Tax Residency Determination of Individual A Sea Change

download

01-Apr-2020

Recently, the Finance Act, 2020 (FA 2020) has made changes to determination of tax residence of individuals under the Indian Income-tax Act, 1961 (IT Act), especially for Indian citizens and persons of Indian origin (PIO).

Earlier regime

Previously, if an individual was present in India for a period of:

Ø	182 days in the relevant tax year (Tax Year) (Test I); or
Ø	60 days in a financial year (FY) and had been in India for a cumulative day count of 365 days or more in the previous 4 FYs prior to the Tax Year (Test II);

then such individual was considered a tax resident of India. Further, if an individual was a resident – he/she was considered as ‘resident but not ordinarily resident’ (RNOR) if certain conditions were satisfied.

The day count threshold in Test II was to be read as 182 days for, inter alia, Indian citizens or PIO coming to visit India. This higher limit was essentially given so that Indians living outside India could visit their family and manage their investments for a longer period.

Revised Regime for Indian citizens / PIO

As per revised residency rule:

Ø	day-count of 182 days in Test II for Indian citizens / PIO has been reduced to 120 days, provided that the Indian-sourced income of such an individual exceeds INR 1.5 million for that Tax Year. However, if the presence in India is more than 120 days but below 182 days in that Tax Year, then such Indian citizen/ PIO will be regarded as an RNOR;
Ø	an Indian citizen who is not otherwise present in India, may still be deemed tax resident of India if:
	§	he/she is not liable to pay tax in any country by virtue of his/her residence or domicile; and
	§	has Indian-sourced income exceeding INR 1.5 million in a Tax Year.
		Nonetheless, such a deemed tax resident will be considered as RNOR.

A quick snapshot on determination of tax residency has been provided below for reference:

SR No	Category of Individual	Minimum number of days of stay in India in Tax Year	Minimum 365 days in India in previous 4 FYs prior to Tax Year	If Indian-sourced Income is more than INR 15,00,000?	Whether tax resident of India? Resident (R) / Non-resident (NR)
					R / NR?	RNOR?
A	Any individual other an Indian citizen or PIO	182	Not relevant	Not relevant	R	Yes (See Note 1)
A	Any individual other an Indian citizen or PIO	60	Yes	Not relevant	R	Yes (See Note 1)
B	Indian citizen not liable to pay tax in any country by virtue of residence or domicile	Not relevant	Not relevant	Yes	R	Yes
C	Indian citizen other than (B) above / PIO coming on a visit to India	120 (but less than 182 days)	Yes	Yes	R	Yes
		120 (but less than 182 days)	Yes	No	NR	Not relevant
		120 (but less than 182 days)	No	Not relevant	NR	Not relevant
		182	Not relevant	Not relevant	R	Yes (See Note 1)
D	Indian citizen leaving on employment from India or as a member of crew of India ship	182	Not relevant	Not relevant	R	No (See Note 2)
Note 1:- Only if the individual has been a non-resident for 9 out of 10 financial years preceding the Tax Year OR has spent less than 729 days in India in 7 financial years preceding the Tax Year Note 2: Assuming that he/she has always been Indian tax resident in the past FYs

Impact of the revision of residency rule?

An ordinary resident is required to pay taxes on its worldwide income, while an RNOR is required to pay taxes only on Indian-sourced income, like non-residents. However, if the RNOR receives income offshore from an entity which is controlled from India, then such income is taxable in India. Furthermore, while an ordinary resident has an additional obligation of reporting their offshore assets in his/her annual tax return; an RNOR is relieved from this disclosure. Interestingly, there has not been any change in such reporting obligation or the impact of being an RNOR.

While it may seem that taxation of RNOR under the IT Act is similar to taxation of only Indian-sourced income for a non-resident –without disclosure of offshore assets, there are other implications which may be worth nothing. If an individual is controlling or managing an overseas company whilst being an RNOR, then such company may also be deemed to be tax resident of India under the ‘place of effective management’ rules. Taxability of Indian-sourced income for a non-resident is subject to relief, if any, under tax treaty. However, if an individual who is an RNOR but is also a tax resident of another jurisdiction, then recourse to complex tie-breaker rules would be required to access any relief under the tax treaty.

The revised residency rules for Indian citizens or PIOs may have consequences and accordingly, this may trigger planning visits to India, citizenship planning, structuring of existing holdings – be it onshore or offshore.

- Bijal Ajinkya (Partner) and Shabnam Shaikh (Principal Associate)

For any queries please contact: editors@khaitanco.com

Bijal Ajinkya (executive_team,partners)

We have updated our Privacy Policy, which provides details of how we process your personal data and apply security measures. We will continue to communicate with you based on the information available with us. You may choose to unsubscribe from our communications at any time by clicking here.

For private circulation only

The contents of this email are for informational purposes only and for the reader’s personal non-commercial use. The views expressed are not the professional views of Khaitan & Co and do not constitute legal advice. The contents are intended, but not guaranteed, to be correct, complete, or up to date. Khaitan & Co disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident or any other cause.

Mumbai

One Forbes
3rd & 4th Floors, No. 1
Dr. V. B. Gandhi Marg
Fort, Mumbai 400 001

Chennai

119/65, First Floor
Dr Radhakrishnan Salai
Mylapore
Chennai 600 004,
India

Noida

Max Towers
7th & 8th Floors
Sector 16B, Noida
Gautam Buddh Nagar
201 301 India

Singapore

Ocean Financial Centre
#37-02 10 Collyer
37th Floor Quay
Raffles Place 049315,
Singapore

Search

Tax Residency Determination of Individual A Sea Change

Mumbai

Chennai

Noida

Singapore