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Income Tax for NRI and how income will be taxed in India effective from FY 2020-21 (AY 20-21)
May 16, 2020Among the global pandemic crisis and the expected economic turmoil, the Finance Bill 2020 has been passed by the Parliament with some major relaxations on March 23, 2020. At the stage of the passing of the Bill, the amendments originally proposed in the criteria determining 'residential status' in India of a person in the Finance Bill 2020 were relaxed. This change will directly impact the non-resident Indian (NRI) community. The Finance Bill 2020 has received the President's assent on March 27, 2020.
Let us have a look at the significant amendments to the criteria determining 'residential status' in the Finance Bill 2020 as passed by the Parliament.
- New rules to determine the residential status of NRIs
However, an amendment at the time of passing of the Budget provides that the reduced period of 120 days shall apply, only in cases where the total Indian income (i.e., income accruing in India) of such visiting individuals during the financial year is more than Rs 15 lakh. Accordingly, visiting NRIs whose total income (which is defined as taxable income) in India is up to Rs 15 lakh during the financial year will continue to remain NRIs if the stay does not exceed 181 days, as was the case earlier.
As such, besides monitoring the number of days present in India, the visiting Indian is also required to keep tab of his Indian taxable income. This is because once income taxable in India or taxable Indian income exceeds Rs 15 lakh, then provisions related to stay exceeding 120 days, as mentioned above will be applicable.
It may be noted that dividends distributed by Indian companies would be taxable in the hands of the shareholders and as such, would form part of the taxable income. On the other hand, since interest on FCNR and NRE deposits are exempt it will not form a part of taxable income. This amendment is effective from the FY year 2020-21, viz. April 1, 2020 to March 31, 2021.
An NRI, whose taxable income exceeds Rs 15 lakh stays in India for 120 days or more, then such an individual further needs to check whether his stay in India is 365 days or more in the immediately preceding 4 years. Let us assume a non-resident visits India in FY 2020-21 (having taxable income in the financial year exceeding Rs 15 lakh) and stays for say 130 days. Further, during the preceding 4 financial years (i.e., FY2019-20, 2018-19, 2017-18, 2016-17) he was in India for a total of 365 days.
In such a case, he will be treated as a resident individual for income tax purposes. While this may ring alarm bells for many NRIs, but in relief they will be treated as "Resident but Not Ordinarily Resident (RNOR)". This would be a relief as their foreign income (i.e., income accrued outside India) shall not be taxable in India.
It may be noted that dividends distributed by Indian companies would be taxable in the hands of the shareholders and as such, would form part of the taxable income. On the other hand, since interest on FCNR and NRE deposits are exempt it will not form a part of taxable income. This amendment is effective from the FY year 2020-21, viz. April 1, 2020 to March 31, 2021.
An NRI, whose taxable income exceeds Rs 15 lakh stays in India for 120 days or more, then such an individual further needs to check whether his stay in India is 365 days or more in the immediately preceding 4 years. Let us assume a non-resident visits India in FY 2020-21 (having taxable income in the financial year exceeding Rs 15 lakh) and stays for say 130 days. Further, during the preceding 4 financial years (i.e., FY2019-20, 2018-19, 2017-18, 2016-17) he was in India for a total of 365 days.
In such a case, he will be treated as a resident individual for income tax purposes. While this may ring alarm bells for many NRIs, but in relief they will be treated as "Resident but Not Ordinarily Resident (RNOR)". This would be a relief as their foreign income (i.e., income accrued outside India) shall not be taxable in India.
RNOR Criteria liberalised
Till and in FY 2019-20, an individual was treated as 'Resident but Not Ordinarily Resident' (RNOR) if any of the following conditions are satisfied:
(a) an individual who has been a non-resident in India in 9 out of 10 previous financial years preceding that year, or
(b) has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less.
The above 2 additional conditions have been retained as per the current law. Further, we have noted above that due to the amendment made, an individual whose taxable income exceeds Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual will still be treated as "Resident but Not Ordinarily Resident (RNOR)".
In the case of RNOR individuals, the foreign income (i.e., income accrued outside India) shall not be taxable in India.
Foreign sources mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
As proposed in Budget 2020, an individual being a citizen of India shall be deemed to be a resident in India in any previous financial 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. However, this provision will be applicable only if his total taxable Indian income during the financial year is more than Rs 15 lakh as per the amended Finance Bill.
