During the Budget 2020, Finance Minister proposed changes in the criteria for determining residential status for Non Residents Indians for tax purpose. On March 23, 2020, the proposal was accepted in Lok Sabha with certain amendments, granting relaxation in the criteria originally proposed. Finance Bill 2020 was then passed in Rajya Sabha and later ratified by President on March 27, 2020 which is brought in force as Finance Act, 2020.
Let us have a concise and brief walk through of the proposed amendment and the assented amendment to have clear idea of actual changes in the Act.
Proposed amendment as per Finance Bill, 2020:
“4. In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,
(a) in clause (1), in Explanation 1, in clause (b), for the words “one hundred and eighty two days”, the words “one hundred and twenty days” shall be substituted;
(b) after clause (1), the following clause shall be inserted, namely:
“(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;
(c) for clause (6), the following clause shall be substituted, namely:
“(6) A person is said to be “not ordinarily resident” in India in any previous year, if such person is—
(a) an individual who has been a non-resident in India in seven out of the ten previous years preceding that year; or
(b) a Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year.’.”
Approved amendment as per Finance Act, 2020:
“4. In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,
(a) in clause (1), in Explanation 1, in clause (b), for the words “substituted” occurring at the end, the words “substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year,” for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted;
(b) after clause (1), the following clause shall be inserted, namely:
“(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature;
(c) in clause (6), in sub-clause (b), for the words ‘‘days or less’’ occurring at the end, the following shall be substituted, namely:—
‘‘days or less; or
(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or
(d) a citizen of India who is deemed to be resident in India under clause (1A).
Explanation.—For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).”
After amendment , the overall provisions of Section 6 stands as under:
6. For the purposes of this Act,—
(1) An individual is said to be resident in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty- two days or more ; or
(b) [***]
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature;
Explanation. 1—In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and twenty days” had been substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year.
Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.
………
(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—
(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or
(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or
(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or
(d) a citizen of India who is deemed to be resident in India under clause (1A).
Explanation.—For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
Highlights of amendments are explained below:
- New criteria introduced to determine residential status:
As per the Act, an individual is considered as a ‘Resident’ in India during a tax year, if he meets any of the following criteria:
(a) has been in India for
an overall period of 182 days or more in the relevant tax year; or
(b) has been in India for 60 days or more in the relevant tax year and for 365
days or more during four tax years preceding the current tax year.
An individual who does not meet both the above criteria qualifies as a ‘Non-Resident’. The tax laws recognize that Indian citizens or Person of Indian Origin (PIO) ( now PIO and OCI are merged ) who stay outside India often visit India to take care of their assets, families or for other purposes. Therefore, relaxation is provided to Indian citizens/ PIOs, allowing them to visit India for longer duration, without qualifying as a ‘Resident’ of India. Under the existing tax laws, Indian citizens/ PIO visiting India shall qualify as a ‘Resident’ only if they are in India for at least 182 days in the tax year.
However, the government believes that some individuals misuse the relaxed provisions to avoid qualifying as a ‘Resident’ in India, by managing their period of stay in India as less than the specified limit of 182 days and thereby escaping the payment of tax on their Global income in India, even while they may be carrying out significant economic activities within India. Therefore, in order to curb potential tax loss, the Finance Bill 2020 proposes to reduce the threshold to 120 days in the tax year coupled with 365 days in previous four tax years in order for an Indian citizen/PIO visiting India.
As per the amendment in the Bill, applicable from April 1st, 2020, which was passed by Parliament subsequently, it is enacted that any individual (covers Indian citizen and Indian origin) will be considered as resident for tax purposes if he stays in India for 120 days or more in that financial year and 365 days or more in the immediately preceding 4 years to that financial year only if he has total taxable income, excluding foreign income, exceeding Rs.15 lakhs in that financial year. The first condition of stay for 182 days or more remains intact. Thus, if the taxable income of NRI in India is up to Rs.15 lakhs during the financial year, then he can stay in India for less than 182 days to maintain his status as Non-resident.
Thus, from now on, besides monitoring the number of days present in India, the visiting Indian is also required to keep a tab of his Indian taxable income. This is because once the total taxable income exceeds Rs.15 lakhs, then provision related to stay exceeding 120 days will become applicable.
The next question arises that if the NRI is considered as resident as per Section 6(1), will his global income become taxable? The Answer is prima facilely No.
This is because a resident is further categorized between ‘ordinary resident’ or ‘not-ordinary resident’. It is important to note here that an ‘ordinary resident’ is taxable in India on his global income as against a ‘not-ordinary resident’ whose income from sources outside India is taxable in India only if it is derived from a business controlled in or a profession set up in India.
As per the current tax laws, an individual would qualify as a ‘not-ordinarily resident’ if he has been a ‘Non-Resident’ in India in at-least nine out of the ten previous tax years or has been in India for an overall period of 729 days or less during the seven previous tax years. An individual exceeding these limits would qualify as an ‘ordinary resident’ and therefore be required to pay taxes in India on his global income.
