Ever wondered what the residential status of NRIs is? The NRI residential status has changed a lot in India due to various reasons. Every individual must be aware of these rules made by the Government of India. This article will help you know all the NRI residential status & taxation (new) rules FY 2020-2021Budget 2020.
Before digging deep into the topic, let us first have an idea about India’s residential status.
What Does Residential Status Mean?
In this article
Residential Status is based upon the period in which you stay in India. Wait, now don’t get baffled between citizenship and residential status. Both are different terms. Citizenship status refers to the condition when you’re a citizen of a country. Whereas when you travel to another country and stay for about a year, you gain that country’s residential status.
For instance, you’re born in India and traveled to the US for higher education. You stayed there for 2 years and then returned to India. In this scenario, you gain citizenship in India and the US’s residential status for 2 years. In these 2 years, you might be an Indian citizen but still end up being a non-resident. you can think more about how NRIs can save on TAX benefits.
Your taxable income of a particular year is put into light by your residential position. That is, the country you’re presently residing in decides your taxable income. Here, taxable income refers to the income between India and foreign countries. In general, there are 3 types of Residential status:
- Resident and Ordinary Resident(ROR)
- Resident but not Ordinary Resident(RNOR)
- Non-Resident Indian(NRI)
1. Resident And Ordinary Resident(ROR)
As per Indian government rules, you’re considered as a ROR under the following conditions-
- If in a particular year, you lodge in a country for at least 6 months or more, or
- If you reside in a country for about 60 days or more in one year, provided you have visited the same country in the last 4 years.
Apart from that, you’re treated as an ordinary resident taxpayer in India if you meet the following conditions:
- Considering the upcoming 7 years, make sure you lodged there for 730 days or more than that.
- You must be a resident of India for at least 2 out of 10 accounting years, forgoing the current financial year.
In case you don’t match with the above-mentioned criteria, you’ll not get regarded as a credible member of ROR.
Let’s go for an example. For instance, let you stayed in the US for 218 days in one accounting or financial year. By this, you become a part of ROR. Isn’t it?
2. Resident But Not Ordinary Resident(RNOR):
In India, you’re considered an RNOR if you stay in India during the relevant financial year, i.e., 6 months or more. Otherwise, if you stay for 2 months or more in the country throughout the accounting year, provided that you stay for more than a year when counted for about four accounting years. Confused right?
Let’s give you an example, say; you went to Germany for higher education. However, you missed your family and couldn’t stay there for long and returned after 2 months. But, due to family pressure, I again went there. You completed your 4 years’ degree, and the total number of days you lodged there was more than a year (of course!). In this situation, you will get considered an RNOR of Germany.
However, as per Indian rules, you will get considered a taxpayer in India in case you fulfill at least one of the conditions mentioned below:
- If in the last 7 accounting years, including the current year, the total number of days you lodged in India is equal to 2 years, or more, i.e., 730 days or more.
- If you had ever been an Indian resident, at least for 730 days or more, in the past 10 accounting years, including the current year.
In the above two cases, get prepared for tax impositions. For example, you lodged in India for 192 days. As per the above-mentioned criteria, you fulfill one. Since this does not complete your 2 years’ stay criteria, it’s left out. Thus, the amount you earn in India only gets tax imposition. Let’s say, for instance; you earned a total of 27 lakh in India in a particular financial year. Only this amount gets tax imposition.
3. Non-Resident Indian(NRI)
You will get treated as an NRI if you meet the conditions mentioned below:
- In case you lodged in India for less than 6 months or let it say 181 days. (One day more for a safer side).
- If you didn’t lodge in India for more than 2 months or more in the present accounting year.
- In another case, even if you stayed a total of 2 months or more in the present accounting year, yet it doesn’t exceed a years’ stay as a total in the last 4 accounting years.
As per the Ministry of External Affairs, around 31 million NRIs live outside India as of December 2018.
Let take an imaginary situation for your better understanding. In case you lodged in India for 35 days. Thus, you become an NRI fulfilling all the above-mentioned criteria.
Now let us move onto the main content of the topic.
NRI Residential Status And Taxation (New) Rules From FY2020-2021
The parliament passed the Finance Bill 2020 on March 23, 2020, with some major relaxations. The changes made while passing the bill were originally proposed to determine a person’s ‘residential status’ in India. There lies a direct impact on the non-resident Indians due to the changes made in the bill.
