The COVID-19 crisis has brought about a steep increase in job layovers across the world which has in turn had a huge impact on the Indian migrants residing abroad. A lot of Non-Resident Indians (NRIs), therefore, are looking to return to their hometown. If you are considering returning to India, a vigilant planning would be required for a hassle-free relocation. A generic concern amongst most NRIs is the tax implications on the income earned during the year in which NRI returns to India.

The Union Budget 2020 has reformulated the norms for determining the tax residential status of an individual in India. An individual in India can be classified into three categories - a) Resident and Ordinarily Resident (ROR); b) Resident but Not Ordinarily Resident (RNOR); and c) Non-Resident (NR).

Rules to determine residential status of NRI

Residential status of an individual is determined based on his/her physical presence in India during a Financial Year (FY). The Hon'ble Finance Minister, in Budget 2020 has brought about certain amendments to the residency provisions. Below is a glimpse of the amendments that one needs to keep in mind for determination of residential status.

If an individual satisfies any of the following two conditions he will qualify as a resident of India else will qualify as a NR for that FY:

a) his/her stay exceeds 182 days during the FY or

b) his/her stay exceeds 60 days during a FY and 365 days in preceding 4 FY’s.

If an Indian citizen or Person of Indian Origin (PIO) comes for a visit to India, then 60 days mentioned in point b) above will be enhanced to 182 days.

There is a new leg to this condition, which states that if an Indian citizen or PIO who comes for a visit to India and his total income from a business/or a profession set up in India exceeds ₹15 lakh during that FY, then 60 days will substitute by 120 days. However, if the ₹15 lakh threshold is not met, then the 182 condition will apply.

Deemed residency

With an aim to tighten the clutches of the residency provisions and to plug certain loopholes, a new concept of deemed residency has been introduced. An Indian citizen whose total income from a business/or a profession set up in India exceeds ₹15 lakh during any FY, and if he is not liable to tax in any other country or territory by reason of his domicile or residency or any other criteria of similar nature, then he will deem to be resident of India.

In addition to the existing conditions discussed above, the following two amendments have been made to the existing conditions for determination of NOR status:

i) An Indian citizen or PIO, whose total income from a business/or a profession set up in India exceeds ₹15 lakh and whose stay in India is more than 120 days but less than 182 days during a FY; and

ii) A citizen who is deemed to be resident of India as provided above.

Indian Government relaxed residential provisions for FY20

During the end of FY 2019-20, a number of individuals holding the status of RNOR or NR were stranded in India due to the COVID19 pandemic. The inability of people to travel back was going to impact their residential status in India and the tax liability thereon. Accordingly, to avoid genuine hardship to such individuals, the Indian Government relaxed the residential provisions particularly for FY 2019-20. A relaxation was provided whereby the cut-off date for considering the physical presence in India was brought down to 22 March, 2020 instead of 31 March, 2020, thereby excluding the COVID-19 lockdown phase for the purpose of calculating the physical presence.

How income of ROR, RNOR or NRI is taxed?

Your tax liability depends on your residential status. If you are ROR, your global income will be taxed in India. However, if you qualify as a RNOR or NR, income only to the extent that accrues or arises in India shall be taxable. However, it is important to note one thin line of difference between the tax liability of RNOR and NR. A RNOR is liable to tax on income from business/profession controlled/set up in India whereas a NR is not.

The rationale of Indian Government behind making the residency provisions more stringent, was to bring the super-rich individuals under the tax net who used to till now arrange their stay in such a way so as to remain NRs across the globe and evade taxes. The Government has surely made a smart move and will go a long way in preventing the tax abuse and generating revenue.