The new criteria for residential status will restrict the NRI’s visit to India for longer period as per Section 6(1) however relaxation is given as per Section 6(6) that if they fall in this category they will be treated as Resident but not ordinary resident (RNOR). This comes out as sigh of relief for NRIs because their foreign sourced income (income accrued outside India) will not be taxable in India solely because they have stayed for 120 days or more in that financial year.
2. Introducing the concept of deemed resident
A new clause is added to the Section, wherein if any individual, being a citizen of India, having total income exceeding Rs.15 lakhs during financial year, will be deemed to be resident of India, if he is not liable to tax in any other country by reason of his domicile or residence or any criteria of similar nature.
Till FY 2019-20, there was no such provision in the Act. The introduction of new provision of making certain Indian citizens a ‘deemed resident’ was done only to curb and bring those citizens under the tax net who had been traveling from country to country merely to maintain their non-resident status and ended up being a ‘resident’ of no country.
However as per clause (d) of Sub Section 6, deemed resident will be covered under Resident but Not Ordinary Resident and taxed accordingly. Although such ‘deemed resident’ may not have immediate tax implication on their global income due to being considered as Not Ordinary resident while they continue to visit India for less than 182 days but may stand to lose on the benefit of Not Ordinary Resident subsequently if their stay in India is for 182 days or more as another condition for not ordinary resident of being non-resident resident for 9 years out of 10 years immediately preceding that year may not be fulfilled.
3. Criteria for Resident but not Ordinary Resident (RNOR) liberalized
Up till now, there were two conditions for a person to be qualified as Resident but not ordinary resident under sub-section 6;
- An individual must have been NRI for 9 out of 10 years in immediately preceding financial year or;
- He has stayed in India for upto 729 days or less during 7 years immediately preceding financial year.
The proposal in the Budget was to have only one condition for a person to be treated as RNOR, that the individual must have been NRI for 7 out of 10 years in immediately preceding that financial year.
However, as per the amendment in the Act, the two existing conditions mentioned have been retained and the scope of applicability has been widened further to include the above two criteria of deemed resident and 120 day applicability for NRIs as explained.
Few examples below would help to bring more clarity in the modalities of amendment brought in the definition of residential status.
Case-1
Aman works in USA and visits India after 5 years and stays for a period of 150 days and his total taxable income in India exceeds Rs.15 lakhs during that financial year. In this situation, Aman does not automatically become resident because of his stay in India for more than 120 days, as he does not qualify for the cumulative condition of 365 days in the immediately preceding 4 years from the financial year. Thus, he will be Non-resident during that year and hence there is no need to ascertain the status as not ordinary resident.
Case-2
Let’s say Aman stays in India for 130 days during the year and had been in India for 365 days in 4 years immediately preceding that year. His total taxable income in India is Rs.16 lakhs. Now as he qualifies both the conditions as per the amendment, he will be treated as Resident as per Section 6(1) but not ordinary resident as per Section 6(6) and hence his global income will not be taxable.
Case-3
Karan, an Indian citizen, works in Dubai (tax free country) and also earns income from India exceeding Rs.15 lakhs. Not considering the DTAA agreement with UAE, Karan will qualify as deemed resident under clause (1A) of Section 6 of Income Tax Act, and will be treated as Resident but not ordinary resident for the purpose of taxation.
Case-4
Suppose Karan, being NRI was non-resident for 10 years and had been visiting India for only 100 days in a year but has completely shifted back to India during the year on 05.10.2020. Now for the FY 2020-21, as he has stayed in India for more than 120 days but less than 182 days, he shall qualify as resident but not ordinary resident as per clause (c) of Section 6(6) newly inserted. In the second year i.e. FY 21-22, he stays in India for 365 days and hence he will qualify as resident as per Section 6(1) but will not be an ordinary resident as he had the status of non-resident in 9 out of 10 preceding years and hence for FY 2021-22 also, his global income will not be taxable. It will only be in FY 2022-23 that he would be considered as resident and ordinary resident wherein his global income shall be taxable.
Conclusion: NRIs need to carefully consider the total Indian income and plan their travel itinerary based on the amendment for their period of stay. The positive aspect is that in most cases, where the period of stay in India is 120 days or more (and also 365 days or more in preceeding 4 years) or in case of Indian citizens who are not tax residents of any other country and are deemed to be tax residents of India, the status would be RNOR and hence foreign income shall not be taxable in India.
Editor’s Note : Considering the situation of Lockdown during COVID19 , there shall be a lot of NRIs who could not go back abroad because of lockdown or even NRI who voluntarily came to India considering it more safe and homely during these stressed times. These NRIs should consult their respective Chartered Accountant or expert to plan their taxes and residential status. Alternatively, if you are an NRI and if the amended tax provisions concerns you, you may place a request on https://www.itatorders.in/case-research and get on a Free Consultation Call from our team of legal experts to discuss the issue.
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