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.