One of the key changes in the Finance Act was the amendment in provisions of residential status of an individual in India, effective from Financial Year (FY) 2020-21.
By Rajeshree Sabnavis
The Finance Act, 2020 (FA) has introduced several changes which kind of have an impact on the life of a common man clearly since tax at the end of the day does determine the actual income in hand for onward spending. While changes were introduced across sections of the business fraternity, one of the key changes was the amendment in provisions of residential status of an individual in India, effective from Financial Year (FY) 2020-21. The residential status of an individual is a key factor to determine his or her income tax liability in India.
A quick snapshot of the amendments before we really talk about the issue is presented below:
1. Concessional stay period of 182 days reduced to 120 days
As per the current provisions of the Income-tax Act 1961 (Act), an individual is qualified as Resident of India, if he satisfies either of the following conditions:
(i) Stay in India is at least 182 days during the FY; or
(ii) Stay in India is at least 60 days during the FY and at least 365 days during 4 preceding FYs.
The relaxation is provided to an Indian citizen or a Person of Indian Origin (PIO) who, being outside India, comes on a visit to India by providing an extended period of 182 days instead of 60 days as mentioned in point (ii) above. The FA has reduced the said extended period of 182 days to 120 days for those Indian citizens or PIOs having total income, other than income from foreign sources exceeding Rs 15 lakhs during the FY.
This is an anti-abusive provision as it is noticed that many individuals, who are actually carrying out substantial economic activities from India, manage their period of stay in India to be less than 182 days to remain a Non-Resident (NR) in India.
2. Not Ordinarily Resident (NOR)
To the existing condition laid down under the Act , for an individual to qualify as a NOR, additional condition has been inserted under the FA which states that an Indian citizen or a PIO, who, being outside India, comes on a visit to India in any FY shall be considered NOR if –
(i) His total income, other than the income from foreign sources, exceeds Rs 15 lakhs; and
(ii) His stay in India is 120 days or more but less than 182 days.
3. Introduction of provision of ‘Deemed Residency’
As per the current provisions of the Act, an individual’s residential status in India is characterised as Ordinary Resident (OR) or NOR, based on his number of days stay in India. Hence, some Indian citizens used to shift their stay in low / no tax jurisdiction to enjoy the status of NR in India. To prevent such abuse, FA has introduced the provision of ‘Deemed Residency’.
As per this provision, Indian citizen shall be deemed to be Resident of India (ROI), if –
(i) His total income, other than income from foreign sources, exceeds Rs 15 lakhs during the FY; and
(ii) 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.
The residential status of an Indian citizen who is deemed Resident of India shall be ‘Not Ordinarily Resident (NOR)’. It is important to note here that while an Ordinary Resident is taxable in India on his global income as against NOR whose income from outside India is taxable in India only if it is derived from a business controlled in or a profession set up in India. This in fact requires for every individual who was erstwhile taking the benefit of these provisions of the Act are now in a way coming within the purview of the Indian tax net.
Pursuant to the above changes introduced in the residency provisions, it is important for Indian citizens and PIOs to carefully evaluate their residential status and assess their tax liability in India accordingly.
(The author is Founder & Mansi Parekh, Senior Consultant, Rajeshree Sabnavis & Associates)