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New rules to determine residential status of NRIs

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  • New rules to determine residential status of NRIs

    Till end of FY 2019-20, NRIs (covers Indian citizens and Persons of Indian Origin) included those individuals who visited India for less than 182 days in a financial year. Finance Act 2020 reduced this period to 120 days for all NRIs.

    Further, amended section 6 provides that the reduced period of 120 days shall apply, only in cases where the total Indian income (i.e., income accruing in India) of such visiting individuals during the financial year is more than Rs 15 lakh. Accordingly, visiting NRIs whose total income (which is defined as taxable income) in India is up to Rs 15 lakh during the financial year will continue to remain NRIs if the stay does not exceed 181 days, as was the case earlier.

    As such, besides monitoring the number of days present in India, the visiting Indian is also required to keep tab of his Indian taxable income. This is because once income taxable in India or taxable Indian income exceeds Rs 15 lakh, then provisions related to stay exceeding 120 days, as mentioned above will be applicable.

    It may be noted that dividends distributed by Indian companies would be taxable in the hands of the shareholders and as such, would form part of the taxable income. On the other hand, since interest on FCNR and NRE deposits are exempt it will not form a part of taxable income. This amendment is effective from financial year 2020-21, viz. April 1, 2020 to March 31, 2021.

    An NRI, whose taxable income exceeds Rs 15 lakh stays in India for 120 days or more, then such an individual further needs to check whether his stay in India is 365 days or more in the immediately preceding 4 years. Let us assume a non-resident visits India in FY 2020-21 (having taxable income in the financial year exceeding Rs 15 lakh) and stays for say 130 days. Further, during the preceding 4 financial years (i.e., FY2019-20, 2018-19, 2017-18, 2016-17) he was in India for total of 365 days.