Dubai: When the India budget was announced earlier this year, a few modifications were introduced, which became a topic of discussion among the Non-Resident Indian (NRI) expatriate community within the country. This was concerning a change in the definition of an NRI’s residential status back home.
There was a lot of confusion among NRIs with regard to the new change that was introduced and here we seek to decode the changes and see how the change will impact the life of NRIs.
FAQ #1: What was the change in the definition of an NRI’s ‘Residential Status’? How is this different from before?
According to the old law (Income Tax Act, 1961), before the latest rule modification:
An individual is a resident of India (for tax purposes or otherwise) if:
• He or she has lived in India for at least 182 days during the financial year, or,
• He or she has lived in India for at least 60 days of a year, in the previous year, and at least 365 days in the preceding four years.
If you satisfy any of the above two conditions, you are a ‘Resident Indian’. Else, you are deemed a ‘Non-Resident Indian (NRI)’.
According to new law, after the latest rule modification:
With effect from the current fiscal year (2021-2022), in case of Indian Citizens coming to India on visit, all the following conditions are required to be fulfilled for the individual to be considered as a resident, pursuant to the latest rule modification:
• total income, other than income from foreign sources, should exceed INR1.5 million (INR15 lakhs), and,
• total stay in India during the year should be more than 119 days (4 months), and,
• the period of stay in India in the immediately preceding 4 years should be 365 days or more
Such Indian citizens whose period of stay in India is 182 days or more were anyway considered as residents and will continue to be considered as residents. Thus, there will be no impact on such individuals.
The impact will be on such individuals whose period of stay is more than 119 days during the year, but less than 182 days. Such individuals will be considered to be “resident but not ordinarily resident”.
Below is the table which depicts the changes in the residential status as per the amendment.
Further, a new paragraph was added which states the following:
“An individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees (INR 1.5 million) 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 of similar nature”
This new modification created a lot of confusion in the minds of NRIs, let’s break it down clearly.
New rule modification explained
What does it say exactly? It clearly states the following:
a) Indian Citizen
b) Having more than INR1.5 million (INR15 lakhs) of Indian sourced Income
c) Not liable to pay tax in any other country or territory by any reason
If all these three conditions are satisfied, then the person will be deemed a resident of India (RNOR) even if he or she does not stay in India for even a single day. This is where we need to decide what will be our residential status if we meet these conditions.
In the case of an Indian Citizen living in UAE, let’s consider the following example:
Mr. A lives in UAE running a business. He stays in UAE for 200 days and travels across the globe for his business. During the financial year 2020-21 he did not go to India for even 1 day, however his taxable income in India was more than INR1.5 million (INR15 lakhs). In this case what will be his residential status?
If we look at the above rule modification, he will be deemed a resident of India (RNOR) but before we come to this conclusion we need to analyse the Double Taxation Avoidance Agreement (DTAA) between India and UAE. Let us look at the paragraph pertaining to ‘residence’ in the India and UAE DTAA.
b) in the case of the United Arab Emirates: an individual who is present in the UAE for a period or periods totalling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE.
So since Mr. A has been present in UAE for more than 183 days in UAE, he becomes the tax resident of UAE as well. It means Mr. A has become a dual tax resident of India as well as UAE due to the respective laws. In such a situation one has to apply the so-called ‘tie-breaker’ rules to decide for which country he will be called as a ‘Tax Resident’. The ‘tie-breaker’ rules are as follows, verbatim:
b) if the State in which he has his center of vital interests cannot be determined, or if he has not a permanent home available to him in either state, he shall be deemed to be a resident of the state in which he has an habitual abode;
c) if he has an habitual abode in both states or in either of them, he shall be deemed to be a resident of the state of which he is a national;
d) if he is a national of both states or of neither of them, the competent authorities of the contracting states shall settle the question by mutual agreement
So in our case, assuming Mr. A fulfils the requirements of the tie breaker rules in UAE, he will be deemed to be a ‘Tax Resident’ of UAE and hence a ‘Non-Resident’ of India.
