Budget 2020 had caused much confusion and concerns over the residential status and tax liability of Indians abroad.
But the Finance Act, 2020 has tweaked most of the residential status changes the Budget proposed.
The Budget had tightened the norms on residency provisions for some individual assessees. Amendments in the Finance Act has limited the impact.
An individual if not a non-resident (NR) becomes a resident. A resident can either be a resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR).
The Finance Act, 2020 aims to categorise some individuals who were earlier NR as RNOR.
Before understanding what has been changed, see the accompanying table that lays out the taxability of residents/non-residents in India.
As shown in the table, the only difference in the taxability of an NR and an RNOR is that the ‘income accruing or earned outside India from a business controlled from India or from a profession set up in India’ is charged to tax in the case of RNOR, but not in the case of NR. So, recategorisation as RNOR from NR could mean a higher tax liability for some individuals.
Residency status change
The Finance Act has changed the residential status conditions for two categories — one, an Indian citizen or person of Indian Origin (PIO) visiting India; two, ‘stateless persons’.
Earlier, an Indian citizen or a PIO coming on a visit to India was considered a ‘resident’, if she stayed in India for at least 182 days (about six months) in a financial year.
Else, she was a non-resident.
For example, Reema, a PIO settled in Australia, visits India for five months (about 150 days) in every financial year to look after her family. Reema, till FY20, was not considered a resident since she stayed in India for less than 182 days in each year.
The Finance Act, 2020 after amendments (applicable from FY21) has tightened the conditions somewhat for Indian citizens or PIOs visiting India, but only for those whose income from Indian sources exceeds ₹15 lakh during the financial year.
Earlier, the Budget had proposed this change for all Indian citizens or PIOs visiting India.
So, from FY21, such an individual (with Indian income of over ₹15 lakh) will be considered a resident only if she meets either of the two conditions:
1) She stays in India for at least 182 days in a financial year
OR
2) a) She stays in India for at least 120 days in a financial year and b) her stay in in India in the preceding four financial years is at least 365 days.
Thus, Reema, in the above example, will continue to be a non-resident if her income from Indian sources is only up to ₹15 lakh.
But if her income from Indian sources is more than ₹15 lakh, she will be considered a resident from FY21 onwards if she continues to visit India for five months every year, like in the earlier years. That’s because she will satisfy the second condition above, as she would have stayed in India for at least 120 days in the financial year, and also at least 365 days in the preceding four financial years.
If Reema does not want to be categorised as a resident, she will have to restrict her stay in India to less than 120 days (about four months) from FY21 instead of the limit of less than 182 days (about six months) until FY20.
Further, the Finance Act, 2020 has made some ‘stateless persons’ — those who do not qualify as residents or domiciled in any country/tax jurisdiction — deemed residents of India.
As per the new provision, a citizen of India who is a stateless person and having total income in India exceeding ₹15 lakh during a financial year will be deemed to be a resident in India in that year. This residential status comes into play irrespective of the individual’s period of stay in India.
For instance, say Salman, a citizen of India, has been working in a country, where there is no imposition of income tax on individuals under local tax laws.
From FY21, he will be considered a deemed resident in India if his income from India in the financial year is more than ₹15 lakh, even if he does not visit India for a single day in the year.
Not ordinarily resident (NOR)
Now, even if one qualifies as a resident, it is not that foreign income is always chargeable to tax in India.
All income (Indian and foreign) will be taxed in the hands of an individual only if she is an ROR.
The government has not included those for whom residential status conditions were tightened above, as per the Finance Act, under the category of ROR. Such persons qualify as RNOR as per the Finance Act.
So, an Indian citizen or a PIO visiting India for a stay of 120 days or more but less than 182 days is considered an RNOR. Also, an Indian citizen who is a stateless person and is deemed a resident in India is considered an RNOR. Besides, in both these cases, the change is applicable only if the income from India exceeds₹15 lakh in the year.
Hence, Reema and Salman, in the above examples, will be RNOR from FY21. They are not required to satisfy other conditions laid out in the Income Tax Act to become RNOR.
In other cases, apart from the above two categories of persons, the rules to qualify as an RNOR have not changed. The Budget had proposed changes, but the Finance Act amendments have reverted to the original position. So, a resident individual, in other cases, will be considered RNOR in a financial year, if she satisfies either of the following two conditions. One, if she is a non-resident in India in nine out of the 10 previous years preceding that financial year. Two, if she has been in India for a maximum of 729 days during the seven years preceding that financial year.
If an NR becomes an RNOR
When an NR becomes an RNOR due to the changes introduced by the Finance Act, income earned or accrued in India continue to be taxable in India as earlier.
However, income earned abroad, from a business controlled from India or a profession set up in India, which was earlier not taxed in India (due to NR status) would now become taxable for such persons as they will be considered RNORs.
Thus, this Finance Act change will impact such persons only if they have a business/profession set-up or controlled from India from which income is earned abroad.
Shailesh Kumar, Director, Nangia Andersen Consulting, clarifies that for the calculation of the threshold of ₹15-lakh income from Indian sources, all incomes earned/accrued or arisen in India have to be included, and not just the income earned abroad from a business/profession controlled or set up from India.
Seafarers’ shipping income
Many Indian seafarers, including those working on foreign ships, enjoyed NR status under the Income Tax Act. This has helped them avoid their foreign shipping income becoming chargeable to tax in India.
But the Budget 2020 proposals, which recommended a higher number of days stay abroad to be eligible as a non-resident, caused concern among shippers that they might lose the beneficial status.
Also, the introduction of deemed residency provision in the Budget for an Indian citizen earning income abroad but not liable to tax in any other country or territory, added fuel to the fire. That’s because, unlike land-based jobs, seafarers are a floating population, and often are not resident in any country for tax purposes.
Thankfully, as per the amendments brought in by the Finance Act, 2020, the taxability of seafarers’ shipping income hasnow remains the same as before, though the residential status might now change from NR to RNOR for some seafarers.
The new limit of up to 120 days’ stay in India, applicable for Indian citizens or PIOs visiting India and whose income from India exceeds ₹15 lakh during the financial year (as explained above), will also be applicable for seafarers who visit India.
Further, the new deemed residency provision for stateless persons will also be relevant for seafarers (when Indian income is more than ₹15 lakh), whose income is not taxed anywhere else.
Note that shipping income earned outside India or received in the NRE account (Indian rupee-denominated account) in India is considered to be foreign income and will not form part of the ₹15-lakh limit calculation.
In effect, due to the changes brought about by the Finance Act, some of the seafarers, whose Indian income exceeds ₹15 lakh, may lose the residential status of NR.
Even so, their foreign shipping income will not be taxable in India, even if they are categorised as residents. That’s because, as per the Finance Act 2020, they will be categorised as RNORs and not RORs.
The benefit of the RNOR status is that foreign income (except that earned abroad from a business/profession controlled or set up from India) will not be taxed in India.
With inputs from Anand Kalyanaraman