Are you an Expat or working out of India- Know your Residential status before Tax Filing?

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Are you an Expat or working out of India- Know your Residential status before Tax Filing.
There are separate laws for Indian citizens who have settled abroad. If you are planning to move aboard for employment or move back to India, you need to know and understand these rules before doing so. These rules are helpful to understanding NRI taxation and under what circumstances you can stay in the country. In this article, we are going to talk about NRI and different types of Residential Status as per the Income Tax Act 1961.

Who is an NRI?

A non-resident Indian or NRI is a person who is currently residing in a foreign country while owning Indian citizenship. NRIs are the people who have been absent from India for a substantial period, which complicates tax filing for NRIs. The reason for residing outside of India can differ from studying to employment to business. Whatever the reason, the intention is to stay outside India for an undefined time.

NRIs are also known as Overseas Indians. There is another term known as PIO or Person of Indian Origin. These terms are often used interchangeably, but there’s a significant difference between the two. NRIs are people who are Indian citizens but residing in another country. However, PIOs are people who are foreign citizens, but they once held an Indian passport.

According to statistics shared by the Ministry of External Affairs, there are almost 32 million Overseas Indians that qualify for either NRI or PIO.

OCI is another term that stands for Overseas Citizens of India. This is a type of permanent residency that is offered to People having Indian Origin, and it allows them to live and work in India. However, this doesn’t make them citizens of India.

Why is it Important to Know Your Residential Status?

The taxability of a person in India relies on the residential status of a person in India for any particular financial year. The term residential status falls under the income tax laws of India, and it must not be confused with an individual’s citizenship in India. An individual may be a citizen of India, but they may end up being a non-resident for a specific year. Likewise, a foreign citizen may end up being a resident of India for income tax purposes for a specific year.

The residential status of an individual taxpayer varies from the citizenship status in the country. To determine the status, there are detailed rules mentioned in the Income Tax Act 1961. Also, the residential status of different types of persons is determined differently for an individual, a company, a firm, etc. The resident determination terms are separate for each taxpayer: individual, company, HUF, BOU, AOP, or firm.

According to the residential status, the following is determined:

    1. Taxable Income

    2. Tax deduction

    3. Tax exemptions

    4. Tax Payable

    5. Form of Income tax return

    6. Disclosures in the Income Tax Return 


How to Determine Residential Status?

For the purpose of Income Tax, the income tax laws in India categorize residential status as:

1. A resident
2. A resident no ordinarily resident (RNOR)
3. A non-resident (NR)
Each of the above categories has different taxability rules. Here, we will understand how a taxpayer becomes a resident, an NR, or an RNOR.

Resident

A taxpayer is known as a resident of India if he meets one of the following two conditions:
1. Staying in India for 182 days or more in a year
2. Staying in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year

For Example:

Consider the case of a person name Raj who is the business head for the North America region for a private firm. Raj was born and brought up in India. He needs to travel to various countries on the continent for business purposes. He has spent over 261 days traveling in the current financial year. He has also been traveling abroad for the past two years and has stayed out of India for about 404 days.

Let us check if Mr. Raj was resident in India for the current financial year.

Condition I – Resides in India for a minimum of 182 days in a year – Not met

To figure out the resident status of Mr. Raj, you will understand that he has spent only 104 days in India during the current financial year. Therefore, he doesn’t meet the first condition.

Condition II – Resides in India for a minimum of 365 days in the immediately preceding 4 years and a minimum of 60 days in the current financial year – Met

However, it is given that Mr. Raj has been traveling only for the past two years. Also, it is said that he traveled for 404 days in the past two years. In such a case, Mr. Raj has stayed in India for more than 365 days. Hence, he has resided for at least 60 days in the current financial year and more than 365 days in the preceding four financial years. Thus, Mr. Raj meets the second condition.

Thus, if any one of the two conditions is met, he is a resident taxpayer.

Exceptions

However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 120 days as mentioned in Condition II above shall be substituted with 182 days. A similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.

To summarise in the case of an
1. An Indian citizen or person of Indian origin
2. An Indian citizen who leaves India as a crew member or for employment outside
Will be considered Resident if Condition 1 is satisfied. Condition 2 test does not apply to them.

