The residential status of taxpayers plays a key role in determining the scope of taxable income (Indian Income / Foreign Income) for a financial year in India and there by the tax payable.
The residential status of an individual is based on the duration for which he/she is present in India. There are 3 types of Residential status.
- Resident & Ordinarily Resident (ROR)
- Resident But not Ordinarily Resident (RNOR)
- Non –Resident Indian (NRI)
According to a Ministry of External Affairs report, there are around 31 million NRIs and PIOs (Person of Indian Origin) residing outside India as of December 2018.
Budget 2020 has proposed two significant changes with respect to calculation of NRI Residential Status and Taxability of Income of NRI.
In this post, let us understand – What the new NRI Residency Status rules proposed in Budget 2020? What are the latest NRI Taxation rules in India for FY 2020-21 (AY 2021-22)? How to determine NRI Status as per the new rules in India?
Latest NRI Residential Status & Income Taxation Rules | Budget 2020-21
Budget 2020 has proposed two new rules with respect to NRIs residency status and Taxation, which are as below;
- Firstly, to be categorized as a non-resident, an Indian now has to stay abroad for minimum 245 days a year, against 182 previously (FY 2019-20). In other words, an Indian national, to claim the non-resident status, can’t stay in India for 120 days or more in a financial year.
- Secondly, a non-resident Indian, who is not taxed in the foreign country, will become taxable in India. The government said it is introducing this provision to prevent tax abuse.
Let us now understand these two amendments in detail.
1) Changes with respect to Residency Status of NRIs for FY 2020-21
As per the Budget 2020, an individual has to meet either of the below (new) eligibility criteria to become Non-Resident India;
- He/She is in India for less than 120 days during the financial year. That means, if you stay abroad for minimum 245 days in previous year (financial year) then your residential status becomes NRI for taxation purposes. (OR)
- If you have stayed in India for less than 365 days during the 4 years preceding the previous financial year AND less than 60 days in the previous financial year.
Example 1 : If you stay for say 260 days abroad for FY 2020-21, then for AY 2021-22 your residential status would be NRI.
Example 2 : If you stay for say 125 days in India then you need to meet the second condition to become NRI. That is, you should have stayed for less than 60 days in FY 2020-21 AND less than 365 days during 4 financial years before the FY 2020-21 in India.
Latest NRI Status Online Calculator for FY 2020-21 / AY 2021-22
You can use the below online residential status check calculator, which is as per the Budget 2020 proposals..
Kindly keep the below points in mind while entering the no of days in the above calculator:
- Previous Year is period of 12 months from 1st April to 31st March. Number of days stay in India is to be counted during this period.
- Both the Day of Arrival into India and the Day of Departure from India are counted as the days of stay in India (i.e. 2 days stay in India).
- Dates stamped on Passport are normally considered as proof of dates of departure from and arrival in India.
- Keep track of no. of days in India from year to year and check the same before making the next trip to India. It is advisable to maintain a chart for the number of days stay in the current and in the preceding seven (7) previous years.
2) Budget (2020) Amendments with respect to Taxability of NRI Income for AY 2021-22
Below is the proposed amendment in Budget 2020 which will affect taxability of NRI Income;
“An individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature”
This proposed new rule has created quite a confusion among the NRI fraternity.
Wrong Interpretation of the new rule:
It states that If any person who is citizen of India and not liable to tax in any other country or territory by any specified reason then he/she will be treated as resident of India despite of his residency status NRI or whatever. It is important to note that once he becomes resident under this clause his/her global income will be taxed in India.
Example : Let’s say you are an NRI employed in UAE, your income earned in UAE is tax-free and you are not liable to pay any taxes there. Now, as per this rule, as you are not paying taxes in UAE, your global income will be taxable in India.
Correct Interpretation of the new rule :
The CBDT/Govt has been quick enough to clarify on this confusing proposal.
“Genuine NRIs need not worry, because the aim of the legislature is to catch people who are evading the tax net. What matters is the tax incidence and not the tax rate in a foreign country,”
Since the tax exemption on salary in countries like say, UAE, is conferred by the law of that country, it will not be taxable in India.
So, whose NRIs’ income will be taxed as per the new rule? What happens to Indian citizens who live in countries where there is no tax on individual incomes?
Scenario 1: An HNI businessmen whose Residential status is NRI, resides in different countries in a Financial Year, thus making him a non-tax resident of any country. So, his global income is neither taxable in those countries nor in India. To remove this ‘tax arbitrage’ (loophole), the Govt now wants to tax such NRIs’ global income. (This new rule can have a negative impact on ‘Seafarers’ profession.)
Scenario 2 : An HNI businessmen whose Residential Status is NRI, resides and does business in Dubai, his global income is tax-free in Dubai and such income is also not taxable in India (he/she will not be deemed to be resident in India just because he/she is not liable to be taxed in Dubai).
Note that an NRI’s Indian income continues to be taxable in India. This income can be – interest on your bank fixed deposits, rents received from property, profit/loss from shares etc.,
Also, there can be situations where in your income may be liable to tax in foreign country as well as in India. To avoid such double taxation or to get relief from double tax, you need to check if India has any tax treaty with that nation or not. The concept of ‘Double Taxation Avoidance Agreement’ comes into picture.
Continue reading :
- How NRIs can save on Tax in India? | NRI Tax Saving options
- Latest NRI Gift Tax Rules 2019-2020 | Gifts to NRIs can be Taxable now!
- Should NRIs buy Health Insurance in India?
- New Income Tax Slab Rates Vs Old Tax Regime | Which one is better?
(This post is intended for general information purposes only. We strongly recommend you to consult an expert for your taxation/legal matters.) (Post first published on : 07-February-2020)