Recent Changes in Residential Status Under Income Tax Act

Are you an NRI visiting India frequently? Recent changes in residential status may impact you Recent Changes to Residential Status Under Income Tax Act:

Mr. Ram is an Indian citizen (NRI) living abroad for several years now. He has his extended family, immovable properties and other investments in India. He frequently visits India to meet his family and friends and to manage his investments. During his recent conversation with an Indian friend, he came to know that there have been sweeping changes to the Indian tax laws with respect to residential status of an individual which may result in expanding his tax base in India and he may qualify to be a ‘stateless’ person. Ram is curious to know more about these changes.

So, what are these changes? Does it really have far reaching impact on NRIs like Ram? Who is a state less person? Let us understand these in detail.

Hitherto (till 31 March 2020), an Indian citizen or a person of Indian origin living outside India and coming on a visit to India could have stayed in India for a period less than 182 days without triggering residency in India. However, the new rule

(applicable from 01 Apr 2020) reduces this threshold to 120 days. Further, the new rule has inserted an income threshold of INR 1.5 million from sources within India in order to trigger residency. So, both the conditions i.e., no. of days and the income level need to be satisfied in order to trigger a residency. In case of Ram, he would be considered as Resident but Not Ordinarily Resident in India provided his stay in India during the relevant tax year exceeds 119 days (but less than 182 days) and his total income from Indian sources exceeds INR 1.5 million.

Stateless person or Deemed resident A stateless person in the context of taxation means a person who is not liable to tax on his income in any country during the year. It may be possible for an individual to position his affairs in such a manner that he is not liable to tax in any country. In order to curb these kinds of arrangements, the new rules introduced the concept of ‘deemed resident’. As per this, an Indian citizen having total income exceeding INR 1.5 million or 15 lacs from sources within India during the relevant year, will be deemed to be a resident of India (RNOR) if he is not liable to pay tax in any country outside India.

So, in case of Ram, since he is a resident of foreign country and is a citizen of India, he may be considered as RNOR for India tax purposes provided his total income exceeds INR 1.5 million from sources within India and he is not liable to tax in his country of residence.

For the purpose of above rules, the income from sources within in India includes income arising outside India from a business controlled in India or profession set up in India.

So, you are an RNOR. Is your global income taxed, then? uh!

So, what happens if an individual qualifies as RNOR? Will his global income be taxed in India?

Definitely NO. In case of an RNOR, in addition to the Income derived from Indian sources, the individual would be taxed on income arising outside India from a business controlled /profession set up in India.

Further, in case an RNOR who is liable to tax on his income arising outside India from a business controlled /profession set up in India, may result in double taxation of income both in India and in his resident country. So in order to mitigate the double taxation implications, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India has entered into with other countries in order to mitigate the possibility of paying taxes in two countries.

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on their residential status and related tax-implications.

AUTHOR:

A S Amarnatha B.com, FCA, LLB Amar is a practicing Chartered Accountant specializing in the field of NRI and expat taxation. His expertise includes various facets of global mobility like expatriate tax, DTAA, social security, ESOPs etc. He is also specialized in US individual taxation both from expat and foreign national tax compliances perspectives. He can be contacted at amaranathambati@gmail.com