Non Resident Taxation - How Residential Status of Non-Residents is determined?

 

The last year budget has provided with major changes in determining the residential status of the Non-Resident Indians or Persons of Indian Origin (PIO) for the purpose of filing NRI Income Tax Return in India.
 
These provisions have majorly impacted the residential status as well as liability of NRI Income Tax Return filing in India.  In this article, we will be discussing about changes made in definition of Non Resident Indian.

 
New Rules for determining the NRI Residential status:

1. As per provisions of the Act, a person shall be considered as Non Resident in India in case his period of stay in India during previous year is less than 182 days.  
2. Further, in case period of His stay in India during last 4 years preceding the previous year was less than 365 days and period of his stay during previous year was less than 60 days, even then, He will become Non Resident.    
3. As per Explanation (1A) to section section 6(1) which has been newly inserted, concept of deemed resident has been introduced. As per same, any citizen of India whose total income from India exceeds Rs 15 lac 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.  

4.       Further, the definition of Not Ordinary Resident in India has also been amended. A person is said to be "not ordinarily resident" in India in any previous year if such person is--
(a)   Non-resident in India in nine out of the ten previous years preceding that year, or
(b)   Non Resident in India for more than 729 days during the seven previous years preceding that year.
(c)    A new clause (c) to section 6(1)(6) has been inserted which provides that a person shall be considered as not ordinary resident if He is an Indian citizen or a person of Indian origin and His total income from India exceeds Rs 15 lac during the previous year and his period of stay in India is 182 days or more but less than 180 days.
(d)   Further, new clause (d) to section 6(1)(6) has been inserted which provides that a person shall be considered as not ordinary resident if He a citizen of India who is deemed to be resident in India under clause (1A). 
 
It may be noted that as per the amendment in Section 6, the time period reduced to 120 days is only applicable in cases where the total accrued income in India of the visiting person in a particular financial year is more than Rs. 15 Lakhs. As was the case earlier, if a person’s total income earned in India in a fiscal year is up to Rs. 15 Lakh, they will continue to have their NRI status, even if their stay period has not exceeded 181 days.
 
The visiting Indian person is required to keep a track of all his taxable income accrued in India as well as the number of days of their stay in India. This is to be done because in case the Indian taxable income exceeds the mark of Rs.15 Lakhs, then the provisions related to stay period of more than 120 days will be applicable on them.
 
Any NRI with a stay period of 120 days or more and whose taxable income has exceeded Rs. 15 Lakhs, is required to check whether their stay period in the immediate preceding 4 years is 365 days or more. If their stay period in the preceded immediate 4 years is 365 days in total then they will be treated as a resident Indian and not NRI for the tax purposes. E assessment income tax
 
However, such individuals will be treated as Resident but Not Ordinarily Resident (RNOR) providing them with a relief that their income accrued outside India will not be taxable under Foreign Income Tax in India.
 
Why aforesaid determination of Residential status in case of Non Resident Indians is important?
 
Determination of residential status is important to correctly compute the Income Tax Liability of Non Resident and also for filing NRI Income Tax return.
 
This is due to the fact that unlike Residents, whose global income is taxable in India, in case of NRIs, only income accrued or arise or deemed to be accrued or arise and/or received in India is taxable. Therefore, in case any NRI does not have any income from India, there is no need to file NRI Tax return in India.
 
There may be situation that a person has been NRI for some years but becomes Resident in a particular year, in such case, for that year, his income from foreign country will also become taxable in India and in such case, he need to file his Income tax return from Indian as well as foreign source. However, as per DTAA applicable between both countries, he would be entitled to claim proportionate credit of taxes paid in foreign country.

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How Residential Status is determined in case of NRIs

 

Residential status is an important criterion to understand the liability of NRI to pay taxes in India as well as liability for NRI Income Tax return filing.

As per the provisions of the Income Tax Act, the taxability of income also depends upon the residential status of any individual. As a general rule,

1. In the case of Residents, their global income becomes taxable in India. Therefore, in case any Resident has also earned income outside India during any previous year, He might have paid tax in that country since the source of such income was outside India. Also, He would be liable to pay taxes in India since he was Resident in India. In such a case, there would be double taxation. However, He would be entitled to claim proportionate credit of taxes paid outside India while filling his Indian Tax Return.
   
2. In the case of Non-Residents, only income which has been accrued in India or deemed to accrue in India or received or deemed to be received in India is taxable in India. Therefore, income which has accrued outside India or received outside will not be taxable in India, and no need to show such income during NRI Income Tax return filing.
3. In the case of Residents but not ordinary Residents (RNOR), only income which has been accrued in India or deemed to accrue in India or received or deemed to be received in India is taxable in India. Further, Income which accrues or arises outside India from a business controlled in India or a profession or business set up in India would be taxable in India.

It is because of aforesaid reason, it is important to determine residential status since it will help in determining tax liability as well as liability for filing Income Tax Return by NRI.

Determining Residential Status of Person

RESIDENT

To be qualified as a Resident of India, an individual must fulfill these two conditions as follows-

1. He/she has stayed in India for more than 182 days during a particular financial year. OR
2. He/she has stayed in India for 60 days or more in total during a particular financial year. Also, they have stayed in India for 365 days or more for four years preceding the financial year.

In case none of the conditions stated above is satisfied then, the individual is categorized as a Non-Resident Indian (NRI). Also, it is to be noted that if any Indian citizen or a Person of Indian Origin (PIO) is visiting India and their total income during that particular financial year from all the Indian sources exceeds Rs. 15 Lakhs, then the above mentioned period of 60 days is to be read as 120 days in total. In other scenarios, it will be taken as 180 days in total.

NON RESIDENT

Any person, who is Not Resident in India as per aforesaid conditions, will become Non-Resident Indian.

RESIDENT BUT NOT ORDINARY RESIDENT (RNOR)

To be categorized as a Resident and Ordinarily Resident (ROR), a person shall fulfill the following conditions-

(a) He must have been a non-resident in India in 9 out of 10 previous financial years preceding that year, 

OR

(b) His period of stay in India during the last 7 previous years preceding that year has been for 729 days or less.

Further, due to recent amendment, an individual will be treated as resident but not ordinarily Resident if taxable income exceeds Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual. Income Tax Return Filing

When should NRIs file their Income Tax Return (ITR) in India?

NRI Tax return becomes compulsory in the following situations:

1. When NRI has income from India which exceeds Rs 2.5 lac.
2. When there is a refund receivable.
3. In the case of the sale of shares and assets, if there is a capital gain or loss transaction.
4. When NRI wants to carry forward losses from the sale of shares or business.