- As we’ve already discussed above, you’re regarded as an NRI if you lodged in India for less than 6 months or 181 days. Here, by referring to NRI, I’m stating it to both, i.e., NRI and PIO. So, let’s put some light on the improvisations made.
- The first improvisation put on implementation was the decrease in the number of days from 181 to 120. You need to stay a min of 120 days or 4 months to get regarded as an NRI. However, it has certain limitations attached as well. It is applicable only on that NRI, whose yearly taxable earning is more than Rs. 15 lakh. So, if you’re earning less than that, then I’m sorry this law is not meant for you. The rule of 181 days or 6 months with one day extra get applied to you. Thus, you’ve two options. Either earn a taxable amount of more than 15 lakh or stay for 181 or more days.
- But, if your taxable earning is more than Rs. 15 lakh per accounting year, the rule of 120 days or 4 months gets applicable to you.
- Apart from that, the taxable income is also decided as per the shareholders. That is the share portion that the Indian companies share with you that shall get taxed. For instance, if a company shares with you Rs. 10 lakh, you have to bear the tax imposed on that principal amount.
- If you lodged in India for 4 months and earned Rs. 15 lakh or more, make your calculations for the last 4 years. Include the current year as well. Check if you stayed for about 365 days or more. If yes, then you fulfill another list criterion, as I’ve mentioned above in the NRI status. In this case, you become an Indian resident, and the rules of tax payment motive get levied.
Don’t panic! It will just make your job easier. You’ll get regarded as RNOR and no more an NRI. By this, the earnings you make worldwide, i.e., apart from India, go directly into your pocket. It won’t get any further tax impositions.
Deemed Residential Status
As per the improvisations, you can get regarded as the deemed resident, even India’s citizen. In a situation where you’re not eligible for any tax improvisations in any other country except India, you fulfill this criterion. However, it applies to you only if you satisfy a greater annual earning than 15 lakh. It is also not applicable if you’re a foreigner or a member of OCI, i.e., Overseas Citizen of India.
However, in another modification, it got amended that this law does not apply to ‘authentic workers.’ These are the workers that are serving in other countries. Thus, as per the improvised law, the amount you’re earning outside gets no tax impositions. This is just another reason for your joy. Isn’t it?
Countries that do not impose any individual income tax, like Saudi Arabia, UAE, etc. have certain other guidelines. As per the Double Tax Avoidance Agreement, the concept of likely tax imposition got modified. Again there was a treaty proposed, i.e., UAE Tax Treaty and the Protocol. It proposed that you shall get a credential of “Tax Residency” if you’re lodging in UAE for 6 months or more. Again I would say it’s applicable only if you’re earning a taxable salary greater than Rs. 15 lakh per accounting year.
Improvisations were framed for the broader profit gain and smooth procedure. Therefore, with time, you must know the new tax rules if you’re working abroad. I’ve stated the revised rules in the next paragraph. Let’s go through them.
i. If You’re Earning Abroad
If you’re working in some other country, it is undoubtedly a proud moment for you and your family. Apart from acquiring a legitimate residency, you must know the tax rules as well. Recently, there was a questionnaire session made for non-residents. It was to make clear whether they held a bank account in any other country or not. However, they declared later that it’s quite optional for you to provide. They interrogated to make sure you hold a bank account and, if not, can open a bank account in India.
As per Indian laws, your origination country is not implied to check whether you’re eligible for a taxpayer or not. For instance, you’re a citizen of Germany and came to India for job purpose. Thus, as per the law, you become a taxpayer in India. Apart from that, as I’ve already stated above, calculate the total number of days you stayed. It clarifies your residential status and furthers your tax-paying options.
All these modifications were put into action from 1st April 2020.
Mentioned below is a table to make your understanding crystal clear.
Residential Status And Taxability In India:
The Finance bill was passed under the guidelines of the President on March 27, 2020. This bill became further known as the Finance Act 2020. According to the Finance Act, Budget 2020, two significant changes concerning the calculation of NRI Residential Status and Taxability of Income of an NRI.
