Changes in Tax Residency of Indian Citizens and Persons of Indian Origin as Amended by Finance Act, 2020

The amended Finance Bill, 2020 came into effect from 1^st April 2020. Among numerous and vital changes in many provisions of the Act, significant changes have been proposed on the ‘basis of determining the individual’s residency status in India’. The changes will peculiarly affect Indian Citizens and Persons of Indian Origin. In the following composition, the revised tax residency norms for Indian Citizens and Persons of Indian Origin have been summed up.

Under Income Tax Act, the status of residency in India is classified as an “ordinary resident,” a “resident but not ordinarily resident,” or a “non-resident based on a person’s stay in the previous year. Further, through Finance Bill, 2020, there is an introduction of “deemed residency” concept which has re-defined the traditional rule of residency.

Currently, for a resident individual to be classified as an “ordinarily resident”, one of the following two criteria need to be satisfied:

• Stay in India for a period of 182 days or more in a year.
• Having stayed in India for a period of 365 days or more during the immediately preceding 4 years and 60 days or more during the relevant financial year.

For Indian Citizens and Persons of Indian Origin visiting India, leniency was provided in the second criteria by replacing 60 days with 182 days.

Budget 2020 has proposed changes in these conditions to reduce the period of 182 days to 120 days in a financial year combined with the other condition of 365 days in the previous 4 years for an Indian Citizens and Persons of Indian Origin visiting India. However, such 120 day rule will apply only if that person’s total Indian sourced income, other than income from foreign sources*, exceeds Rs. 15,00,000 in the relevant Financial Year.

Presently, a resident individual qualifies as “resident but not ordinarily resident” if either of the following two criteria is satisfied:

• He is non-resident in nine out of ten preceding Financial Years, or
• He has stayed in India for up to 729 days in the preceding seven Financial Years.

The amended Bill retains the current provisions pertaining to nine Financial Years and 729 days.  However, it provides that Indian Citizens and Persons of Indian Origin having a total income, other than income from foreign sources*, exceeding Rs. 15,00,000, and staying in India for 120 days or more but less than 182 days, would also qualify to be “resident but not ordinarily resident” in India for such Financial Year (Not to mention that the criteria of stay in India in preceding 4 years for 365 days or more shall also be considered).

Further, The Finance Bill, 2020 has proposed to insert sub-section (1A) into Section 6, which introduces a new form of residency for Indian citizens, i.e., “Deemed to be Resident.” The amended Bill provides that an Indian Citizen would be deemed to be resident in India if the following two criteria are satisfied:

• Such individual is not liable to tax in any other country or territory on account of residency or domicile (or any other criteria of similar nature) in that country, and
• His total income, other than income from foreign sources*, exceeds Rs. 15,00,000 in the relevant Financial Year.

The deemed resident individual would qualify to be “resident but not ordinarily resident” in India for such Financial Year.

Therefore, Indian Citizens and Persons of Indian Origin who are residing abroad and affected by these new provisions would be taxable under the Indian Income-tax Act only with regard to their Indian income (including any income derived from a business controlled in or a profession set up in India) and not income earned from foreign sources. The summary of taxability of various sources of income with respect to the residential status is as follows:

Tabular presentation of Taxation of Income in India based on Residential Status

S No	Sources of Income	Residential Status
		Resident and Ordinarily Resident	Resident and Not Ordinarily Resident	Non- Resident
1	Income received or deemed to be received   in India	YES	YES	YES
2	Income accrues or arises or deemed to accrue or arise in India	YES	YES	YES
3	Income accrues or arises outside India from: Ø  a business controlled from India; or Ø  profession set up in India	YES	YES	NO
4	Income accrues or arises outside India	YES	NO	NO

 

*For determining the income criteria to find the residential status, the “income from foreign sources” would mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).