In India, the residential status of an individual forms the basis on which the scope of taxability of the person’s income is determined. The residential status is determined based on the staying pattern of an individual during the relevant financial year and preceding years.
The law relating to the determination of residential status was quite settled. However, with the intention to check tax abuse, the Finance Act 2020 introduced important amendments in determining the residential status of an individual.
Typically, the residential status of any individual taxpayer in the country can either be resident and ordinarily resident (ROR), resident but not ordinarily resident (NOR) or non-resident (NR). The relationship between the residential status and the scope of taxable income is summarised in the following table:
| Residential status | Scope of taxable income |
|---|---|
| Resident and ordinarily resident | • Global income / worldwide income and mandatory reporting of global assets and liabilities |
| Not ordinarily resident | • Income received or deemed to be received in India • Income accrues or deemed to accrue in India • Income accruing outside India only if it is derived from a business controlled in or a profession set up in India |
| Non-resident | • Income received or deemed to be received in India • Income accrues or deemed to accrue in India |
The erstwhile provisions for determination of residential status are as under:
Basic conditions
The taxpayer is considered a resident in India if present in India for:
- 182 days or more during the current financial year; or
- 365 days or more in the preceding four financial years in aggregate, and for 60 days or more in the current financial year
If the aforementioned conditions are not satisfied, the taxpayer would qualify as an non-resident.
Further, the above mentioned criteria of 60 days will be substituted with 182 days for the below mentioned individuals:
- Indian citizen or person of Indian origin (PIO) coming on a visit to India
- An Indian citizen going outside India for the purpose of employment
Hence, an individual satisfying the above conditions and present for less than 182 days would qualify as a non-resident.
Additional conditions
Residents were further categorised as resident and ordinarily resident if:
- present in India for more than 729 days (in aggregate) during preceding seven financial years, and
- resident in India for two or more financial years out of the previous 10 financial years
Otherwise, the taxpayer will be considered as not ordinarily resident.
The amendments to the provisions introduced vide Finance Act, 2020 pertaining to residential status are as under:
1. Relaxations available for Indian citizen/person of Indian origin (if any of the individual, the parents or grandparents were born in undivided India) coming on visits to India
The threshold for Indian citizens or PIOs visiting India and having total income exceeding ₹ 15,00,000 (excluding foreign sourced income) has been reduced to 120 days, from 182 days. However, these individuals will now qualify as not ordinarily resident.
| Stay days in India | Residency before Finance Act, 2020 | Residency after Finance Act, 2020 |
|---|---|---|
| Less than 120 | NR | NR |
| 120 days or more to 181 days and having total income (excluding foreign sourced income[1]): INR 15 lakhs or more Less than INR 15 lakhs |
NR NR |
NOR NR |
| 182 days or more | Resident | Resident |
2. Additional deeming provision for residency
A certain category of individuals having foreign income and operating business from India escaped taxability in the country as they managed their stay in a manner that they qualified as a non-resident in India as well as the other country.
Consequently, with the intention of covering such individuals who were otherwise not liable to tax in any country by reason of their residency, a new provision has been inserted vide Finance Act 2020. Accordingly, the person satisfying the below conditions will qualify as an not ordinarily resident in India from financial year 2020-21 onwards irrespective of their stay pattern in the country:
- is a citizen of India
- has total income (excluding income from foreign sources) exceeding ₹ 15,00,000 during the year
- not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature
It is further clarified that where a person is already considered as a resident as per the basic conditions, the above deeming provision will not apply.
In view of the above, the individuals who were likely to qualify as non-residents earlier will qualify as not ordinarily residents as per the amended provisions. Exemptions that were earlier available for such non-residents may need to be revisited to check for their residential status as that would now change to not ordinarily resident, and there will now be tax implications for such individuals. It is important to note that due to the COVID-19 pandemic, Government of India has issued a circular granting concession in computation of days for determining residency for financial year 2019-20 in respect of employees who were stranded in India. However, a similar circular is yet to be issued for financial year 2020-21. Hence, the residency of individuals will have to be revisited once the same is issued and one should factor this aspect while determining residency in India for financial year 2020-21.