Here is how we can understand this:
FAQ #2: What is the meaning of ‘Indian sourced income’, for the purpose of calculating INR1.5 million (INR15 lakhs)?
The following incomes will be considered while computing the threshold of INR1.5 million (INR15 lakhs):
a) Income that accrues or arises in India or is believed to accrue or arise in India
b) Income that is received in India or is deemed to be received in India
c) Income that accrues or arises outside India but is derived from a business controlled in or a profession set up in India
FAQ #3: Will NRE or FCNR interest income be included for the calculation of INR1.5 million (INR15 lakhs)?
(An NRE account is a bank account opened in India in the name of an NRI, to park his foreign earnings; whereas, an NRO account is a bank account opened in India in the name of an NRI, to manage the income earned by him in India. FCNR stands for Foreign Currency Non Resident account. This is a kind of fixed deposit account opened for depositing income earned overseas. The account is held in foreign currency.)
Note that interest on NRO account is taxable whereas interest earned on NRE account is exempt from tax. Interest income earned from your FCNR deposit accounts shall be exempt from tax till you hold Non-Resident Indian (NRI) status or Resident and Not Ordinarily Resident (RNOR) status.
To answer the above question – the answer is no, the interest received on NRE accounts or Fixed deposits and FCNR deposits will continue to remain tax-free and will not be included in the calculation of INR1.5 million (INR15 lakhs).
FAQ #4: What if I am a Person of Indian Origin but having different citizenship or passport of country other than India, will the modified rule be applicable to me?
To answer the above question, let’s revisit again what the modified rule states:
As per the rule, “an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees (INR 1.5 million) 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 of similar nature.”
It means the above provision is only applicable to Indian Citizens, meaning a person holding an Indian Passport, therefore if you are holding a different citizenship or a passport other than an Indian passport than the provisions of the concerned modified rule will not be applicable to you.
FAQ #5: In case I become a Resident of India as per the modified rule, will I have to pay tax on my global Income?
One needs to understand that once you fall under the above-mentioned modified norm and also do not satisfy the conditions of the tie-breaker rules of the DTAA, you will become a deemed resident of India.
However, your residential status will be ‘Resident but not Ordinary Resident (RNOR)’ and not ‘Resident and Ordinary Resident (ROR)’. These terms are explained below, after which we’ll see how your tax liability gets affected in the table after.
Two conditions i.e. if a person has resided in India for at least 9 out of 10 immediate previous years and he or she has resided in India for at least 729 days in seven immediately previous years, the person is considered a ROR. If only one of the two conditions are met the person is deemed RNOR.
Now let’s see how will your tax liability gets affected in the below table, with regard to the above mentioned scenario:
Now to answer the above question. In case you have become an RNOR, your global income will not be taxed, only that overseas income will be taxed in India which is earned from a business controlled or profession set up in India.
For example, let’s say UAE-resident Mr. A has set up an office in the US but the operations of that office is controlled from India. Then the income of the US-based office will be taxed in India.
FAQ# 6: How does the change in rule affect returning Indians who want to go back to India for good?
When a NRI who has been out of India for many years, for the reason of employment or business, decides to go back to India for good, the Income Tax department of India gives them some relief by providing RNOR status for 2-3 years (the RNOR period can vary depending on the planning of the date of returning).
In the case of RNOR, as we already discussed above, we pay tax only on Indian sourced income and income generated overseas from a business controlled or profession set up in India that means any other income like rent in foreign country or dividends shall not be taxable in India as long as you hold RNOR status.
Now with the introduction of the latest rule modification, if one becomes deemed resident i.e. RNOR, then the benefit of RNOR may be taken away when they go back to India as they may not be NRI for 9 years or so as per the requirements. This means the person may have to pay tax on the global income from the year he goes back to India.