Private Client Series
Series 1 | Article 3
Article 2 dealt with determining your residential status under the Foreign Exchange Management Act, 1999 (“FEMA”). FEMA and the Income Tax Act, 1961 (“Tax Act”), serving different purposes, define and determine residential status of an individual differently. This article focuses on the criteria set out for individuals under the Tax Act.
Section 6 of the Tax Act prescribes the criteria for determining whether an individual is considered a resident in India. It specifically covers those who reside in India, irrespective of their citizenship; those who do not permanently reside in India but visit India and have an income in India greater than the prescribed threshold; and those who are considered “not ordinarily resident” in India. The section also prescribes the criteria for persons, other than natural persons, being considered residents in India, which is an important consideration for those intending to avail tax residencies outside India. However, that will be dealt with in a later article.
An individual is considered a resident in India in the previous year (i.e. the year for which they are being assessed) if they satisfy the following conditions:
They were in India for a cumulative period exceeding 182 days or more in that year.
OR
They have been in India for at least 60 days or more in the previous year and for 365 days cumulatively in the preceding 4 years.
The period of 60 days in the second condition stands modified to 182 days if it relates to the following people:
An Indian who has left India in the previous year either as, (a) a crew member of an Indian Ship, or (b) to take up employment outside India.
An Indian citizen or a Person of Indian Origin (now an Overseas Citizen of India), who otherwise resides outside India, visits India in the previous year. However, the period of 60 days is modified to 120 days when such a person has an Indian sourced income greater than INR. 15,00,000 (Indian rupees fifteen lakhs) in the year for which they are assessed.
The Tax Act makes it clear that a citizen of India, having an income in India greater than INR. 15,00,000 (Indian rupees fifteen lakhs or one million five hundred thousand) in the year for which they are assessed, is deemed an Indian resident, irrespective of the number of days spent in India, if on account of their residence or domicile outside India, are not liable to pay taxes in any other country. This is a very important consideration for those Indian citizens who intend to relocate their tax residency to a more favourable tax jurisdiction.
A “non-resident” is simply a person who is not a “resident of India”.
A person is considered “not ordinarily resident”, a term commonly referred to as “RNOR” or “Resident but Not Ordinarily Resident” if they have been a non-resident in India for 9 out of the last 10 years, or in the previous 7 years have been in India cumulatively for 729 days or less. The RNOR category also includes citizens of India and Persons of Indian Origin (Overseas Citizens of India) who have income in India exceeding INR. 15,00,000 and those who have been in India for more than 120 days but less than 182 days in the previous year. Lastly, the category also includes those citizens of India who have an income greater than INR. 15,00,000 and are not liable to pay tax in any other country. RNOR’s enjoy certain benefits under the Tax Act.
The classification as a “resident” or a person being “resident but not ordinarily resident” requires a lot of careful consideration as well as planning when in the context of choosing an alternate residency / citizenship or taking advantage of a favourable alternate tax jurisdiction. This must be done only in consultation with a chartered accountant or tax lawyer armed with all of your information and an understanding of your broader goals.
The next article in this series deals with the Liberalised Remittance Scheme (LRS)as it applies to resident Indians.
About the Author
Pranay Mangharam is a founding member of MZD Legal Consultancy. He leads the firm's private client; technology; and transaction advisory practices. Pranay advises high-net-worth individuals, closely held businesses, and family offices on a range of private matters including their investments, succession planning, trans-border holdings, etc. He can be contacted at pranay@mzdlegal.in
About MZD Legal Consultancy
MZD Legal Consultancy is a boutique law firm in Mumbai, India. The firm was established in 2011 and comprises professionally qualified lawyers with varied levels of experience and expertise in specific practice areas. To know more, click here www.mzdlegal.in
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