Changes in Residential Rules

Meaning of Residential Status:

The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a particular year.

Also, to note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. In this article, we will discussed about how the residential status of an individual taxpayer can be determined for any particular financial year and the proposed amendment by finance act 2020

Provision before amendment

For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:

1. A resident
2. A resident not ordinarily resident (RNOR)
3. A non-resident (NR)

Resident

Section 6(1) provides for situations in which an individual shall be considered to be resident in India in a financial year if fulfils any of the below conditions:

1. He stays in India for a year is 182 days or more or
2. He has been in India for a period of 365 days or more within 4 years preceding that previous year and he is in India for a period 60 days or more in that financial year.

Explanation 1 to section 6(1) provides exception to clause (b) to section 6(1) as follows

1. being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship or for the purposes of employment outside India, the words 60 days shall be replaced by 182 days
2.  being a citizen of India, or a person of Indian origin who, being outside India, comes on a visit to India in any previous year, the words 60 days shall be replaced by 182 days

Amendment vide Finance act 2020

Finance Act 2020 proposed to reduce the number of days of 182 days for person comes on a visit to India to 120 days under explanation 1(b) to section 6(1).

Consequently, this amendment is only applicable to person who comes on a visit to India being citizen or resident in India the number of days shall be counted 120 for stays in India.

A resident not ordinarily resident (RNOR)

Section 6(6) provides the conditions for Resident but not ordinary resident as follows:

1. an individual who has been a non-resident in India in 9 out of the 10 previous years preceding that year, or has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less; or
2. a Hindu undivided family whose manager has been a non-resident in India in 9 out of the 10 previous years preceding that year, or has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less.

Amendment vide Finance act 2020

It is proposed to amend the said clause (6) to relax the said conditions whereby an individual or the manager of HUF has been non-resident in India in 7 out of 10 previous years preceding that year to be “not ordinarily resident” in that year.

Deemed Resident – Moving towards citizenship-based taxation

• The government has taken cognizance with respect to individuals who arrange their physical presence in India and abroad in such a manner that they do not qualify as tax residents in any country or jurisdiction during a given tax year.
• Accordingly, in order to discourage this, a new clause  is to be inserted in Section 6 to provide that an Indian citizen, who 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, shall be deemed to be a ‘Resident’ in India.
• Further CBDT had come up with clarification vide notification to bring more clarity on above clause as follows:
  • It is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession