A Non-resident Indian (NRI) has to be mindful of the duration of stay in India in order to avoid paying taxes on their income. Tax liability is determined by your residential status meaning whether you are a resident or a non-resident.
Related Article: NRI Status Redefined
The Finance Bill, 2020 has made major changes in the rules for determining the residential status of Indians. The new changes will have a huge impact on NRI taxation.
Before we move on, let’s find out who is an NRI. The definition of an NRI is different as per the Income Tax Act and Foreign Exchange Management Act (FEMA). This is important because the Income Tax Act tells you how you will be taxed and FEMA decides where and how you can invest as an NRI. For example, to invest in mutual funds, NRI needs to open an NRE or NRO account and your tax liabilities in such investments will be decided by your residential status.
Read more on bank accounts for NRIs.
For tax purposes, under the Income Tax Act, you are a resident of India if (any one of the two conditions):
(Condition 2 is not applicable for Indians leaving the country for employment abroad or who is a crew on an Indian merchant ship. The 60 days is replaced by 182 days in such cases).
So, you are considered an NRI if any of the above conditions are not satisfied.
NRI Taxation based on the New Rules
The budget 2020 presented by the Finance Minister in February proposed the number of days to determine resident status to be reduced from 182 days to 120 days for all NRIs. However, at the time of passing the bill, it was added that the reduced 120 days period is applicable only if the taxable income accrued by NRIs in India exceeds 15 lakh during the financial year. In other words, any NRIs whose taxable income in India is up to 15 lakh in the financial year will remain as NRIs if they don’t exceed the 182 stay period. This does not include income from foreign sources and the money you send home to India also known as inward remittances are not taxable. Outward remittances or money going out of India above 7 lakh rupees is subject to a 5% tax collection at source (TCS).
Do keep in mind that the interest earned from your NRE and FCNR doesn’t include in your taxable income.
To enjoy the tax relief, you will have to keep a tab on your Indian taxable income (if it's more than 15 lakh, the stay period of 120 days will be in effect) and also your duration of stay (should not exceed 182 days). In case, you do exceed the 120 days on top of having taxable income above 15 lakh, you can further check if, in the previous 4 years, you have stayed for 365 days or more. If you meet all these criteria, you will be treated as a resident Indian for income tax purposes.
However, you can still be classified as “Resident but Not Ordinarily Resident (RNOR)”. In such cases, your foreign income is not taxable in India. This is a huge relief for returning NRIs.
Who is an RNOR?
You are regarded as Resident But Not Ordinarily Resident (RNOR) if the following conditions are met:
As per the Finance Bill, 2020, an Indian citizen who is exempted from paying taxes in any other country (stateless individual) because of residential status or domicile or any additional criteria of comparable nature will be deemed a resident Indian in any financial year if his/her taxable income in India exceeds 15 lakh.
Also, any Indian citizen or Person of Indian origin (PIO) whose Indian taxable income exceeds 15 lakh in the preceding year and the period of stay in India ranges from 120 days to 181 days in that year.
(PIO is a person of Indian origin who either his/her parents or any of the grandparents were born in undivided India)
It was also added in the bill that the provision is not applicable to “bonafide workers” outside India. And if deemed a resident individual under the provision, the foreign income (income earned outside Indian and not derived from business or profession in India) will not be taxed.
Therefore, as an RNOR, you don't have to pay taxes in India on your foreign income, just like the NRIs. It is best if you plan your return to India so that you can retain the RNOR status for more years.
This provision is also not applicable for OCI (Overseas Citizen of India) cardholders and foreign nationals.
The above new rules would be in effect from April 1, 2020.
Tax rules for NRIs in UAE
According to the UAE Tax Treaty and the Protocol, you can get a “tax residency certificate” if you have stayed in the UAE for over 182 days in a year to prove your residency. In such cases, the above provisions remain invalid.
Based on the amendments, it is crucial to monitor your taxable Indian income and plan your travel and period of stay in India. One relief is the RNOR status, where your foreign earnings are not taxed even if you are deemed a resident Indian.