Recently, due to the ongoing COVID-19 pandemic, many NRIs got stranded in India, which triggered concerns about their residential status in the country. It is imperative to check the residential status of a person for every financial year because this is one of the factors that determine the taxability of income. The term "residential status" is defined under the Income Tax Act of India and has no relation to a person’s citizenship. An individual might be an Indian citizen but still be a non-resident in India for a particular financial year. Similarly, a foreign citizen may become a resident of India for Income Tax purposes in a specific year.

Types of Residential Status

The taxability of an individual varies based on their residential status. Before understanding tax implications, it is essential to know how a taxpayer is classified as a Resident and Ordinarily Resident (ROR), a Resident but Not Ordinarily Resident (RNOR), or a Non-Resident (NR).

Who is a Resident in India?

As per Section 6(1) of the Income Tax Act, an individual is considered a resident in India for a particular financial year if they satisfy either of the following conditions:

1. The individual has been in India for at least 182 days during the previous year, or
2. The individual has been in India for at least 365 days in the four financial years preceding the previous year and for a minimum of 60 days in the relevant previous year.

Who is a Non-Resident in India?

If an individual does not satisfy either of the above conditions, they are considered a non-resident for that financial year.

Exceptions

Certain individuals will be considered residents in India only if their stay in the relevant previous year is 182 days or more:

1. Indian citizens who leave India as crew members of an Indian ship or for employment purposes abroad.
2. Indian citizens or persons of Indian origin residing outside India who visit India during the relevant previous year.

If such individuals have a total income exceeding Rs. 15 lakhs (excluding foreign income), they will be considered residents in India if:

• Their stay in India during the relevant previous year is at least 182 days, or
• They have been in India for at least 365 days in the four preceding years and for at least 120 days in the relevant previous year.

Deemed Resident (Section 6(1A))

An Indian citizen earning more than Rs. 15 lakhs (excluding foreign income) in a financial year will be deemed a resident in India if they are not taxable in any other country due to residence, domicile, or similar criteria, even if they do not meet the conditions of Section 6(1).

Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR)

A resident individual can be further classified as a Resident and Ordinarily Resident (ROR) or a Resident but Not Ordinarily Resident (RNOR). As per Section 6(6), a person is considered RNOR if they satisfy any of the following conditions:

1. They were a non-resident in India for 9 out of the 10 previous years preceding the relevant financial year.
2. Their stay in India during the last 7 years is 729 days or less.
3. They are an Indian citizen or a person of Indian origin with total income exceeding Rs. 15 lakhs (excluding foreign income) and have been in India for at least 120 days but less than 182 days during the relevant financial year.
4. They are an Indian citizen deemed a resident under Section 6(1A).

If an individual does not meet any of the above conditions, they are classified as a Resident and Ordinarily Resident (ROR).

Important Points to Note

• The number of days stayed in India does not have to be continuous or at a fixed place.
• Both the date of arrival and departure are counted in the total stay in India.
• Residential status is determined separately for each financial year.
• Income from foreign sources includes income accrued outside India, except that from a business controlled or a profession set up in India.

Examples of Residential Status

Example 1: Mr. Mohan, a Belgian citizen, visited India for the first time in the financial year 2016-17. His stays in India for the next five years were:

• 2016-17: 54 days
• 2017-18: 61 days
• 2018-19: 93 days
• 2019-20: 146 days
• 2020-21: 68 days

Since his total stay in the preceding four years was 354 days (less than 365 days) and his stay in 2020-21 was only 68 days (less than 182 days), he qualifies as a non-resident for the assessment year 2021-22.

Example 2: Mr. John, a non-resident since 1990, returned to India permanently on 1st April 2019. Since he stayed in India for over 182 days in 2020-21, he qualifies as a resident. However, as he was a non-resident in 9 out of the last 10 years and stayed for only 366 days in the previous 7 years, he is classified as Resident but Not Ordinarily Resident (RNOR) for A.Y. 2021-22.

Scope of Total Income

As per Section 5, an individual’s tax liability depends on their residential status, the place of income accrual or receipt, and the time of accrual or receipt.

• A resident (ROR) is taxed on global income.
• A non-resident (NR) and RNOR are taxed only on Indian income, except in cases where the RNOR earns income from a business controlled in India.
   

Taxation Considerations for NRIs

If an NRI becomes a resident in India, their global income is taxable in India, and they must file a Non-Resident Indian Income Tax return.

Key definitions:

• Income accrued: The right to receive income.
• Income received/deemed received in India: The first occasion when money is under the recipient’s control.
• Income deemed to accrue in India: Income earned through business connections, property, or services in India.

Double Taxation Avoidance Agreement (DTAA)

In cases where the same income is taxed in India and another country, NRIs can benefit from DTAA (Double Taxation Avoidance Agreement) to avoid paying tax twice.

Tax Planning for NRIs

NRIs should plan their visits to India carefully to maintain their non-resident status, as non-residents face the least tax burden. It is crucial to determine residential status accurately, as it directly impacts tax obligations.

For expert assistance in determining residential status, tax filing, or DTAA benefits, you can reach out to [email protected]. Our team of professionals can guide you on NRI taxation, double taxation, and other tax-related matte