Understanding Residential Status & Its Tax Implications For NRIs & RNORs

Residential Status & Its Related Tax Implications

Every resident individual pays taxes to the government for maintaining and providing a welfare state. The Income Tax Act, 1961 governs the applicability of income tax on residents of India. An individual's residential status may change over time based on their physical presence in India and other criteria. It is essential to review and determine the residential status each financial year to understand the tax implications accurately.

The residential status of an individual for taxation purposes is determined by the criteria laid down in Section 6 of the Income Tax Act, 1961. An individual is considered a resident in India if they meet any one of the following conditions related to physical presence/stay in India:

1. 182 days or more in a financial year (from April 1 to March 31 of the next year), or
2. 60 days or more during the financial year and 365 days or more during the four preceding financial years.

An individual who does not meet either of these conditions will be considered a Non- Resident for that financial year. This principle governs the determination of the residential status of all individuals, irrespective of their nationality.

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Special Provisions For NRIs

An Indian citizen who leaves India as a crew member or for employment outside India in any previous year, the 60-day period mentioned above is extended to 182 days. This provision is applicable only to NRIs leaving India on a work visa or other employment visa issued by the host country, and not to their dependents.

To align the provisions for all family members, the law also provides another exception. An Indian citizen or a Person of Indian Origin (PIO), including OCI card holders, who visits India during the year, has the 60-day period extended to 182 days. These provisions practically made the second condition redundant for NRIs for many years.

The Budget 2020 introduced a new category of NRIs, i.e., those having Indian income (total income reduced by income earned outside India) exceeding INR 15 lakh during the previous year. For such individuals, the 182-day period is reduced to 120 days in the second condition, requiring them to ensure that their stay in India in the preceding four years was less than 365 days.

Additionally, an Indian citizen with Indian income exceeding ₹15 lakh (total income excluding foreign income) will be deemed a Resident in India if they are not liable to pay tax in any other country.

Suggested Read - NRI's Ultimate Guide to India Tax Filing

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Resident But Not-Ordinary Resident (RNOR) Status

These amendments brought renewed importance to the almost forgotten concept of Resident but Not-Ordinary Resident (RNOR). NRIs will be considered as RNOR for the year if they meet the following conditions:

a) Non-resident for 9 years out of 10 preceding the financial years or

b) Stayed in India for 729 days or less during 7 preceding the financial years.

Thus, a NRI who comes to visit India and shall now be considered as RNOR subject to the following conditions:

a) Indian income of Rs 15 lakh or more

b) Stayed in India for more than 120 days but less than 182 days in the financial

year.

c) Stayed in India for 365 days or more in four years preceding the financial year.

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Different Taxation Implications For Resident And RNOR

A resident is taxed on their global income, meaning all income earned in India and abroad is subject to Indian tax laws. Conversely, a non-resident is taxed only on income received or deemed to be received in India, or income that accrues or arises or is deemed to accrue or arise in India.

Unlike residents, RNORs are not taxed on their global income, and income earned and received outside India is generally not taxable unless derived from a business controlled or a profession set up in India. Taxable income for NRIs includes income from salaries, house property, business, capital gains, and other sources within India.

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It can be understood with a situation wherein Mr. A, receives INR10 lakh as interest in India in NRE Account, Interest of INR 600000 in NRO Account and $10000 as interest from a foreign bank account.

Here’s a useful read on Old Tax Regime Vs New Tax Regime - What Should NRIs Choose?

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Benefits Of RNOR Status

With the re-emergence of the RNOR concept, NRIs can have more cash available due to the change in their status from Non-Resident to RNOR. There shall be lower deduction of tax by the payer of Indian income to a NRI determined as RNOR, increasing the availability of cash for expenses or further reinvestment to earn more income.

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Conclusion

In summary, NRIs, even when considered as RNOR, enjoy certain tax benefits by being exempt from taxation on foreign income. However, they must still comply with Indian tax laws concerning their Indian income and any applicable reporting requirements.

However, NRIs should be aware of potential tax notices they might receive if they fail to comply with these obligations. Learn more about the five common Indian income tax notices and how to avoid them.

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Residential Status For Taxes In India: NRI & RNOR - Frequently Asked Questions (FAQS)

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I'm an NRI. How long can I stay in India without changing my residential status for tax purposes?

This depends on your total income from India and your stay in the previous four years. Generally, NRIs can stay up to 120 days if their Indian income is over ₹15 lakh.

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What is the difference between Resident and Non-Resident (NRI) taxes in India?

Residents are taxed on their worldwide income, while NRIs are only taxed on income earned or received in India.

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I will be visiting India for more than 120 days this year. What should I do?

You might be classified as RNOR. Consult a tax professional to understand your specific situation and potential tax implications.

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I am an NRI with an NRO account. How is the interest taxed?

Interest earned on NRO accounts is considered Indian income and is taxable for residents and RNORs.

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Author - Mr. Abhishek Batra 

CPA, CA - India, US and Canada Taxes

20+ years of experience in NRI Taxation

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To connect with Abhishek Batra, you can reach out to him on iNRI's Tax Service Platform