After the amendments in Budget 2020 and clarificatory/confusing post budget press meet by the Finance Ministry, Non-Resident Indian Citizens were worried about their liability to income tax in India on their global income, as there were certain modifications in residential status of individuals. After numerous representations received from various stake holders, The Finance Act has been passed in The Gazette of India as on 27th March 2020. Broadly speaking, the said amendments will be effective from FY 2020-2021, and affects only those individuals who are citizen of India or Person of Indian Citizen (PIO) who’s taxable income in India from Indian sources will exceed Rs 15 lakhs during a year.

At this juncture, it is important to understand certain concepts, which will have bearing on understanding of residential status and taxation of incomes in their hands.

Concepts of Nature of Incomes

1.      Income from Indian Sources – Income earned in India will include Salary income from employment in India, Rental income from property in India, business/profession income earned in India, Capital Gains from sale of properties in India, Interest/Dividend and other incomes earned in India

2.      Income from Indian business/profession earned outside India – It will include, Income earned outside India from business controlled from India or profession set-up in India

3.      Income from foreign sources – Income earned outside India includes, Salary income from employment outside India, rental income from property held outside India, Income earned outside India from business controlled from outside India or profession set-up outside India, Capital Gains from sale of properties held outside India, Interest/Dividend and other incomes earned outside India.

Concepts of Taxation of income in the hands of Individuals in India

In India, there are primarily three types of taxable Individuals and in their hands the following nature of incomes will be taxable.

1.      Residents and Ordinarily Residents (ROR) – In the hands of ROR, all there types of income as stated above will be taxable in India, i.e. Income from Indian Sources, Income from Indian business/profession earned outside India and Income from foreign sources.

2.   Residents but Not Ordinarily Resident (RNOR) –In the hands of RNOR only two types of income i.e. Income from Indian Sources and Income from Indian business/profession earned outside India.

3.      Non-Residents in India (NRI)  In hands of NRI only income from Indian sources will be taxable.

Before going ahead with illustrations to understand the residential status and amended provisions thereon, it is better to make clear certain facts.

·         The basic condition of determination of residentials status in India will remain the same as it was for earlier years, i.e. one who stays in India for 182 days or more during a year, will become resident in India. Otherwise he will be a NRI.

·     The amended provisions will be applicable only to those individuals who are Indian Citizens or PIO’s and has total taxable income in India in excess of Rs 15 lakhs, which has been earned from Indian Sources and/or Income from Indian business/profession earned outside India.

·        Hence, those Indian Citizens or PIO’s, who does not have aggregate taxable income in India in excess of 15 lakhs, earned from Indian sources and/or income from Indian business/profession earned outside India, need not be bothered about the amendments that has taken place by The Finance Act, 2020, effective from FY 2020-2021.

·      Furthermore, it has to be noted that, all the NRI’s are liable to tax on their Income from Indian Sources, even when their total taxable income does not exceed Rs 15 lakhs. They will have to file their return of income in India as they would have been normally complying in earlier years.

 As stated above, the amendments in Finance Act, 2020 will have effect only on two categories of Individuals, who are citizen of India or PIO and who’s aggregate income from Indian sources and income from Indian business/profession earned outside India, exceed Rs 15 lakhs. The two categories are as follows

1.      Indian Citizen or PIO, who, being outside India, comes on a visit to India – has stayed in India during FY for 120 days or more but less than 182 days + has stayed in India for 365 days or more during 4 previous FY.

2.      Indian Citizen, who is a NRI as per normal provision and he is also not a tax resident in any other country/jurisdiction during that FY. (Concept of deemed resident)

Furthermore, even when the above mentioned two categories of people become resident in India, they will only be RNOR and they will be liable to pay tax in India only on incomes from Indian Sources and income from Indian business/profession earned outside India. They will never be asked to pay tax on income earned by them from foreign sources as explained above. Necessary amendments in this respect also has been made in The Finance Act, 2020.

 Illustrations to understand the concept of Residential Status and Taxation of Income

Illustration 1

Q 1: An Indian Citizen leaves India for the purpose of employment/as a member of crew of Indian ship, after a stay in India of 180 days during the previous year 2020-21. He has a total income of Rs 20 lakhs from Indian sources, Rs 10 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans 1a: If, the said person is a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be NRI. His taxable income in India will be Rs 20 lakhs earned from Indian sources.

Reason: He has stayed in India for a period less than 182 days. The amended provision will not be applicable to Indian citizens leaving India for the purpose of employment or as a member of crew of Indian ship. Further, as he is a tax resident of a foreign country, the deemed resident provision will also be not applicable.

 Ans 1b: If, the said person is not a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be RNOR. His taxable income in India will be Rs 30 lakhs earned from Indian sources and income from Indian business/profession earned outside India.

Reason: As the said person is not a tax resident in any foreign country, he will covered by the amended deemed resident concept. As his income from Indian sources and income from Indian business/profession earned outside India exceeds Rs 15 lakhs, he will be a deemed resident and RNOR.

 Note: It has to be noted that, there is a significant difference between the words “for the purpose of employment” and “in continuation of employment”. If a person is leaving India with a fresh appointment letter to join a new job, then it will be considered as “for the purpose of employment” and only to those persons the said clause will be applicable.

 Illustration 2

Q 2: An Indian Citizen leaves India for the purpose of employment/as a member of crew of Indian ship, after a stay in India of 180 days during the previous year 2020-21. He is not a tax resident of a foreign country as per the law prevailing in that country. He has a total income of Rs 10 lakhs from Indian sources, Rs 2 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans: He will be a NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

 Reason: He has stayed in India for a period less than 182 days. The amended provisions will not be applicable to Indian citizens leaving India for the purpose of employment or as a member of crew of Indian ship. Further, even though he is not a tax resident of a foreign country, as his income from Indian sources and income from Indian business/profession earned outside India is only Rs 12 lakhs (does not exceed 15 lakhs), he will not be covered by deemed resident provision also.

 Illustration 3

Q: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India of 180 days during the previous year 2020-21. He has stayed in India for a total period of 350 days during the four immediately preceding previous year (i.e 2019-20, 2018-19, 2017-18, 2016-17). He has a total income of Rs 10 lakhs from Indian sources, Rs 2 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans 3a: Indian Citizen will be a NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Reason: He has stayed in India for a period less than 182 days. The amended provisions including the deemed resident provision will not be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is only Rs 12 lakhs, which is less than 15 lakhs.

 Ans 3b: PIO will be a NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Reason: He has stayed in India for a period less than 182 days. The amended provisions including the deemed resident provision will not be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is only Rs 12 lakhs, which is less than 15 lakhs. Furthermore, the amendment regarding deemed resident will not be applicable to PIO irrespective of his total taxable income in India and residential status in foreign country.

 Illustration 4

Q 4: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India of 110 days during the previous year 2020-21. He has stayed in India for a total period of 450 days during the four immediately preceding previous year (i.e 2019-20, 2018-19, 2017-18, 2016-17). He has a total income of Rs 10 lakhs from Indian sources, Rs 7 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans 4a: PIO will be NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Ans 4b: If, the said Indian Citizen is a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Reason: The amended provisions will be applicable to Indian Citizen or PIO, as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lakhs, which is in excess of Rs 15 lakhs. However, it has to be noted that, as he has stayed in India for less than 120 days during FY 2020-21, he will be a NRI. His stay in India in excess of 365 days during 4 previous years will not make any difference as in the relevant financial year his stay is less than 120 days. Further, as he is a tax resident of a foreign country, the deemed resident provision will also be not applicable. Furthermore, the amendment regarding deemed resident will not be applicable to PIO irrespective of his total taxable income in India and residential status in foreign country.

 Ans 4c: If, the said Indian Citizen is not a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a RNOR. His taxable income in India will be Rs 17 lakhs earned from Indian sources and income from Indian business/profession earned outside India.

Reason: The amended provisions will be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lakhs, which is in excess of Rs 15 lakhs. As he is not a tax resident of a foreign country, the deemed resident provision will be applicable, even though his stay in India is for less than 120 days during the FY 2020-21.

 Illustration 5

Q: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India of 180 days during the previous year 2020-21. He has stayed in India for a total period of 350 days during the four immediately preceding previous year (i.e 2019-20, 2018-19, 2017-18, 2016-17). He has a total income of Rs 10 lakhs from Indian sources, Rs 7 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans 5a: PIO will be NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Ans 5b: If, the Indian Citizen is a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Reason: The amended provisions will be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lakhs, which is in excess of Rs 15 lakhs. However, it has to be noted that, even though he has stayed in India for a period more than 120 days during the FY 2020-21, his stay in India during previous 4 years was only for 350 days, i.e. less than 365 days as prescribed. Therefore, as one of the additional condition of stay of 365 days during previous 4 years is not satisfied, he will be a NRI. Further, as he is a tax resident of a foreign country, the deemed resident provision will also be not applicable. Furthermore, the amendment regarding deemed resident will not be applicable to PIO irrespective of his total taxable income in India and residential status in foreign country.

 Ans 5c: If, the Indian Citizen is not a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a RNOR. His taxable income in India will be Rs 17 lakhs earned from Indian sources and income from Indian business/profession earned outside India.

 Reason: The amended provisions will be applicable to Indian Citizen as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lakhs, which is in excess of Rs 15 lakhs. As he is not a tax resident of a foreign country, the deemed resident provision will be applicable, even though his stay in India is for less than 365 days during the 4 previous years.

 Illustration 6

Q: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India of 125 days during the previous year 2020-21. He has stayed in India for a total period of 450 days during the four immediately preceding previous year (i.e 2019-20, 2018-19, 2017-18, 2016-17). He has a total income of Rs 10 lakhs from Indian sources, Rs 7 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans: He will be a RNOR. His taxable income in India will be Rs 17 lakhs earned from Indian sources and income from Indian business/profession earned outside India.

Reason: The amended provisions will be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lakhs, which is in excess of Rs 15 lakhs and His stay in India during the FY 2020-21 is not less than 120 days + his stay in India during previous 4 years is also not less than 365 days, as prescribed. Therefore, he will be a RNOR. Even, in a case, where the Indian Citizen is not a tax resident in foreign country, his status will remain the same as of RNOR.

 Illustration 7

Q: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India of 182 days during the previous year 2020-21. He has a total income of Rs 10 lakhs from Indian sources, Rs 2 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans: He will be a RNOR or ROR. His taxable income in India will either be Rs 12 lakhs earned from Indian sources and income from Indian business/profession earned outside India as RNOR or Rs 52 lakhs including his foreign source of income, if he is ROR.

Reason: As the said individual stay in India for a period of 182 days, he will not be attracted by the amended provisions by Finance Act, 2020. As his stay in India is 182 days as prescribed in normal provision, he will automatically be a Resident in India and to determine his ROR or RNOR status, one need to verify the normal provisions of The Income Tax Act, 1961. The provisions of deemed resident will not be applicable in this case, as the person is a resident under the normal provisions of The Income Tax Act, 1961.

 Illustration 8

Q: An Indian Citizen or PIO, who stayed in India for a period of 55 days during FY 2020-21. He has a total income of Rs 10 lakhs from Indian sources, Rs 2 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans: He will be NRI. His taxable income will be Rs 10 lakhs earned from Indian Sources.

Reason: As his stay in India is less than 60 days as prescribed in normal provisions, he will be NRI. The provisions of deemed resident will not be applicable in this case, as his total taxable income from Indian sources and income from Indian business/profession earned outside India is only Rs 12 lakhs (less than 15 lakhs). Furthermore, the amendment regarding deemed resident will not be applicable to PIO irrespective of his total taxable income in India and residential status in foreign country.

 Illustration 9

Q 9: An Indian Citizen or PIO, who stayed in India for a period of 55 days during FY 2020-21. He has a total income of Rs 10 lakhs from Indian sources, Rs 7 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

 Ans 9a: PIO will be a NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Reason: As his stay in India is less than 60 days as prescribed in normal provisions, he will be NRI. The provisions of deemed resident will not be applicable in the case of PIO irrespective of his total taxable income and residential status in foreign country.

 Ans 9b: If, the said Indian Citizen is a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Reason: As his stay in India is less than 60 days as prescribed in normal provisions, he will be NRI. The provisions of deemed resident will not be applicable in this case, as he is tax resident in a foreign country.

 Ans 9c: If, the said Indian Citizen is not a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a RNOR. His taxable income in India will be Rs 17 lakhs earned from Indian sources and income from Indian business/profession earned outside India.

Reason: Even though the said person is not a resident as per normal provisions, as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lakhs, which is in excess of Rs 15 lakhs and as he is not a tax resident of a foreign country, the deemed resident provision will be applicable, he will be covered by deemed resident concept and will be a RNOR.

 Illustration 10

Q : An Individual (who is not an Indian Citizen or PIO), who stayed in India for a period of 55 days during FY 2020-21. He has a total income of Rs 10 lakhs from Indian sources, Rs 7 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans 10: He will be a NRI. His taxable income in India will be Rs 10 lakhs earned from Indian sources.

Reason: As his stay in India is less than 60 days as prescribed in normal provisions, he will be NRI. The provisions of deemed resident will not be applicable in this case, as he is not an Indian Citizen or POI, irrespective of the fact that, he has total income of Rs 17 lakhs from Indian sources and whether or not he is tax resident of any other foreign county.

 To conclude, the residential status of an individual as amended by The Finance Act, 2020, which is applicable from financial year 2020-2021, i.e. from assessment year 2021-2022, will be affect only those high net-worth individuals who has income taxable in India from Indian sources in excess of 15 lakhs. Those NRI’s who has income less than 15 lakhs in India can take a sigh of relief as the prescribed amendment in finance bill has been modified to a greater extent in Finance Act. However, all the NRI’s will have to continue to comply with filling return of income and pay applicable taxes in the same manner as they have been doing in earlier years, as income from Indian Sources will always be taxable in India. It is also important for all tax residents of foreign country to obtain and keep with themselves a proper proof\evidence of them being tax resident, such as Tax Residency Certificate (TRC) from appropriate tax authorities or residency permit etc.

Furthermore, it is also very important to mention that interest income earned from NRE deposits will be taxable in India as pre residential status applicable for an individual under FEMA Regulations. Hence, the amendments that has taken place in Income Tax Act, through Finance Act, 2020, will not make interest earned from NRE deposits taxable in India,  unless such person becomes resident under FEMA regulations.