- As per the Indian government regulations, you, as an NRI, are forbidden to reside in India for more than 4 months or 120 days. In other words, the individual gets categorized as non-resident if he stays abroad for 245 days a year.
- This rule was put into action to prevent tax abuse. As per this regulation, if you’re exempted from taxpaying in all other countries, you’ve to bear the tax-payment burden in India.
Now, let’s focus more on what these rules have to say.
Improvisations In Residency Status of NRIs For FY 2020-21:
According to the new rules, you’re considered as a Non-Resident Indian if you meet the following conditions:
- You must have stayed at least 4 months in India. In detail, you must have lodged out of the country for at least 245 days in the last accounting year.
- Suppose you’ve lodged in India for less than a year during the 4 years in the previous financial years. Apart from that, another stay of fewer than 2 months in the last accounting year.
Example 1: Let’s say you lodged in a country for 250 days in the accounting year 2020-21. Thus, in the next accounting year, you would get the credibility of an NRI.
Example 2: Suppose you lodged in India for about 130 days. Here, to get the credibility of an NRI, you need to fulfill the second criteria. That is, make sure you lodge there for less than 60 days in the financial year 2020-21. Apart from that, the duration must also be less than a year throughout the 4 accounting years before the FY 2020-21 in India.
Residential Status As Per The Budget 2020 Proposals
Don’t worry! There’s an online calculator available for you to check your residential status for FY 2020-21. While entering your details into the calculator, you should keep the following points in your mind:
i. The arrival and departure days are both taken as your days of stay in India (i.e., 2 days of stay in India).
ii. The proof of the dates is taken from the dates stamped on your Passport during both arrival and departure.
iii. The number of days you stay in India will get counted, taking into account the previous year, i.e., 12 months.
iv. You must have a track of the no. of days you stayed in India each year. It is better to maintain a chart or to note the total number of days you lodged.
Budget 2020 Rules Regarding The Taxability Of NRI Income For AY 2021-22:
This rule became a priority to catch the people who were evading the tax net. Genuine NRIs do not have to worry about this rule. As I’ve already mentioned, some countries don’t levy personal or individual tax. Their state and new policies implied on them are mentioned in this rule. This rule can be well explained through an example.
For example, let’s say X is a trader. He has to go to different countries for trading purposes. Thus he’s regarded as an NRI. So, when he visits such countries as mentioned above, these rules get implied on him. He becomes a non-tax resident in those countries. His income will neither be taxable in India nor other countries. To avoid such issues, the government made this rule to tax the global income of such NRIs.
In some cases, a person’s income may be liable to tax in India and other countries. So, to remove this kind of situation, this new rule came into the act.
Look at the image below. You’ll get an idea.
These are the new rules that every NRI must be aware of. You must have got an idea about the residential status of NRIs and the taxation rules. If you have any more doubts, have a look at the following questions, and clarify them.
1. Does your taxability earnings rely on which residential status you come in?
Your earnings in India is mandatory for tax impositions by the Indian government. Apart from that, your residential status also depends on how many days you lodged in India in a single accounting year. However, it doesn’t depend on the cause of your stay.
As I’ve mentioned above, a non-resident gets tax impositions on his earnings in India. On the other hand, a ROR gets a mandatory tax imposition on his worldwide earning.
2. What makes an individual eligible for the income tax law?
I. Resident and Ordinarily Resident (ROR).
II. Resident but not Ordinary Resident (RONR).
III. Non-Resident Indian (NRI).
3. Is a person who holds Indian citizenship treated as a resident of India, to charge Income-tax?
4. How can you predict the residential status of someone?
5. Which incomes get encouraged to tax by a taxpayer in India?
I. Income that arises in India.
II. Income which is under deemed to arise in India.
III. Income which you receive in India.
IV. Income which is under deemed and you’re about to receive in India.
V. If the earning has no direct or indirect connection with India.
6. Which incomes come under deemed to arise in India?
i. Incomes related to the government of India.
ii. Incomes related to the business companies of India.
iii. Income gained by the transfer of property.
iv. Income from any asset or any other source of income in India.
7. Can a resident individual purchase a property outside India?
8. Can foreign individuals acquire property in India?
These are the new rules under the NRI residential status and taxation FY 2020-21. If you’ve read this article, you must be well aware of all the information you need to know. I hope this article proved to be of some help to you.