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The Finance Act of 2020 and 2021 have introduced significant modifications in the rules concerning the determination of residential status for individuals. These changes, applicable from the FY 2020-21 onwards, have directly impacted the Non-Resident Indian (NRI) community.
With more than millions of NRIs residing in various countries, it is important to understand the revised criteria for determining the NRI status.
Understanding the Change in NRI Status upon Returning to India
When an NRI decides to return to India permanently, their NRI status undergoes changes based on the duration of their stay in India during the year of their return.
If they return in the fiscal year after October, they can still maintain their NRI status for that year since their stay in India will be less than 182 days. However, the NRI status is lost in the same year if the return happens before October.
Upon losing the NRI status, returning NRIs can be categorised as residents but not ordinarily resident (RNOR) or resident and ordinarily resident (ROR) Indians.
The RNOR status serves as a transitional phase for returning NRIs before they become ordinary residents of India (ROR).
Returning NRIs qualify as RNOR for a fiscal year if any of the following conditions are met:
They have been an NRI for at least 9 out of the 10 years preceding the fiscal year under consideration.
They have spent no more than 729 days in India during the preceding seven years.
They are not considered tax residents in any other country, and their Indian income exceeded ₹15 lakhs in the previous year, with their stay in India ranging from 120 days to 181 days.
If returning NRIs do not meet any of these conditions, they automatically become ordinary residents for taxation purposes. Returning NRIs may either qualify as RNOR or become ordinary residents based on specific criteria outlined by the tax regulations.
New Criteria for NRI Status in India
Until the end of the financial year 2019-20 (March 31, 2020), NRIs (comprising Indian citizens and Persons of Indian Origin) were defined as individuals who visited India for less than 182 days in a financial year while residing outside India.
However, the Finance Act of 2020 modified this rule, reducing the maximum permissible stay to 120 days for visiting individuals whose total taxable Indian income (income earned in India) during the financial year exceeded ₹15 lakhs.
As a result, NRIs visiting India with a total income of up to ₹15 lakhs will still retain their NRI status if their stay does not exceed 181 days, as per the previous NRI criteria for income tax.
In addition to monitoring the number of days spent in India, visiting NRIs must also track their Indian taxable income. If the taxable income in India exceeds ₹15 lakhs, the provisions concerning stays exceeding 120 days will apply.
Dividends distributed by Indian companies are now subject to taxation as part of shareholders' taxable income. Hence, the interest earned on FCNR (Foreign Currency Non-Residential) and NRE (Non-Residential External) deposits is exempt and does not contribute to taxable income.
Moreover, if an NRI's taxable Indian income surpasses ₹15 lakhs and their stay in India extends to 120 days or more, they must also evaluate whether their stay in India during the immediately preceding four financial years totals 365 days or more.
For example, a non-resident individual who visits India during FY 2022-23 (with taxable income exceeding ₹15 lakhs) stays in India for 130 days. Their cumulative stay in India over the preceding four financial years (FY 2020-21, 2019-20, 2018-19, 2017-18) amounts to 365 days or more.
In this case, they will be classified as residents for income tax purposes. However, there is some relief for NRIs per the new NRI criteria, as they will be categorised as Resident but Not Ordinarily Resident (RNOR). This classification can benefit them since their foreign income (income earned outside India) will not be subject to taxation in India.
Residential Status - Under Section 6(1A) based on Indian Income Criteria
In accordance with Section 6(1A) of the Income-tax Act, an individual who is a citizen of India will be considered a resident in India for a previous financial year if they are not "liable to tax" in any other country or territory due to factors such as domicile, residence, or similar tax criteria in India. However, this provision will only apply if their total taxable Indian income exceeds ₹15 lakhs in the financial year.
Before the financial year 2019-20, the Income-tax Act did not include such a provision. It is important to note that this determination of residential status for stateless individuals does not apply to OCI (Overseas Citizen of India) card holders, foreign citizens, or PIOs (Persons of Indian Origin).
Ensuring the security of your family through life insurance is made simple for NRIs, especially when it comes to taxation rules. NRI insurance plans provide a convenient option in India, specifically designed to offer life cover protection to Non-Resident Indians and their families.
With NRI insurance, the process becomes hassle-free. You can easily purchase the policy in India and manage premium payments from another country, guaranteeing uninterrupted life insurance coverage for your family back home.
Opting for a Tata AIA life insurance policy brings numerous advantages. You can choose from various NRI policies that best suit your requirements. Additionally, you can customise premium payments to align with your preferences. Moreover, these life insurance policies offer tax and policy benefits tailored to your residential status.
Conclusion
As seen above, the revised criteria for determining the NRI status and taxation rules in India have introduced significant changes for NRIs. Even though NRIs with taxable Indian income exceeding ₹15 lakhs and falling under the necessary residential qualifications can be taxed as residents, the Resident but Not Ordinarily Resident (RNOR) status can provide some taxation relief on foreign income.
