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.

Here, we will discuss the amendment in Section 6(1) of Income Tax Act, 1961 regarding the residential status and the insertion of New Section 6(1A) of Income Tax Act, 1961 regarding Deemed residency in India.

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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 –
      1. Employment / Business / Profession OR
      2. as a member of Crew of Indian Ship OR
      3. 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, the Relaxation of 182 days in the exception mentioned above is reduced to 120 days, if :
    1. An Individual is an Indian Citizen or a Person of Indian Origin (PIO) AND
    2. 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
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 :
    1. Citizens of India AND
    2. Having Indian Income of Rs. 15,00,000 or more AND
    3. 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)?
YesYesNoYes
YesYesYesNo
YesNoNoNo
YesNoYesNo
NoYesYesNo

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 CriteriaR-ORR-NORNon-Resident
Income Received or deemed to be received in IndiaYesYesYes
Income accruing or arising or deeming to accrue or arise in India during the previous yearYesYesYes
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 GroupR-ORR-NORNRI
Below 60 YearsRs. 2,50,000Rs. 2,50,000Rs. 2,50,000
60 years or more but below 80 yearsRs. 3,00,000Rs. 3,00,000Rs. 2,50,000
80 years and moreRs. 5,00,000Rs. 5,00,000Rs. 2,50,000
Age Based Exemptions
Section wise deductions under Income Tax Act, 1961
Sr. No.SectionParticularsClaimed ByAmount of Deduction
R-OR IndividualsR-NOR IndividualsNRI
180DHealth Insurance and Preventive Health Check-upYesYesYesRs. 25,000 / Rs. 50,000 ( separate limit of parents)
280DDMaintenance including medical treatment of a dependent disableYesYesNoFlat Deduction of Rs. 75,000 / Rs. 1,25,000 (for severe disability)
380DDBDeduction for medical treatment of specified diseases or ailmentsYesYesNoMax Up to 40,000 And Rs. 1 Lakh for Senior Citizen
480QQBRoyalty on booksYesYesNoUp to 15% of value of books sold
580RRBRoyalty on PatentsYesYesNoUp to Rs. 3,00,000
680TTBDeduction for InterestsYesYesNoUp to Rs. 50,000
780UDeduction in case of a person with disability. (For himself / herself)YesYesNoFlat 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 IndiaResident of Foreign CountryDTAA benefit available?
YesYesYes
YesNoNo
NoYesNo
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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