A guide to amended provisions of Residential Status of an Individual as per the Finance Act, 2020

Taxability of an individual visiting/residing in India or going outside India has always been a matter of concern for the revenue authorities. Individual who is earning income in India as well as earning in other country generally faces the dilemma of taxability of such Indian and foreign incomes.

Firstly, it is important to determine residential status of an individual based on the number of days of stay in India as per section 6 of the Income Tax Act, 1961 (‘Act’) . After determining the residential status of an individual, section 5 of the Act comes into play which determines the scope of total income.

Now, let us understand provisions governing the Residential status of an individual.

Section 6 of the Act lays down the provisions governing the residential status of an individual to determine whether an individual qualifies the status of resident, resident but not ordinarily resident (‘RNOR’) or a non resident (‘NR’).

Resident

An Individual is considered to be a resident if he satisfies any of the following conditions:

  • whose period of stay in India is 182 days or more in the previous year or; [Section 6(1)(a)]
  • whose period of stay in India is 365 days or more in 4 years preceding the previous year and 60 days or more in the previous year. [Section 6(1)(c)]

Member of crew of an Indian Ship

Explanation 1(a) to section 6 covers a case of a person who is amember of crew of an Indian Ship (as defined in section 3(18) of Merchant Shipping Act, 1958) or for the purpose of employment outside India. The above stated person shall be deemed to be a resident as per section 6 if he stays in India for a period of 365 days or more in 4 years preceding the previous year and 182 days or more in the previous year.

Citizen of India/ person of Indian origin, being outside India, comes on a visit to India

The condition to be seen is that the period of stay in India for a period of 182 days or more in the previous year.

Regardless of any level of income, if the period of stay is exceeding or equal to 182 days, then the person shall be deemed to be a resident of India.

Resident but not ordinary resident(RNOR)

An Individual shall be considered as RNOR in the previous year if he satisfies any of the following :

  • who has been a Non-Resident(NR) in India in 9 out of the 10 previous years preceding that year, or
  • who has stayed in India for a period of 729 days or less during the 7 previous years preceding that year.

Extended Scope of RNOR

Two Major amendments have been introduced to increase the scope of RNOR:

  • New Slab of period of stay in India;
  • Stateless person to be considered as RNOR.

New Slab of period of stay In India (w.e.f FY 2020-21)

The Finance Act, 2020 has amended the Explanation 1(b) to sub-section 1 of section 6 to include the person who is a citizen of India/ person of Indian origin, being outside India, comes on a visit to India shall be considered as RNOR who fulfils the following conditions cumulatively:

  • total income other than the foreign income of more than Rs. 15 Lakhs and;
  • Stay in India for a period of 120 days or more but less than 182 days in the previous year and;
  • Stay in India for a period of 365 days or more in 4 years preceding the previous year

Impact of amendment as per Finance Act, 2020.

Prior to the amendment in Finance Act, 2020, such person qualified as Non Resident. However, pursuant to amendment, they will be considered as RNOR. The amendment has been introduced to widen the scope of taxability of income of RNOR.

Due to the amendment, a person qualifying as non-resident prior to amendment may qualify as resident and following consequences shall follow due to the change in status:

1) Loss of treaty benefits

2) Increase in the scope of total income

3) Loss of various exemptions

4) Increases onus on Individual to substantiate the non taxability of Income in India

Now, to summarize the amendments, the following cases can be looked into :

Cases Period of stay* Total Income(excluding foreign income) Prior to amendment Post Amendment
1. Less than 120 days Exceeding INR 15 lakhs NR NR
2. Less than 120 days Less than or equal to INR 15 lakhs NR NR
3. 120 days or more but less than 182 days Exceeding INR 15 lakhs NR RNOR
4. 120 days or more but less than 182 days Less than INR15 lakhs NR NR
5. 182 days or** more Less than INR 15 Lakhs Resident Resident
6. More than 182 days Exceeding INR 15 lakhs Resident Resident

*It has been assumed in the above cases that POI/Indian citizen has stayed in India for a period of 365 days or more in the 4 years preceding the previous year.

** Notably, if an individual stays in India for a period of 182 days or more, he shall be a resident in that previous year irrespective of level of income..

