In India, the residential status of an individual determines their scope of taxability based on their residential status for a specific financial year and not citizenship. Three tax principles are followed globally, forming how an individual’s income will be taxed. They are:
- Residence Principles
- Source Principles
- Citizenship Principles
The Finance Act 2020, passed in Lok Sabha, brought some crucial amendments to determining someone’s residential status in India. It becomes even more relevant during the tax filing.
The term residential status has been defined by the Income Tax Department of India, which must not be confused with someone being a citizen of India. An individual may be an Indian citizen but become a non-resident for any particular financial year. Likewise, an overseas national may be a resident of India for a specific year. Also, it’s worth noting that income tax liabilities are different for individuals, a firm, and an organization.
In India, an individual’s residential status is divided into two categories depending on the number of days they have stayed in India:
- A resident not ordinarily resident (RNOR)
As per the income tax department of India, a person becomes a resident of India if stayed in India for:
- 182 days or more in a specific year
- Stayed in India for 60 days or more in a year or stayed for 365 days or above in four preceding years.
The above-mentioned 60-days criteria will be considered as 182 days or more for the following individuals:
- Indian citizen or person of Indian origin (PIO) visiting India
- An Indian citizen leaving India for employment
From 2020-to 21, the Indian government has reduced the period to 120 days or more for individuals whose total income is above INR15 lakh. These individuals will now qualify as not ordinarily residents.
Additionally, from FY 2020 to 2021, an Indian citizen with no tax liabilities will be deemed an Indian resident. The rule applies to individuals with more than INR 15 Lakhs (other than foreign sources) and nil tax obligations.
Resident Not Ordinarily Resident
A person will be treated as a Resident ordinarily resident (ROR) or an RNOR if they meet the following conditions:
- They are a resident in India for at least two years out of 10 years immediately preceding the relevant year; or
- Their stay in India is for 730 days or more during seven years immediately preceding the relevant year
However, with effect from FY 2021-22, the Finance Act 2020 has included two additional conditions. For employment purposes, an individual going abroad will be treated as a resident and ordinarily resident if they are present in India for 182 days or above. The condition applies to an Indian Citizen or a person of Indian origin whose total income (other than income from foreign sources) exceeds INR 15 lakhs during the previous year and has been in India for 182 days.
A resident has tax obligations in India on their foreign income and income earned in India.
NR and RNOR- An individual with NR or RNOR status has tax liabilities limited to the income they earn in India. They are not obliged to pay taxes on the income earned outside India. Also, individuals with double taxation obligations may resort to the Double Taxation Avoidance Agreement that India has signed with other countries to eliminate the burden of paying taxes twice.