How Change in Residential Status Affects the Income Tax Liability

The residential status of an individual is important while taking into consideration the tax liability in a particular fiscal year. Any change in your residential status is likely to have a direct impact on your tax liabilities.

NRI Status Defined

The NRI status primarily depends on the period of your stay in India. As per Section 6 of the Income-tax Act, 1961 (ITA), you can be treated as an NRI in any given financial year (FY) provided you are present in India:

• For less than 182 days during that fiscal year, or
• For less than 365 days cumulatively during the preceding four fiscal years and less than 60 days during that fiscal year

From FY 2020-21, the period of 182 days has been reduced to 120 days for those who are Indian citizens/person of Indian origin, and whose income accruing or arising in India exceeds Rs 15 lakh during that fiscal year.

So, if you are an Indian citizen or of Indian origin, whose total taxable income from India is more than Rs 15 lakh, staying in the country for more than 119 days in a fiscal year would not be enough to retain your NRI status. Also, you will come in the ambit of taxation in the country.

However, if your total taxable income in India is less than Rs 15 lakh during any financial year, then your status would be Non-resident if your stay is for less than 181 days. This is just like in the earlier case.

Deemed Residential Status

If you satisfy any of the above conditions, then check whether the rule of ‘deemed resident’ of India applies.

You shall be deemed to be a resident of India:

• If you are a citizen of India or a person of Indian origin, and 
• you have no liability to pay tax in any other country, and
• the total income (apart from foreign income sources) is more than Rs 15 lakh, and 
• there is no tax liability in other countries or territories by reason of the domicile, residence or any such criteria

The said rule is effective from 1st April 2020.

Understanding RNOR or ROR Status

When you as an NRI return to India on a permanent basis, you would lose the NRI status depending on the total time you spend in the country during the year of your return.

In case you lose the NRI status defined above or you are deemed to be a resident of India, you will be classified as either a resident but not ordinarily resident (RNOR), or resident and ordinarily resident (ROR) Indians.

Essentially, RNOR is a transitional residential status, which is given prior to you becoming a ROR.

NRIs returning to India qualify as an RNOR for any fiscal year provided you have been:

• An NRI in 9 out of 10 years preceding the fiscal year under consideration, or
• In India for no more than 729 days during the preceding seven years, or
• If you are not a tax resident in any other country, and your income in India exceeded Rs 15 lakh in the previous year with your stay in India ranging from 120 days to 181 days in that particular year.

In case you as an NRI do not fulfil any one of the above-mentioned conditions, you directly become an ordinary resident.

Your residential status is directly proportional to the period of stay. Delve into the following points to gain better insight about period of stay, total income and residential status.

Duration of stay in India	Total income (excluding income from overseas)	Residential status
If your stay in India is for 182 days or more	Below Rs 15 lakh	Resident
If your stay in India is for 182 days or more	Exceeds  Rs 15 lakh	Resident
In case your stay is for 120 days or more but less than 182 days	Exceed Rs 15 lakh	Resident Not Ordinarily Resident (RNOR)
If your stay is for 120 days or more but less than 182 days	Below Rs 15 lakh	Non-resident Indian (NRI)
If you stay in India for less than 120 days	Exceeds Rs 15 lakh	NRI
If you stay in India for less than 120 days	Below Rs 15 lakh	NRI

Taxability Factor

If you return to India, then you may lose the NRI status in the same year of return. However, you can continue to enjoy the tax exemption benefits for a few more years as an RNOR. 

RNORs are regarded at par with NRIs for Indian income tax purposes. Similar to the case of an NRI, RNORs are also taxed to the extent of income earned in India and have no liability for taxation on income earned in any other country. 

Over a period of time, as you move from the RNOR status to the ordinary resident category, all your income from overseas will be taxed in India as per the ITA.

Also, in cases where an individual qualifies as a deemed resident or Indian citizen or person of Indian-origin (PIO) visiting India who qualify as not ordinary residents (NORs) and who have income in foreign jurisdictions from business controlled or profession set up in India, would now need to determine such income and offer it to tax in India, if the specified conditions are met.