Income Tax Provisions applicable to non-residents

The residential status of an individual is crucial for determining the taxability of income under Indian tax law. An individual’s residential status can be one of three types: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR). This status influences how various types of income are taxed. Indian citizens are deemed residents if their total income, excluding foreign sources, exceeds Rs. 15 lakhs and they are not taxed in another country. For Hindu Undivided Families (HUFs) and companies, residential status is determined based on the location of management and control. Companies, in particular, are considered resident if they are incorporated in India or their place of effective management is in India. The taxability of income also depends on its nature and source, with Indian incomes and those deemed to arise in India being taxed according to the residential status of the taxpayer. Changes to the residential status may occur annually based on specific conditions, impacting the tax obligations of individuals and entities.

Q1. Is the residential status of a person relevant for determining the taxability of the income in his hands?

Ans: Yes, the residential status of a person earning income is very much relevant for determining the taxability of such income in his hands.

Taxability of any income in the hands of a person depends on the following two things :

(1) Residential status of the person as per the Income-tax Law; and

(2) Nature of income earned by him.

Hence, residential status plays a vital role in determining the taxability of the income.

Q2. What are the different classes of residential status prescribed under the Income-tax Law for an individual?

Ans: For the purpose of Income-tax Law, an individual can have any one of the following residential status:

(1) Resident and ordinarily resident in India (also known as resident)

(2) Resident but not ordinarily resident in India

(3) Non-resident

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.

Q3. Will a person holding Indian citizenship be treated as a resident in India for the purpose of charging Income-tax?

Ans: The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.

Thus, from Assessment Year 2021-22, an Indian Citizen earning total income in excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country.

“Liable to tax” in relation to a person and with reference to a country means that there is an income-tax liability on such person under the law of that country for the time being in force. It shall include a person who has subsequently been exempted from such liability under the law of that country.

Q4. What are the different classes of residential status prescribed under the Income-tax Law for a Hindu Undivided Family (HUF)?

Ans: For the purpose of Income-tax Law, a HUF can have any one of the following residential status:

(1) Resident and ordinarily resident in India

(2) Resident but not ordinarily resident in India

(3) Non-resident

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the HUF would be a resident and ordinarily resident and in the next year it may become non-resident or resident but not ordinarily resident and again in the next year its status may change or may remain same.

Q5. What are the different classes of residential status prescribed under the Income-tax Law for a person other than an individual or a HUF?

Ans: For the purpose of Income-tax Law, a person other than an individual or a HUF, i.e., company, partnership firm, etc., can have any one of the following residential status:

(1) Resident

(2) Non-resident

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the taxpayer would be a resident and in the next year may become non-resident and again in the next year the status may change or may remain same.

Q6. How to determine the residential status of an Individual?

Ans: To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident.

Step 1 given below will ascertain whether the individual is resident or non-resident and step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident.

Step 1: Determining whether resident or non-resident

Under the Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy any one or may satisfy both the conditions):

(1) He is in India for a period of 182 days or more in that year; or

(2) He is in India for a period of 60 days or more in the year and for a period of 365 days or more in 4 years immediately preceding the relevant year.

However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.

The Finance Act, 2020, w.e.f., Assessment Year 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Note: The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.

Thus, from Assessment Year 2021-22, an Indian Citizen earning total income in excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country.

Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident

A resident individual will be treated as resident but not ordinarily resident in India during the year if he satisfies following conditions:

(1) He is non-resident in India in 9 out of last 10 years immediately preceding the relevant year; or

(2) His stay in India is for 729 days or less during 7 years immediately preceding the relevant year.

However, w.e.f., Assessment Year 2021-22, the Finance Act, 2020 has inserted the following two more situations wherein a resident person is deemed to be ‘Not Ordinarily Resident’ in India:

a) An Indian Citizen or a person of Indian origin whose total income (other than income from foreign sources) exceeds Rs. 15 lakhs during the previous year and who has been in India for a period of 120 days or more but less than 182 days;

b) An Indian Citizen who is deemed to be resident in India as per new section 6(1A).

