How to determine Residential Status of NRIs | New Rules in NRI Taxation

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.

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 :

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,

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,

• 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-

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.

• 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.