Residential status of individuals in India under Income tax Act – amendment brought by Finance Act, 2020

Residential status of individuals in India under Income tax Act – amendment brought by Finance Act, 2020

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The residential status criteria for individuals under the Indian income tax Act, so far, were related to his number of days he / she physical stayed in India in a financial year.

In order to plug the loophole of stateless persons taking the disadvantage of their ‘non-resident’ status, the Government introduced an amendment in Budget 2020. The amendment stated that any citizen of India who is not liable to tax in any other country by reason of his residence or domicile, will be considered as resident in India. This new provision had nothing to do with physical stay in India. This was a great blow to those people who stayed in countries where there was no tax (famous example being, UAE), or merchant navy personnel who provide services outside India for major part of the year. Following public uproar and backlash in media, the final draft of Finance Bill passed by Lok Sabha diluted the harshness to a great extent.

So here we discuss about the amendment brought out by Finance Bill, 2020 which was approved by the Lok Sabha, also received assent from the President and is now officially a Finance Act, 2020:

  1. As per the original provisions, an individual will be considered as resident in India if :
  • He/she spends 182 days or more in India in the concerned financial Year

OR

has spent 365 days or more in the preceding 4 financial years (prior to the concerned financial year) and 60 days or more in the concerned financial year

In case of Indian citizen being a merchant navy person who leaves as a crew or any other Indian Citizen who leaves India for employment outside India or an Indian citizen or PIO, who being outside India, comes on a visit to India, the criterion of 60 days in the second test shall be substituted by 182 days. Hence, the second test is virtually not applicable in such cases.

  • Further, if he satisfies any of the above conditions, he needs to further test if he is a ‘not ordinarily resident in India’. The status of ‘not ordinarily resident is achieved if any of the following conditions are satisfied:

1.If he/she is a non-resident for 9 out of the 10 years preceding the concerned financial year or

  1. In the last 7 years preceding the concerned financial year, he/she had been in India for 729 days or less

If none of the above conditions are satisfied, he/she will become resident and ordinarily resident in India.

  1. Now, after the amendment, even if the above conditions are not satisfied, an individual can be considered as resident if all the following conditions are satisfied:
  • He is a citizen of India
  • He is not liable to tax in any other country by reason of his residence or domicile
  • His total income, other than foreign sourced income, Rs. 15 lakhs or more during the financial year

Such an individual is further categorised as ‘not ordinarily resident’. Hence, his  status will remain resident but not ordinarily resident (‘RNOR’).

Tax impact : For RNOR, only income accruing in India will be taxed. Incomes accruing outside India will not be taxable except if it is derived from business controlled or profession set up in India.

Note: The conditions mentioned in point 1 above are not substituted by the amendment. They are the primary tests and need to be examined every time. New conditions explained in point 2 are applicable to cases where conditions in point 1 are not satisfied.  This interpretation is based on the intent demonstrated by the Government. However, the way the provisions are drafted, one may even have a contrary interpretation.

Illustration:

A merchant navy personnel, having rental income of Rs. 20 lakhs during the financial year, was on board a ship in international waters for say 200 days. He stayed in India for only 135 days. If we look at the conditions of days stay (please see point 1 of this note), he will be a non-resident.

However, from FY 2020-21 onwards, one also needs to see conditions of point 2 (of this Note). Since, all the three conditions are satisfied, he will be a resident but not ordinarily resident.

  1. Amendments for visiting Indians:

Please point 1.2 above for the provisions that prevailed before amendment. It can be seen that for Indians living abroad and visiting India, the second condition of 60 days is relaxed to 182 days.

An amendment is brought here as well. A visiting Indian will be considered as ‘resident but not ordinarily resident’ if all the following conditions are satisfied:

  • He is citizen of India or person of Indian origin
  • His total income, other than foreign sourced income, more than Rs. 15 lakhs during the financial year
  • He has spent 365 days or more in the preceding 4 financial years (prior to the concerned financial year) and 120 days or more in the concerned financial year

Again this is in addition to the already existing provisions. So the conditions mentioned in point 1 needs to seen everytime.

So what will be the impact if the new amendment triggers in your case and you become resident but nor ordinarily resident in India:

  1. All the tax deduction at source (‘TDS’) provisions applicable to resident individual will now be applicable to you. This may even prove beneficial in some cases, particularly where there is sale of immovable property. The TDS rate on sale of immovable property by a non-resident is 20% plus surcharge and cess. However, the same is 1% for sale by a resident.
  2. For those non-resident individuals who intend to return back to India for good, the concession of being RNOR for the first two years of their returning back may be reduced.

Please see point 1.2 above. An individual can have a status of RNOR, if he was a non-resident in 9 out of 10 preceding years. Effectively, this status would be available for two years in most of the cases. An RNOR is not required to disclose his foreign assets and his foreign income is also not taxable.

However, if they turn out to be RNOR due to the new amendment in preceding years, the condition of being non-resident in 9 out of 10 preceding years will not be satisfied. They may become resident and ordinarily resident in the year of their return to India. In such cases, their worldwide income will be taxed.

  1. Non-residents are taxed at concessional rate for certain incomes. If you become RNOR, this concessional rate cannot be availed:
    1. Like dividends on shares are taxed at flat 20% for non-resident. Now if you become RNOR, you will be taxed at slab rates. Depending on which income bracket an individual is, this may or may not be beneficial.
    2. Capital gains on sale of unlisted shares or securities are taxed at 10% (without indexation) in the hands of non-resident. The same are taxed at 20% (with indexation) for residents.

 

  1. For long term capital gains and certain short term capital gains (on sale of listed equity shares and mutual fund units), non-residents are cannot avail benefit of basic exemption limit. However, if they now become RNOR, they will be able to get benefit of basic exemption limit. This may particularly be helpful to senior citizens. Also rebate under section 87A will be available.

 

  1. For individuals staying in countries with no income tax, say UAE, they may end up being residents of both the countries because of the local laws of both the countries. In such cases, one would have to check the tie-breaker tests in the Double Tax Avoidance Agreement every year.

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