An individual’s taxability in India is determined by his residency status in India during any given fiscal year. The word “residential status” was invented by India’s income tax laws and should not be confused with an individual’s citizenship in India.
An person may be an Indian citizen but become a non-resident for a given year. Similarly, a foreign citizen may become a resident of India for income tax purposes in a given year. It is also worth noting that the residential status of various categories of people, such as an employee, a business, a group, and so on, is calculated differently. In this article, we addressed how an actual taxpayer’s residential status can be calculated for any given fiscal year.
How to determine residential status?
The income tax laws in India classify taxable people as follows for the purposes of income tax in India:
- A resident
- A resident not ordinarily resident (RNOR)
- A non-resident (NR)
Each of the above taxpayer divisions has a different taxability. Before we get into taxability, let’s look at how a taxpayer becomes a citizen, RNOR, or NR.
Resident
A taxpayer qualifies as an Indian citizen if he meets one of the two requirements mentioned below:
- You must spend at least 182 days in India during a year.
- You spent 365 days or more in India in the previous four years and 60 days or more in the current financial year.
If a citizen of India or a person of Indian descent leaves India for jobs during an FY, he may only count as a resident of India if he remains in India for 182 days or more. Such people are permitted to remain in India for a period of more than 60 days but less than 182 days. However, beginning with the fiscal year 2020-21, the duration is reduced to 120 days or more for such a person whose total income (excluding foreign sources) exceeds Rs 15 lakh. Another important change that will take effect in FY 2020-21 is that a person who is a citizen of India and is not subject to taxation in any other country will be considered to be a resident of India. The criterion for considered residential status applies only if his gross income (other than from foreign sources) crosses Rs 15 lakh and he has no tax obligation in other countries or territories due to his domicile or residency or any other related requirements.
Resident Not Ordinarily Resident
If a person meets the residency requirements, the next step is to decide if he or she is a Resident ordinarily resident (ROR) or an RNOR. He would be a ROR if he satisfies any of the conditions mentioned below:
- Has spent at least 730 days in India in the previous seven years and;
- Has been a citizen of India for at least two of the previous ten years.
As a result, if any person fails to meet even one of the above conditions, he is classified as an RNOR. A citizen of India or a person of Indian descent who leaves India for jobs outside India during the fiscal year will be a resident and normally resident if he remains in India for an accumulated amount of 182 days or more beginning in fiscal year 2020-21. This condition, however, would apply only if his overall income (other than from foreign sources) exceeds Rs 15 lakh. A person of India who is declared to be a resident in India (with effect from FY 2020-21) will also be a resident and normally resident in India.
NOTE: Revenue from foreign sources refers to income earned or derived outside of India (except income derived from a business controlled in India or profession set up in India).
Non-resident
An NR for the year is anyone who meets none of the requirements mentioned in (a) or (b) above.
Taxability
Resident: A citizen will be taxed in India on his total income, which includes all income earned in India and income earned outside of India.NR and RNOR: In India, their tax burden is limited to the revenue they receive there. They do not have to pay any taxes in India on their international earnings. Often keep in mind that in the event of double taxation of income, if the same income is taxed both in India and abroad, one should use the Double Taxation Avoidance Agreement (DTAA) that India may have entered into with the other country to avoid paying taxes twice.