Revised Residential Status Provisions | Section 6 | Income Tax Act 1961

Introduction

With the recent amendment by Finance Act 2020 in residential status provisions, NRIs are looking for possible understanding. It is crucial to understand the same as taxability of any income in the hands of an individual depends on the below criteria:-

– Residential Status of the individual as per the Income tax act and

– Nature of income earned

A person can only be a citizen of India while not being the resident of India, so we’ll understand the same as following.

Determination Of Residential Status

To understand this simply, let’s apportion the concept in checks.

• Check 1: Resident of India

An individual is said to be the resident in relevant year, if he/she is in India:-

(a) For 182 days or more in relevant year

or

(b) For 60 days or more in relevant year and

For 365 days or more in 4 years immediately preceding relevant year.

Notes:

> For individuals being the citizen of India, leaving India as member of crew of an Indian ship or for the purpose of employment outside India then 60 days mentioned in (b) above shall be read as 182 days.

> For individuals being citizen of India or a person of Indian origin (as defined in explanation to clause (e) of section 115C) who being outside comes to India on a visit then 60 days mentioned in (b) above shall be read as 182 days.

And

For individuals being citizen of India or person of Indian origin, having total income other than the income from foreign sources exceeding 15 lakhs rupees during the relevant year then 60 days mentioned in (b) above be read as 120 days.

As 182 days relief was being misused by many Indians citizens or person of Indian origin residing abroad by reason whatsoever so to address it govt. has revised it by reducing relief to 120 days in respective case. One more point need to be understood here is that it only covers those individuals who are paying tax on his/her income outside India.

DEEMED RESIDENT

♦ Usually individuals who are not fulfilling above all conditions as per Check 1 are said to be Nonresident. But there is an amendment which has created uncertainty. It states that disregarding any provision/rule written in Check 1, individuals being a citizen of India shall be deemed to be the resident for the year if he/she is:-

– Having total income other than the income from foreign sources exceeding 15 lakhs rupees during the relevant year

And

– Not liable to tax in any other country or territory by reason of his/her domicile or residence or any other criteria of similar nature.

♦ This deemed resident amendment will be applicable in case only if individual is not paying any tax on his/her income outside India for e.g. individual working in Dubai, Kuwait or Cayman islands etc. where there is no tax on income earned. This will be applicable even if Individuals working in these countries having income other than the income from foreign sources exceeding 15 lakhs rupees don’t come to India for even a single day in relevant year.

• Check 2 : Resident But Non Ordinary Resident (RNOR)

Resident is further divided into two parts:-

– Resident But Non Ordinary Resident (RNOR)

– Resident and Ordinarily Resident (ROR)

This bifurcation is crucial for taxability purpose, we’ll understand it later on.

An individual is said to be RNOR in relevant year, if he/she:-

(a) Is non-resident in India in 9 out of the 10 previous years preceding relevant year

Or

(b) has during the 7 previous years preceding relevant year been in India for 729 days or less

Or

(c) Being citizen of India or a person of Indian origin having total income other than the income from foreign sources exceeding 15 lakhs rupees during the relevant year and has been in India for a period ranging 120 to 181 days. (It covers the scenario where individual is paying tax outside India). Thus, if individual being citizen of India or a person of Indian origin visits India for 182 days or more, he/she will be treated as ROR.

Or

(d) Being citizen of India who is Deemed to be resident under Check 1. (It covers scenario where individual is not paying tax outside India)

• Check 3 : Resident and Ordinary Resident (ROR)

An individual not satisfying above check 2 conditions is said to be ROR.

Taxability of Income

After determining residential status, next is to understand that what will be in our scope of income i.e. interpreting taxability of global and local income in India.

Individuals being Resident or ROR

Total income for relevant year includes all income from whatsoever source, which

– is received or deemed to be received in India.

– accrues or deemed to accrue in India.

– accrues to him/her outside India.

Individuals being RNOR

Total income for relevant year includes income from source, which

– is received or deemed to be received in India

– accrues or deemed to accrue in India

– accrues to him/her outside India only if it is derived from a business controlled in or a profession set up in India.

Individuals being Non-Resident (NR)

Total income for relevant year includes income from source, which

– is received or deemed to be received in India

– accrues or deemed to accrue in India

There is another advantage to NR which is if he/she is a NR of India and Resident of other country, and there is Double Taxation Avoidance Agreement (DTAA) of India with that respective country then certain Indian incomes are not taxable at slab rates but taxable at concessional rates.

CONSIDERABLE POINTS

1. Let us assume that individual is deemed resident of India as per amendment and if that individual stays in Dubai for 183 days or more in a relevant year than he/she will be treated as Resident of both the countries. Now as per DTAA (Double Taxation Avoidance Agreement) of India and UAE, if you are resident of both countries than Tie-breaker rules are applied.

Tie-breaker rules are applied where there is a tax treaty between the two countries in question and that the individual should qualify as a resident (for tax purposes) under the domestic laws of both countries. In this case as per Article 4 of India UAE DTAA, following step by step process has to be considered:-

– The first rule is where does this individual has a permanent home. If he/she has a permanent home in UAE only, the tie-breaker test is resolved in favor of him/her being a resident of UAE.

– If individual has a permanent home in both the UAE and India, we proceed to the second test, which is the centre of vital interest being personal and economic relation. If individual is employed only in UAE, has business establishment only in UAE or has a source of income only in the UAE, then his economic relation would only lie in the UAE. Under such a scenario, he would become a resident of the UAE.

– If individual has personal and economic relation both in India and in UAE, the next tie-breaker test is where does he/she habitually resides. Habitually reside criteria is decided based on the period of time, one stays in a country. If a person actually resides only in the UAE and occasionally visits India, he would be resident of the UAE.

– If individual habitually resides in both the countries then determine the residency on the basis of nationality.

– In the end, if individual is national of both or neither of countries then the authorities of respective countries will decide on the basis of mutual agreements.

I believe with the UAE-India DTAA in place, an NRI holding a valid residence visa will not be taxed in India with respect to his income in the UAE. This can be validated by furnishing a Tax Residency Certificate to the income tax authorities.

2. Normally, dates stamped on passport are considered as a proof of departure from and arrival in India. While calculating the number of days of stay in India, date of arrival and date of departure in India shall be counted in as days of stay in India. This view is taken in Petition No.7 of 1995 225 ITR 462 (AAR).

3. Authority of Advance Ruling (AAR) in case of Smita Anand clarifies that individual visiting India after resignation can’t be treated as visit to India as per the concept of residential status. Thus, no relief of 120 or 182 days whatever the case may be.

4. The expression “having total income other than the income from foreign sources” means income which:-

– is received or deemed to be received in India

– accrues or deemed to accrue in India

– accrues to him/her outside India only if it is derived from a business controlled in or a profession set up in India.

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