November 2, 2024

Navigating India’s Tax Residency Rules for Expats and NRIs Under the Income Tax Act, 1961

India’s tax residency rules play a critical role in determining an individual’s tax liability, impacting both Non-Resident Indians (NRIs) and expatriates. The Income Tax Act, 1961, sets forth specific residency criteria that dictate whether an individual is liable to pay tax on their global or only Indian-sourced income. This blog provides a comprehensive guide to understanding the current provisions of Section 6 of the Income Tax Act, which governs residency determination for individuals and entities.

1. Overview of Residency Determination Under Section 6

Section 6 of the Income Tax Act, 1961, provides a clear framework for determining an individual’s residency status for tax purposes. Under this section, individuals can be classified as:

  • Resident and Ordinarily Resident (ROR)
  • Resident but Not Ordinarily Resident (RNOR)
  • Non-Resident (NR)

Each category determines the scope of income subject to tax in India, with ROR status attracting the widest tax net, followed by RNOR and then NR.

2. Key Residency Criteria Under Section 6

The Act prescribes different residency tests for individuals based on their physical presence in India:

Basic Residency Tests

According to Section 6(1), an individual is deemed Resident in India if they meet one of the following conditions:

  1. Presence for 182 Days or More: If an individual is physically present in India for at least 182 days in a financial year (April 1 – March 31), they qualify as a resident.
  2. Alternate Test for Frequent Visitors or Returnees: If an individual has stayed in India for 365 days or more in the four preceding years and spends 60 days or more in the current financial year, they are considered a resident.

Special Rules for Certain Indian Citizens

The Act provides additional provisions for Indian citizens, crew members of Indian ships, and persons of Indian origin (PIOs):

  • Indian Citizens Leaving for Employment or as Crew Members: Under Explanation 1(a) to Section 6(1), Indian citizens who leave India for employment or as crew members of an Indian ship are eligible for a relaxed threshold, requiring a presence of 182 days or more instead of 60 days in the current year to be classified as residents.
  • Visiting Indian Citizens and Persons of Indian Origin: Explanation 1(b) to Section 6(1) further states that if an Indian citizen or PIO visits India, they need to spend at least 182 days (instead of 60 days) to qualify as a resident, provided they have no other Indian income exceeding INR 15 lakh. If they earn above INR 15 lakh from Indian sources in the current year, the threshold is reduced to 120 days instead of 182.

Deemed Residency for High Net-Worth Individuals (HNWIs)

A unique provision in Section 6(1A) applies to Indian citizens with high income in India but no tax residency abroad. This clause deems Indian citizens with INR 15 lakh or more of Indian income as residents if they spend at least 120 days in India and lack tax residency in any other country.

3. Tax Implications of Residency Status

The residency status of an individual directly influences their tax obligations:

  • Resident and Ordinarily Resident (ROR): Individuals classified as ROR are liable to pay tax on their global income in India, including both Indian and foreign-sourced income. RORs are required to report foreign assets, bank accounts, and other overseas investments under the Income Tax Act.
  • Resident but Not Ordinarily Resident (RNOR): RNORs have limited tax obligations compared to RORs. They are only taxed on income earned in India or income sourced from a business or profession controlled in India. Foreign income is exempt unless derived from an Indian business or profession.
  • Non-Resident (NR): Non-residents face the least tax burden in India, with liability limited to Indian-sourced income, such as salary for work done in India, capital gains on Indian assets, and interest on Indian accounts.

4. Special Considerations for NRIs and Expats

For NRIs and expatriates working or staying in India, managing tax residency status involves several unique challenges:

  • Double Taxation Avoidance Agreement (DTAA): India has DTAAs with many countries to avoid double taxation. NRIs and expats can use these agreements to claim tax credits on income taxed in both India and their country of residence, reducing overall tax liability.
  • Foreign Assets and Income Disclosure: ROR individuals must disclose all foreign assets and financial interests in their Indian tax returns. Failure to report foreign holdings accurately could lead to penalties and additional scrutiny under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

5. Recent Amendments Affecting Residency and RNOR Status

Amendments in the Finance Act, 2020, introduced key changes in determining residency and RNOR status:

  1. Stricter Rules for High Net-Worth NRIs: As per Section 6(1A), Indian citizens with INR 15 lakh or more in Indian income and no tax residency in another country are now treated as deemed residents, subjecting them to tax on global income unless they qualify as RNOR.
  2. RNOR Conditions: According to Section 6(6), individuals can qualify as RNOR if they:
    • Have been non-resident in India in nine out of the ten preceding years; or
    • Spent 729 days or less in India over the past seven years.
    • Additionally, citizens with Indian income exceeding INR 15 lakh who stay between 120 and 182 days in India now also qualify as RNOR, reducing their tax obligations on global income.

6. Practical Tips for Managing Tax Residency in India

For NRIs, expats, and high-net-worth individuals, maintaining the desired residency status requires meticulous planning:

  • Track Days in India Accurately: Keeping a record of days spent in India is essential, especially for frequent visitors who are close to the 182-day or 120-day threshold.
  • Use DTAA Benefits for Tax Credits: Familiarizing oneself with India’s DTAAs can prevent double taxation. Form 10F and a Tax Residency Certificate (TRC) are often required to claim DTAA benefits on Indian-sourced income.
  • Strategize Foreign Income Remittances: NRIs and RNORs can manage foreign earnings more efficiently by remitting income through Non-Resident External (NRE) or Foreign Currency Non-Resident (FCNR) accounts, which are tax-exempt.
  • Consult Tax Professionals: Given the complexities of international tax laws and India’s specific provisions, consulting a tax advisor can provide valuable guidance, helping individuals avoid misinterpretation of residency requirements and costly errors in compliance.

Conclusion

Navigating India’s tax residency rules under Section 6 of the Income Tax Act, 1961, is crucial for NRIs, expatriates, and HNWIs. These rules determine the scope of tax liability on Indian and global income, making it essential to stay updated on thresholds, exceptions, and recent amendments. By understanding these provisions, leveraging DTAA benefits, and keeping precise records, individuals can effectively manage their tax residency status, achieving tax efficiency while remaining compliant with Indian tax laws.

For individuals with complex financial situations, engaging with tax professionals ensures proactive planning and full compliance, allowing them to make informed decisions aligned with their residency and income goals.