NRI Taxation - Part 1 -Determination of Residential status of NRI

An NRI's income tax in India depends on their residential status for the year.

If you are classified as a resident, your global income is taxable in India. If you are classified as an NRI, only your income earned or accrued in India is taxable in India.

An individual is considered a Resident in India for any given year if they meet either of the following conditions:

1. They are in India for 182 days or more during the year, or

2. They are in India for 60 days or more during the year and 365 days or more over the four years preceding the year.

The Finance Act 2020 amended the residency provisions to include Indian Citizens or Persons of Indian Origin who visit India. They will now be considered as RNOR (Resident but Not Ordinarily Resident) under the following conditions:

1. Their total income, excluding foreign income, is ₹15 lakh or more.

2. They stayed in India for more than 120 days but less than 182 days in the previous year.

3. They stayed in India for 365 days or more over the four years preceding the year.

Before this amendment, such individuals were classified as non-residents. This change means that an individual's residential status may now be classified as RNOR, leading to an increased scope of taxable income and the loss of various exemptions.

Additionally, it is important to note that an individual staying in India for more than 182 days will be classified as a resident regardless of their income level in the previous year.

**Deemed Residency Status Introduced in Finance Act 2020**

The Finance Act 2020 introduced the concept of 'Deemed Residency.' Under this, Indian citizens earning more than ₹15 lakh from Indian sources will be deemed residents of India if they are not liable for taxes in any other country. Deemed residents will be classified as RNOR starting from FY 2020–21. This amendment aims to tax the incomes of Indian citizens not liable to pay tax in any country.

**Did you know?**

Residency is defined differently under the Income Tax (IT) Act, 1961, and the Foreign Exchange Management Act (FEMA), 1999.

Under the Foreign Exchange Management Act (FEMA), an individual's residential status is determined by their intent to reside in India. A person is considered a resident in India if they meet both of the following criteria:

1. They have lived in India for more than 182 days during the preceding financial year.

2. They intend to stay in India for an indefinite period.

This residency status is important for individuals involved in foreign exchange transactions. It affects activities such as:

- Investments in foreign currency or foreign securities

- Acquisition or transfer of immovable property within India

- Engaging in various financial and economic transactions that involve foreign exchange

In contrast, residency under the IT Act is determined solely by the individual's physical presence in India, irrespective of the purpose of stay. This residency status helps determine taxable income and applicable tax rates.