NRIs and Taxation in India

More often than not, you may have found yourself ask questions or hear people ask you questions like “Am I liable to pay tax if..?” or “if I do it this way, will the liability be lesser?”  But before determining NRI Income Tax, it is fundamental to ascertain the tax applicability. The question becomes more pertinent in the case of Indians not residing in India, more commonly known as the NRIs. Residential status and income tax is closely connected. Let’s explore.

NRI taxation is primarily dependant on the period of residence. A person is regarded as an Indian resident if:

• 1. he/she has resided in India for at least 182 days (6 months) during the financial year ; or
  2. he/she has been in India for 60 days (2 months) for the year in the previous year and have lived for one whole year (365 days) in the last four years

While this is the general applicable parameter for NRI taxation, there exist an exception for Indians working as crew member on an Indian ship. In such circumstances the sixty days stated in the second principle above shall be read as one hundred and eighty two days. 

The Finance Act of 2020 has tweaked the requirements of residency status income tax. The Finance Act of 2020 has lowered the requirement of 180 days to 120 days for individuals who’ve earned IRN 15,00,000 or more as taxable income. This would mean that NRIs to ensure to pay close attention not only to their period of residency of India but also to the quantum of their income generated while residing in India. 

The Finance Act of 2020 gives to alternate principles of residency status of income tax. An NRI is taxed in India if:

1. He/she resides in India for 120 days and earns INR 15,00,000 or more; or
2. He/she resides in India for 182 days and earns less than 15,00,000. 

The necessary collarary arising out of the Finance Act of 2020 would be that NRIs can avoid taxation in India if they reside for less than 182 days in India and earn less than INR 15,00,000. This makes it clear that the residential status of an individual has a bearing on the income tax liability.

NRI categorization:

The question of tax applicability on NRIs does not end at the meeting the thresholds discussed above. The answer leads to the next question of which category? If an individual qualifies for taxation in India on account of meeting any of the above thresholds, the individual would next to categorized either as a Ordinary Resident (ROR) or a Resident but Not Ordinary Resident (RNOR)

The above categorization is dependant on the fulfilment of certain criteria. For the categorization of ROR, both of the following criterias should be fulfilled:

1. an individual who has been a non-resident in India in 9 out of 10 previous financial years preceding that year; and
2. he has not been in India for a period exceeding 729 days during the 7 previous years preceding that year been in India.

A person shall qualify as an RNOR if either and not both of the two criterias stated below are satisfied. 

1. an individual who has been a non-resident in India in 9 out of 10 previous financial years preceding that year, or
2. he has not been in India for a period exceeding 729 days during the 7 previous years preceding that year been in India.

With the adoption of the Finance Act of 2020, an NRI whose taxable income exceeds Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) will be treated as an RNOR. 

Taxable Incomes:

The categorization of a resident and a non-resident and further into ROR and RNOR would determine the ambit of “taxable income” i.e income that can be taxed in India.

For Non-residents:

In case of non-residents, all incomes that are (a) received in India or deemed to be received in India; (b) accrued in India or deemed to be accrued in India (any income falling under 5 heads of Income Tax Act, 1961); and (c) earned as interest on NRO account is taxable for an NRI.

For ROR:

For RORs, all incomes whether derived in India or outside are taxable in India.

For RNOR:

 In case of RNORs, incomes that are (a)  received in India or deemed to be received in India; (b) accrued in India or are deemed to be accrued in India; and (c) received outside India and accrued outside India for a business controlled from India, are all taxable in India

Filling returns for NRI income tax:

Any Individual whether Non Resident or not is required to file his return of Income in India if their income as stated above exceeds Rs. 2,50,000 (Basic Exemption Limit). The due date for filling the returns for NRI and Ordinary residents is the same ie. 31st July. 

Disclaimer: Nothing in this blogpost is intended to be a source of advertising or solicitation or provide any form of advice on law or tax or both and therefore independent legal advice must be procured. The writer is not responsible for the consequence of any action taken by the reader relying on material/information provided in this blog.