Stateless person to be considered as RNOR (w.e.f FY 2020-21)

An individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding Rs. 15 lakhs during the previous year shall be deemed to be resident in India in that 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.

Such deemed residents shall be considered to be RNOR under the Act w.e.f FY 2020-21.

The intent of this amendment was to tax such individuals who are stateless persons and are not liable to tax in any country by reason of his domicile or residence or any other criteria of similar nature.

Note: RNOR is considered to be ‘resident’ under the Act except under section 92, 93 & 168 of the Act where it is considered to be non-resident.

Scope of Taxability

Section 5 of the Act governs the scope of taxability of income. Post determination of residential status of an Individual, the source of income shall be analysed to determine whether such income shall be taxable in India.

Basically, three sources of income has been defined under the Act. These are the sources from where an individual can earn the income.

1. Income which is received or is deemed to be received in India in such year by or on behalf of such person ; or

2. Income which accrues or arises or is deemed to accrue or arise to him in India during such year ; or

3. Income which accrues or arises to him outside India during such year.

Taxation of Resident

Resident is taxed on the basis of its global income in India arising during the Financial year. Therefore, all the three sources shall be included in the scope of income and accordingly be taxed.

Taxation of RNOR

Income which is received or deemed to be received in India or accrued or arise or deemed to accrue or arise in India shall be included in the scope of income of RNOR. Further, only that income which has accrued or arose outside India and is derived from a business controlled in or a profession set up in India shall be included in the taxable income of RNOR.

Taxation of Non Resident

Only the income which is received or deemed to be received in India or accrued or arise or deemed to accrue or arise in India shall be included in the scope of income of NR.

Resident RNOR Non- Resident
Income which is received or deemed to be received in India Taxable in India Taxable in India Taxable in India
Income which has accrued or arise in India Taxable in India Taxable in India Taxable in India
Income which has accrued or arise outside India* Taxable in India Not Taxable in India Not Taxable in India
Income which derived from a business controlled in or a profession set up in India Taxable in India Taxable in India Not Taxable in India

*Except income which derived from a business controlled in or a profession set up in India

Scope of Foreign Income

Following incomes shall be included while computing the threshold limit of INR 15 lakhs as part of total income in India:

1) Dividend or interest income received from a resident in India.

2) Income from business controlled in or profession set up in India.

3) Capital gain arising from transfer of a property situated in India.

4) Capital gain arising on transfer of shares of an Indian company.

5) Capital gain arising on transfer of a shares of a company which derives its value substantially from property situated in India.

6) Rental Income from a property situated in India.

Further, we can say that if the above mentioned incomes are received from source outside India, then such incomes shall not be included while computing the threshold limit of INR 15 lakhs as part of total income in India.

It is to be noted here that exempt incomes shall not be included while computing the threshold limit of INR 15 lakhs as part of total income in India. For example- Interest on NRE account balance exempt u/s 10(4)(ii), Interest on FCNR deposits u/s 10(15)(iv)(fa)  shall not be included while computing the threshold limit.

Conclusion :

Amendments made in Finance Act, 2020 have been made with an intent to include the person who are misusing the tax laws and managing their period of stay in India to escape the taxability of income in India. However, it is to be noted that not all the tax individuals are misusing the law, there may be genuine cases where an individual  travelling to different countries and earning incomes outside India. The amendment has made their foreign incomes taxable in India by widening the scope of Resident. Further, stateless person shall be treated as deemed resident of India if he is not liable to tax to any country by reason of residence, dominance or other similar nature. This amendment has been introduced to include the income of high net worth individuals(HNWI) within the ambit of Indian Tax laws. The term “not liable to tax” is different from exemption from tax, non-payment of tax or not being subject to tax. It would lead to increase in disputes with tax authorities since the plain reading of the section may allow them to take a different view.

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One Comment

  1. Teja Samudrala says:

    Sir, for an Individual having residential status of RNOR (Resident not ordinarily resident) for FY 2019-2020. While registering in efiling (for the first time) there was an option of Resident or Non resident which one i have to choose since he is an RNOR?

    Thank you sir!

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