Many aspects of how a person’s residence status is determined to have been altered by the Finance Act 2020 and the Finance Act 2021. The NRI community will feel the effects of these adjustments beginning with the 2020-21 fiscal year. Nearly thirty million non-resident aliens (NRIs) live in the Middle East, the United States, the United Kingdom, Canada, Singapore, and other nations.
Guidelines for determining an NRI’s residence status
NRIs (covers Indian nationals and Persons of Indian Origin) include those persons who, although residing outside of India, spent less than 182 days in India during the fiscal year (i.e., the year ending March 31, 2020). As of the 2020 fiscal year, this time limit has been slashed to 120 days for foreign nationals whose annual taxable Indian income (i.e. income accruing in India) exceeds Rs 15 lakhs. Consequently, non-resident Indians (NRIs) whose taxable income in India is up to Rs 15 lakhs throughout the financial year would continue to be NRIs if their stay in India does not exceed 181 days.
Therefore, non-resident Indians on a visit to India must track not just the number of days they spend in the country, but also the amount of money they earn there. Since regulations pertaining to stays longer than 120 days become applicable once taxable income in India reaches Rs 15 lakhs, this is the case. It’s vital to keep in mind that starting in 2018, dividends paid out by Indian corporations are considered taxable income for the shareholders. In contrast, the earnings from FCNR and NRE accounts are not subject to taxation. If an NRI has a taxable Indian income of more than Rs 15 lakhs and he or she visits India for 120 or more days, then that person must also determine whether or not they visited India for 365 or more days for the four years prior.
Imagine a non-resident of India (with taxable income in the financial year of over Rs 15 lakhs) coming to the country for a total of 130 days during FY 2022-23. In addition, he spent at least 365 days in India throughout the course of the previous four fiscal years (FY 2020-21, FY 2019-20, FY 2018-19, and FY 2017-18). Therefore, for federal income tax purposes, he will be considered a resident of the United States. This news may cause concern among some non-resident aliens, but they can take comfort in the fact that they will be classified as “Resident but Not Ordinarily Resident” (RNOR). Because of this, they won’t have to worry about paying taxes in India on their foreign income (money earned outside of the country).
Relaxation of RNOR Criteria
If one or more of the following applies to them, they will be considered “Resident but Not Ordinarily Resident” (RNOR).
(a) a person who has not been an Indian resident in 9 of the 10 years before the current year, or (b) a person who has spent a total of 729 days or less in India in the 7 years prior to the current year.
Furthermore, as mentioned above, the change causes a person to be considered “Resident but Not Ordinarily Resident (RNOR)” if their taxable Indian income is more than Rs 15 lakhs and they are present in India for 120 days or more (but less than 182 days). Income earned outside of India is not subject to Indian taxation for residents who do not have a permanent establishment in the country. In this context, “foreign sources” refers to money coming in from outside of India (except income derived from a business controlled in or a profession set up in India). Deemed Residential Status under Indian Income Criteria under Section 6 Applicable to Indian Citizens Who Are Global Non-Residents (1A).
If an Indian national is not “liable to tax” in any other country or territory due to his domicile, residency, or other similar conditions, then the individual will be considered to have been a resident of India in the prior fiscal year. However, this rule only kicks in if his yearly taxable Indian income is higher than Rs 15 lakhs. There was no such clause in the Income-tax Act until the 2019-20 fiscal year. No Overseas Citizen of India (OCI) cardholder or a foreign citizen or Person of Indian Origin (PIO) shall be subject to this provision for determining the residence status of a stateless person.
Finance Act 2021 provides the legal definition of “taxable.”
The word “Liable to tax” in the context of both a person and a nation is defined under the Finance Act, 2021. To be considered a resident of a nation for income tax purposes implies that a person is subject to income tax in that country under the legislation in effect there at the time, and this definition shall apply to a person who has later been exempted from such taxation by the law of that country. Persons residing in Middle Eastern nations that do not levy individual income-tax have been confused by the aforementioned regulation. The Central Board of Direct Taxes released a press release reassuring NRIs working in certain countries that the rule cited above is an anti-abuse law and is not meant to punish genuine employees abroad.
In addition, it is made clear that if a person becomes a Resident under this Section 6(1A), no tax would be paid on foreign income unless it is earned in the course of an Indian trade or profession. As their status would still be NR or RNOR, and only Indian income would continue to be taxable in India, this change would not have any direct effect on taxable income in India. Nonetheless, some ex-pat Indians feel uneasy about their RNOR status. As a result, the provision is counterproductive since it discourages investments in India in shares and other securities, real estate, and other income-yielding assets that would otherwise generate taxable income in India. The growth prediction has been lowered as a result of the current geopolitical events and inflation that have weakened the Indian Rupee. Non-Resident Indians (NRIs) have traditionally provided a substantial portion of India’s inflow of international remittances and investment capital.
NRIs with Indian taxable income over Rs.15 lakhs should no longer be subject to the unfavorable tax treatment that has been in place and should be eligible for non-resident tax status if they are allowed to stay in India for up to 181 days in a given fiscal year. In light of the new residence status rules, NRIs will need to carefully plan their trip schedule, taking into account their overall Indian income. The good news is that NRIs are allowed to continue visiting India for up to 181 days in the financial year and that if they stay in India for 120 days or more (and 365 days or more in the four financial years prior), they will be considered resident nonresidents of India (RNORs) and their foreign income will not be taxable in India.