A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.

In short, following test will determine the residential status of an individual:

• If the individual satisfy any one or both the conditions specified at step 1 and satisfies any of the conditions specified at step 2, then he will become resident and ordinarily resident in India.
• If the individual satisfy any one or both the conditions specified at step 1 and satisfies any of the condition specified at step 2, then he will become resident but not ordinarily resident in India.

If the individual satisfy no conditions satisfied at step one, then he will become non-resident.

Click here to calculate Residential Status

Q7. How to determine the residential status of a HUF for the purpose of the Income-tax Law?

Ans: To determine the residential status of a HUF, the first step is to ascertain whether the HUF is resident or a non-resident. If the HUF turns to be a resident, then the next step is to ascertain whether it is resident and ordinarily resident or is resident but not ordinarily resident.

Step 1 given below will ascertain whether the HUF is resident or non-resident and step 2 will ascertain whether the HUF is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the HUF turns to be a resident.

Step 1: Determining whether resident or non-resident

For the purpose of Income-tax Law, a HUF will be treated as resident in India, if the control and management of the affairs of the HUF is located (partly or wholly) in India.

Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident

A resident HUF will be treated as resident and ordinarily resident in India during the year if its manager (i.e. karta or manager) satisfies both the following conditions :

(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.

(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

A resident HUF whose manager (i.e. karta or manager) does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.

In short, following test will determine the residential status of a HUF :

• If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies both the conditions specified at step 2, then the HUF will become resident and ordinarily resident in India.
• If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies none or only one condition specified at step 2, then the HUF will become resident but not ordinarily resident in India.
• If the control and management of the affairs of the HUF is located wholly outside India, then the HUF will become non-resident.

Q8. How to determine the residential status of a company?

Ans: With effect from Assessment Year 2017-18, a company is said to be resident in India in any previous year, if:

(i) it is an Indian company; or

(ii) its place of effective management, at any time in that year, is in India.

For this purpose, the “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.

The concept of POEM is effective from Assessment Year 2017-18. The CBDT has issued the final guidelines for determination of POEM of a foreign company.

The final guidelines on POEM contain some unique features. One of the unique features is test of Active Business Outside India (ABOI). The guidelines prescribe that a company shall be said to engaged in ‘active business outside India’ if passive income is not more than 50% of its total income. Further, there are certain additional cumulative conditions to be satisfied regarding location of total assets, employees and payroll expenses.

The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.

In cases of companies other than those that are engaged in active business outside India, the determination of POEM would be a two stage process, namely:—

1. First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.

2. Second stage would be determination of place where these decisions are in fact being made.

However, it has been provided that the POEM guidelines shall not apply to a company having turnover or gross receipts of INR 50 crores or less in a financial year vide CIRCULAR NO.8, DATED 23-2-2017.

(To know more about POEM guidelines, read CIRCULAR NO.6, DATED 24-1-2017.)

Q9. How to determine the residential status of a person other than an individual, HUF and company?

Ans: Every person other than an individual, HUF and company is said to be resident in India during the year, if the control and management of its affairs for that year is located wholly or partly in India.

Q10. Which incomes are charged to tax in India in the hands of a taxpayer?

Ans: The following chart highlights the tax incidence in case of different persons:

(*) ROR means resident and ordinarily resident.

RNOR means resident but not ordinarily resident.

NR means non-resident.

Q11. What incomes are deemed to have accrue or arise in India?

