Non Resident Indian: Definition, Taxability and Related Provisions as Amended by Finance Act 2020

Are you a Non-Resident Indian looking to move back to India for good very soon or planning to come in years to come? It is of utmost importance to have a properly planned ground ready before actually, you land up back to your mother country considering especially the challenges concerning income tax liability that may arise due to ignorance or wrong calculation.  The compliance procedures, be it mandatory or voluntary have been done or not is to be checked. If done, the proper set of documents required have been compiled and recorded.

The most important one is to have your income tax returns filed regularly. So that your file is built up and records are made. For Financial Year 2018-19 due date has been extended till 30th June, 2020, and for Financial Year 2019-20 which is recently completed on 31st March 2020, is primarily 31st July, 2020. To be noted the due date is most likely going to extend for sure looking at the situation due to COVID pandemic and also Income Tax forms are not yet notified.

To proceed, the first and base step is to assess your residential status based on your number of days stayed in India and outside India in preceding previous financial year and other previous years is to be seen. Primarily 3 concepts need to be understood i.e. Resident, Non-Resident, and Resident but not ordinary resident, also referred to as RNOR. Technically, the Definition of NRI is defined under 2 different laws that are to be read together, which is as per the Income Tax Act, 1961 and Foreign Exchange Management Act, 1999.

In this article we will discuss definitions under Indian Income Tax Laws. FEMA would be covered in a separate article.

Definition of NRI as Indian Income Tax Act, 1961 is recently amended in Finance Act 2020 i.e. through an amendment proposed at time Budget 2020 was presented in the house on 1st February, 2020 by the Hon. Finance Minister and later passed by the parliament to become a Law. The determination of Income Tax liability in India and most of the counties worldwide is based on residency status. Therefore it’s important to be careful and be diligent enough to calculate the number of days before even planning to relocate.

Section 2(30) of the Income Tax Act, which defines reads as:

“Non-resident” means a person who is not a “resident”, and for the purposes of sections 92, 93 and 168, includes a person who is not ordinarily resident within the meaning of clause (6) of section 6;

So the definition has been put the other way to understand, NRI means a person who is not a resident. That is in negative words. So let’s see who is Resident as per the Act, and any person who is not a resident will be either Non-Resident or RNOR.

As per the provisions of the Income-tax Act 1961 till 31.03.2020, an individual is treated as Resident of India, if he triggers any of the following conditions:

(a)    Stay in India is at least 182 days during the FY; or
(b)   Stay in India is at least 60 days during the FY and at least 365 days during immediately 4 preceding FYs.

However, a relaxation is there to an Indian citizen or a Person of Indian Origin (PIO) who comes on a visit to India by providing an extended period of 182 days instead of 60 days as mentioned in point (b) above.

An individual who becomes resident as per the above section, will attain the status of resident and ordinarily resident (ROR) in India, if satisfies both these conditions cumulatively:
(a)  who has been a resident in India in at least 2 out of 10  financial years immediately preceding the current financial year, and
(b) has stayed in India for a period of, or periods amounting in all to 730 days or more during the preceding 7 previous years.

If a resident doesn’t fulfill both the above-mentioned conditions, he will become Resident but not ordinarily resident i.e. R-NOR

Now, as amended by Finance Act 2020,  Indian citizens or PIOs having total income, other than income from foreign sources, exceeding Rs 15 Lakhs during the Financial Year, and who visits India for a period of more than 120 days, will directly attain the status of R-NOR for Income tax.

(Explanation: If a person who was earlier having NR status and was capable of relieving his Indian Income from tax liability by visiting India for less than 182 days, he will now attain the status of R-NOR if he visits India for 120 days or more as well as has Income of more than 15 Lakhs from Indian sources, his total Indian Income will become taxable in India.

So, the change has been effected to catch those individuals who were carrying out substantial economic activities from India but were able to manage their period of stay in India to be less than 182 days to remain a Non-Resident (NR) in India.

In short, to retain the status of RNOR and have no tax liability arising, Indians need to restrict their visits to India for a period not exceeding 119 days if their income is exceeding Rs. 15 Lakhs. If income is exceeding Rs 15 Lakhs, restrict the number of days to 119 or less.

One more important amendment is done by introducing the concept of “Deemed Residency” for all Indian citizens who used to enjoy the status of NR in India by shifting their stay in low or no-tax jurisdiction. This is done to provide that all Individual being a citizen of India, shall be deemed to be a “Resident” in India in any previous financial year, if

a) He is not liable to tax in any other country or territory because of his domicile or residence or any other criteria of similar nature and

b) If his total taxable Indian income during the financial year is more than Rs. 15 Lakhs.

The residential status of an Indian citizen who becomes deemed Resident by virtue of above provision shall be of RNOR. A suitable clarification was already provided by CBDT that this provision shall not apply to “bonafide workers” working outside India, like those working in UAE, and few other countries.

As a result of the above changes in the residency provisions, it becomes important for all Indian citizens and PIOs to carefully re-evaluate their residential status and assess their tax liability in India accordingly. Having said so, individuals having income in India not exceeding Rs 15 Lakhs are not affected by these amendments and should not be bothered.

To conclude, the Definition of NRI is now to be closely observed every year while preparing to file tax returns and also for individuals looking to relocate or move back to India.

All the articles written before passing of Finance Act, 2020 are now to be ignored. It has been a matter of fact one should be cautious reading articles knowing that laws in India are likely to be changed very often, so applicability is to be seen on a date basis. The role of professionals having expertise in the subject comes into the picture at these moments to educate and update the changes happening and perform with excellence. Since a mistake here and there, it can cost a big setback.

The next article would be on the Taxability of End of Service Benefits i.e Post  Retirement Benefits received after retirement and/or moving back to India. Stay Tuned.

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