resident cannot avail the benefit under chapter XII-A.
Age Based Exemptions
Being R-NOR you can claim age based basic exemption limit. For NRI, the benefit is not available, therefore, you can avail the benefit as below-
Age Group
R-OR
R-NOR
NRI
Below 60 Years
Rs. 2,50,000
Rs. 2,50,000
Rs. 2,50,000
60 years or more but below 80 years
Rs. 3,00,000
Rs. 3,00,000
Rs. 2,50,000
80 years and more
Rs. 5,00,000
Rs. 5,00,000
Rs. 2,50,000
Age Based Exemptions
Section wise deductions under Income Tax Act, 1961
Sr. No.
Section
Particulars
Claimed By
Amount of Deduction
R-OR Individuals
R-NOR Individuals
NRI
1
80D
Health Insurance and Preventive Health Check-up
Yes
Yes
Yes
Rs. 25,000 / Rs. 50,000 ( separate limit of parents)
2
80DD
Maintenance including medical treatment of a dependent disable
Yes
Yes
No
Flat Deduction of Rs. 75,000 / Rs. 1,25,000 (for severe disability)
3
80DDB
Deduction for medical treatment of specified diseases or ailments
Yes
Yes
No
Max Up to 40,000 And Rs. 1 Lakh for Senior Citizen
4
80QQB
Royalty on books
Yes
Yes
No
Up to 15% of value of books sold
5
80RRB
Royalty on Patents
Yes
Yes
No
Up to Rs. 3,00,000
6
80TTB
Deduction for Interests
Yes
Yes
No
Up to Rs. 50,000
7
80U
Deduction in case of a person with disability. (For himself / herself)
Yes
Yes
No
Flat Deduction of Rs. 75,000 / Rs. 1,25,00 (for severe disability)
Section wise deductions under Income Tax Act, 1961
Reduction in TDS Rates
TDS rate is higher in case of NRIs and charged under section 195 of Income Tax Act, 1961. The standard rate is generally 30%.
However, as the status of Deemed Resident is R-NOR, normal TDS rates shall be applicable.
Double Taxation Avoidance Agreement (DTAA)
Being R-NOR, if the individual becomes resident of multiple countries, he can claim the deduction of taxes paid under the provisions of DTAA.
Resident of India
Resident of Foreign Country
DTAA benefit available?
Yes
Yes
Yes
Yes
No
No
No
Yes
No
Double Taxation Avoidance Agreement (DTAA)
No disclosure of Global Assets Required
Being R-NOR, an individual does not require to disclose all the assets and properties outside India. The disclosure is mandatory only for NRIs.
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