Ans: Following incomes are treated as incomes deemed to have accrued or arisen in India:

• Capital gain arising on transfer of property situated in India.
• Income from business connection in India.
• Income from salary in respect of services rendered in India.
• Salary received by an Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case.
• Income from any property, asset or other source of income located in India.
• Dividend paid by an Indian company.
• Interest received from Government of India.
• Interest received from a resident is treated as income deemed to have accrued or arisen in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and used by resident for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.
• Interest received from a non-resident is treated as income deemed to accrue or arise in India if such interest is in respect of funds borrowed by the non-resident for carrying on any business/profession in India.
• Royalty/fees for technical services received from Government of India.
• Royalty/fees for technical services received from resident is treated as income deemed to have accrued or arisen in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.
• Royalty/fees for technical services received from non-resident is treated as income deemed to have accrued or arisen in India if such royalty/fees is for business/profession/other source of income carried by the payer in India.

Income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid on or after 05-07-2019 by a person resident in India to a non-resident.

Q12. When is a business connection said to be established?

Ans: Business connection includes a profession at connection. Business connection includes any activity carried out through a person acting on behalf of a non-resident who performs any one or more of the following:

• If such person has in India authority to conclude contracts on behalf of the non-resident (it will not include cases where authority is restricted to contract for purchase of goods or merchandise on behalf such non-resident); or
• If such person in India habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident;
• If such person habitually secures orders in India mainly or wholly for the non-resident or for the other non-resident under the same management.

No business connection shall be deemed to have been established, if the business is carried on through an independent broker, general commission agent or other agent (i.e., a broker or commission agent who is not working mainly or wholly for such non-resident or other non-resident under same management), provided such person is working in his ordinary course of business.

Only so much of income which accrues or arises due to such business connection is deemed to be income accruing or arising from India and not the entire income of the non-resident.

Q13. What are the other provisions under the Income-tax Act which are applicable to a Non-Resident?

Ans: Refer chart and Table on ‘Non-Resident Benefit Allowable’.

Q14. What is the objective of FEMA?

Ans: The main objective of FEMA is to facilitate external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA deals with provisions relating to procedures, formalities, dealings, etc. of foreign exchange transactions in India. The transactions relating to foreign exchange have been classified under FEMA into two main categories, viz., (1) Current Account Transaction, (2) Capital Account Transaction.

Q15. What is capital account transaction?

Ans: As defined in Section 2(e) of the FEMA 1999, “Capital Account Transaction” means transactions which alters the assets or liabilities, including contingent liabilities outside India, of persons resident in India or assets or liabilities, in India, of persons resident outside India and includes transactions referred to in section 6(3) of the FEMA.

Note: Earlier, section 6(3) of the Foreign Exchange Management Act, 1999, contained a list of capital account transactions which the RBI could have prohibited, restricted or regulated. However, the section 6(3) got deleted with effect from October 15, 2019.

Capital account transactions are governed by Section 6 of the FEMA, 1999 read with Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000

Q16. What is current account transaction?

Ans: As defined in Section 2(j) of the FEMA, “current account transaction” means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes :–

(i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,

(ii) payments due as interest on loans and as net income from investments,

(iii) remittances for living expenses of parents, spouse and children residing abroad, and

(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children

Current account transactions are governed by section 5 of the Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Current Account Transaction) Rules, 2000

Q17. What are the major provisions covered in FEMA, 1999?

Ans: The major provisions of FEMA, 1999 relate to following matters :

• Dealing in foreign exchange, etc.
• Holding of foreign exchange, etc.
• Current account transactions
• Capital account transactions
• Accquistion and transfer of Immovable property in India
• Accquistion and transfer of Immovable property outside India
• Export of goods and services
• Realization and repatriation of foreign exchange
• Exemption from realization and repatriation in certain cases.
• Provisions relating to authorised persons. i.e. authorised by RBI to deal with foreign exchange or in foreign securities
• Power of RBI to inspect authorized person
• Contravention and penalties
• Adjudication and appeal
• Directorate of enforcement
• Miscellaneous provisions

For more details on FEMA refer to the FAQ section at www.rbi.org.in

(Republished with Amendment, Source -Income Tax Website)