Why all the hoopla about Residential Status?

The most underrated concept of the Income Tax is the residential status of an individual. The residential status determines the income chargeable to tax making it particularly relevant during the tax filing season.

The taxability of an individual is determined by their residential status in India for any particular financial year. The residential status should not be confused with the citizenship status of the individual. An individual may be citizen of India but may end up being a non-resident for any given year. Similarly, a foreign individual, who is not a citizen of India, owing to his stay in India and other prescribed conditions ends up being a resident in India.

It should be noted that residential status of an individual is checked for every financial year as for a given financial year, the individual may be a resident but for the next may become a non-resident.

Amendments

Two set of amendments took place under this section, one set of amendments being introduced by The Finance Bill, 2020 on 1 February 2020, where;

Residential Status – determined by the number of days of his stay in India

The exception provided in Explanation 1(b) to section 6(1), for individuals who are Indian citizens and persons of India origin visiting India in that year has been decreased to 120 days from existing 182 days.

Residential Status – Provision of ‘Deemed Resident’

A new clause (1A) was inserted to section 6. It provides that notwithstanding anything contained in clause (1), 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.

That is to say, an Indian citizen shall be deemed to be an Indian tax resident if he is not liable to tax in any other country by reason of residence or domicile or criteria of similar nature i.e. in case he is a ‘stateless person’, irrespective of the days spent in India.

Deemed resident to be treated as ‘Not Ordinarily Resident’

The existing conditions under section 6(6)(a) and (b) have been substituted, for treating an individual or an HUF to be ‘not ordinarily resident’ in India in a previous year.

It is provided that if the individual or the manager of the HUF has been a non-resident in India in seven out of ten previous years preceding that year, then the individual or the HUF would be treated as ‘not ordinarily resident’.

That is to say, the condition of being a non-resident for 9 out of 10 previous preceding years was proposed to be removed.

The second and final set of amendment (applicable from AY 2021-22) was passed by The Finance Act, 2020 on 27 March 2020, where;

Residential Status – determined by the number of days of his stay in India

The exception provided in Explanation 1(b) to section 6(1), for Indian citizens and persons of India origin visiting India in that year has been decreased to 120 days from 182 days, only in cases where the total income of such visiting individuals during the financial year from sources, other than foreign sources, exceeds INR 15 lakhs.

The term ‘income from foreign sources’ has been defined to mean income which accrues or arises outside India except income derived from a business controlled in or a profession set up in India.

Residential Status – Provision of ‘Deemed Resident’ applicable if total income exceeds INR 15 lakhs

The amendment to clause (1A), introduced by the Finance Bill, 2020 created an unrest among the Non-Resident Indian (NRI) which included Indians employed in other countries or those carrying out their businesses outside India and are not subject to tax in their respective countries as per the local/domestic laws of their countries, where they were not liable to pay tax in India on the income they have earned outside India.

Section (1A) was further amended where Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that 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

Accordingly, all Indian citizens who are not subject to tax in any other jurisdiction, i.e. any jurisdiction outside India, will not be considered as Indian tax resident subject to their total income, during the financial year from sources, other than foreign sources, does not exceeds INR 15 lakhs.

Deemed resident to be treated as ‘Not Ordinarily Resident’

The relaxation in the conditions for an individual to be a ‘Resident but Not Ordinarily Resident (RNOR)’ under the Finance Bill have been removed through the Finance Act, 2020.

That is to say, that the condition of being a non-resident for 9 out of 10 previous preceding years was proposed to be removed, but as per the amendments in the Finance Act, remains intact and shall not be removed.

Rather, The Finance Act, 2020, has now added two new conditions / categories for the recognition of an individual to be RNOR under section 6(6)

Out of the two new conditions, one includes those Indian citizens / persons of Indian origin who fulfil the conditions mentioned above in Explanation 1(b) to section 6(1), that is to say, those Indian citizens / Persons of Indian (POI) origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year and have been in India for a period of more than 120 days but less than 182 days; and

Indian citizens falling under the conditions mentioned above in Explanation (1A) to section 6(1) and deemed to be resident in India.

Implications of new Amendments

Where the individual citizen of India or POI

(a) visits India for more than 120 days in the previous year and less than 182 days; or

(b) where the citizen of India resides in any other country or territory and is not liable to tax by reason of his domicile or residence or any other criteria of similar nature;

and in both cases satisfies the total income criteria (>15 lacs) in India, then he would be regarded as RNOR

Scope of Total Income A brief of what section 5 dictates to be considered in the total income and its taxability in India is available here.

Implications of new Amendments

• Section 5 deals with scope of total income, where section 5(1) deals with scope of total income in case of a person who is resident and section 5(2) deals with scope of total income of non-resident. Section 5 entails the residential status of the person to be known. However, section 6(1A) prescribes total income as one of the criteria to deem a person as resident of India and where the residential status is not known, section 5 cannot be invoked. The residential status is a jurisdictional fact for the purpose of section 5. If the residential status is not determined beforehand, there cannot be application of section 5. Similarly, unless 'total income' is determined in terms of section 5, section 6(1A) cannot be applied as the application of section 6(1A) requires prior determination of 'total income'. There appears to be an infinite series causing a dilemma towards the applicability of Section 6(1A).
  

• The expression “liable to tax” is different from the “payment of tax”. Section 6(1A) applies only if the individual 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. A clarity in the two terms is of utmost importance.
  

• It is to be noted that this exclusion of income from foreign sources is solely for the purpose of determining whether the individual has total income exceeding Rs. 15 lacs or not. No amendment has been made to exclude the “income from foreign sources” from the tax net in respect of the individual who is deemed to be resident in India by virtue of section 6(1A).
  

• Section 6(1A) cannot be invoked on a mere non liability to tax. Such non liability should be linked to residence or domicile or any other criteria of similar nature. For instance, where an Indian Citizen who is a non-resident in India and operates in US and by virtue of his certain conditions, he is also not a resident of US. The income earned by him in US may be exempt in US. Since his non taxation in US is not arising because of his non residence in US, Section 6(1A) is not applicable to him.

Impact of Covid-19

In order to avoid genuine hardship, the CBDT has clarified that stay in India from 22 March 2020 to 31 March 2020 will not be counted for NRIs/ Foreign Nationals if they are stuck in India due to the Covid-19 lockdown. You can read more details on this here.

Disclaimer from our associate: The analysis done and the views expressed in this article are of the author and this should in no way construed as an opinion. This article is solely for the purpose of public reading, knowledge sharing purpose and is not meant to address any particular query. In case of any clarifications or before taking any decision, the reader is requested to take a professional’s opinion or advice independently. The author can be reached at mayank.g1402@gmail.com