The Finance Act, 2020, w.e.f. The assessment Year 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in Condition 2 above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose Total Income, other than Income from Foreign Sources, exceeds ₹ 15 lakh during the previous year.

The Finance Act, 2020 has also introduced a new Section 6(1A) which is applicable from Assessment Year 2021-22. It provides that an Indian citizen earning a Total Income over ₹ 15 lakh (other than income from foreign sources) shall be deemed to be Resident in India if he/she is not liable to pay tax in any country.

Residency Status Table

 

Period of Stay

Residential Status

182 Days or more in the relevant FY

Resident

365 Days or more in immediately preceding 4 years and 60 days or more in the relevant Financial Year

Resident

 

 

In case of Indian Citizen or Person of Indian Origin who visits India or leaves India as a crew member or job

 

182 Days or more

Resident

 

 

In case of Indian Citizen or Person of Indian Origin who visits India or leaves India as a crew member or job whose Total Income Other than Foreign Sources exceeds Rs 15 lacs

 

182 Days or more in the relevant FY

Resident

365 Days or more in immediately preceding 4 years and 120 days or more in the relevant Financial Year

Resident

 

 

Indian Citizen whose total Income from other than Foreign Sources exceed Rs 15 lacs and is not taxable in any Foreign country

 

Irrespective of the no. of days of stay

Deemed Resident

  
 

 

If a person qualifies as a resident, the next step is to know if he/she is a Resident ordinarily resident (ROR) or a Resident Not Ordinarily Resident (RNOR).

A person will fall under the ROR category if he is meeting both of the following conditions:

     1. An individual who remained a resident of India for at least 2 years out of 10 immediately previous years and

     2. An individual who spent at least 730 days in 7 immediately preceding years

An individual will be considered RNOR if he fails to meet any of the above 2 conditions.
According to the above example, Mr. Raj met the criteria to be known as a resident of India. Let’s check if he falls under the ROR or RNOR category.

If both the additional conditions are met, then Mr. Raj is RORConsidering the example, Mr. Raj was only traveling out of India for the past 2 years. Therefore, the first condition is met as he resided in India for at least 2 years out of the immediately previous 10 years. He also meets the criteria of residing for at least 730 days in 7 immediately preceding years. Thus, he is known as ROR.

     1. If any one of the additional conditional is not satisfied, then Mr. Raj is RNOR
Alternatively, let’s suppose that he had to work from the headquarters of his firm, located in Malaysia, and he had to work in Malaysia for the past 6 years. He only visited his parents for a week, twice a year during this time. This means he has resided in India for 449 days in the past 6 years, and the same goes for the current financial year too. The first condition is met in such a case but not the second. Thus Mr. Raj is known as RNOR.

Non-resident:

Any individual who doesn’t meet the conditions stated above would be a Non-Resident (NR) for the year.

For Example:
Suppose Mr. Raj went to London to join a reputed university to complete his three years of graduation. While studying there, the professor suggested he join a post-graduate course at the same university for two years. He had to get an internship certificate to complete the course. Upon completion, he was offered a permanent position by the firm. He has been an employee there for the past 4 years. In this way, Mr. Raj has stayed out of India for 9 years now. He receives rental income from a property he inherited from his parents. Both the basic conditions are not met. In this way, Mr. Raj is a non-resident.

Please refer to the following chart for a better understanding:

Residential Status for Income Tax - Individuals & Residents

Taxability

Resident

According to law, a resident will have to pay tax in India against his global income. Global income involves the money he earns in India and any other country except India.

Non Resident and Resident Not Ordinarily Resident

The tax liability, according to India’s law, is restricted to the income that individuals earn in India. There is no need to pay tax in India for their foreign income. However, if a person is a Non-Resident and is having income sources in India and out of India, he will be liable to pay tax in India only for Income that is accrued and arisen in India. Many times Non Residents end up paying taxes in the Income source country as well as in the country of Residence. In such instances, Double Taxation Avoidance Agreements between both the countries 

need to be checked to take tax credits

Conclusion

The residential status of an individual depends on the period of stay in the country. Know your Residential status well on time to optimize Income Tax outflow.