(a) an individual who has been a non-resident in India in 9 out of 10 previous financial years preceding that year, or
(b) has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less.
The above 2 additional conditions have been retained as per the current law. Further, we have noted above that due to the amendment made, an individual whose taxable income exceeds Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual will still be treated as "Resident but Not Ordinarily Resident (RNOR)".
In the case of RNOR individuals, the foreign income (i.e., income accrued outside India) shall not be taxable in India.
Foreign sources mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
- Indian Citizens and Global Non-Resident -Deemed Residential Status Relaxed based on Indian income criteria & RNOR Widened
As proposed in Budget 2020, an individual being a citizen of India shall be deemed to be a resident in India in any previous financial 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. However, this provision will be applicable only if his total taxable Indian income during the financial year is more than Rs 15 lakh as per the amended Finance Bill.
Till FY 2019-20, there was no such provision in the Income-tax Act. This provision of determining residential status for a stateless individual shall not be applicable for OCI (Overseas Citizen of India) cardholders or foreign citizens
A separate clarification was previously issued, which provided that this provision shall not be applicable to "bonafide workers" working outside India. It was clarified vide a CBDT press release, dated February 2, 2020, that in case of an Indian citizen who becomes a deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.
This has also been clarified by way of an amendment in section 6, wherein Income from foreign sources has been specifically defined and the criteria for RNOR have been widened to include such persons who are deemed to be resident in India due to the above provision. Hence, foreign income is not taxed in such cases and the reporting of foreign assets by such Indian citizens, who are considered to RNOR, shall not be applicable.
In case of NRIs who are residing in UAE, Saudi and certain countries (which do not levy personal income tax) and have taxable Indian income of more than Rs. 15 lakhs, a question arises whether they can be treated as "liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature"
In the context of the Double Tax Avoidance Agreement with the UAE, the Indian judicial and advance ruling authorities have taken a view that " liable to tax" need not be equated with "payment of tax". As per Indian UAE Tax Treaty and the Protocol, a person who stays in UAE for more than 182 days in a year is eligible to get a " tax residency certificate" and is treated as a tax resident. In view of the above and the clarification issued above, such persons would not get covered by the above-deemed resident.
A separate clarification was previously issued, which provided that this provision shall not be applicable to "bonafide workers" working outside India. It was clarified vide a CBDT press release, dated February 2, 2020, that in case of an Indian citizen who becomes a deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.
This has also been clarified by way of an amendment in section 6, wherein Income from foreign sources has been specifically defined and the criteria for RNOR have been widened to include such persons who are deemed to be resident in India due to the above provision. Hence, foreign income is not taxed in such cases and the reporting of foreign assets by such Indian citizens, who are considered to RNOR, shall not be applicable.
In case of NRIs who are residing in UAE, Saudi and certain countries (which do not levy personal income tax) and have taxable Indian income of more than Rs. 15 lakhs, a question arises whether they can be treated as "liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature"
In the context of the Double Tax Avoidance Agreement with the UAE, the Indian judicial and advance ruling authorities have taken a view that " liable to tax" need not be equated with "payment of tax". As per Indian UAE Tax Treaty and the Protocol, a person who stays in UAE for more than 182 days in a year is eligible to get a " tax residency certificate" and is treated as a tax resident. In view of the above and the clarification issued above, such persons would not get covered by the above-deemed resident.
All the above amendments would be effective from the financial year beginning April 1, 2020
1ROR - Resident and Ordinarily Resident,
RNOR - Resident and Not Ordinarily Resident and
NR - Non-Resident
Way forward
RNOR - Resident and Not Ordinarily Resident and
NR - Non-Resident
Way forward
NRIs need to carefully consider the total Indian income and plan their travel itinerary based on the amendment for their period of stay. The positive aspect is that in most cases, NRIs can continue to visit India for up to 181 days in the financial year and even in other cases where the period of stay in India is 120 days (and also for 365 days or more in preceding 4 years) or more or in case of Indian citizens who are not tax residents of any other country and are deemed to be tax residents of India, the status would be RNOR and hence foreign income shall not be taxable in India.
ITR Form
Generally,a NRI has to file ITR-2 but till the date of writing this article (16-05-2020) for FY 2019-2020 (AY 2020-2021), the government has notified ITR-1 and ITR 4 only.
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