How Change in Residential Status Affects the Income Tax Liability

The residential status of an individual is crucial factor for determining the tax liability in a particular financial year. While the global income of resident taxpayers are taxable, only the income earned in India for non-resident taxpayers are subject to income tax in India. Change in this residential status can expand or limit your taxable income, and eventually your tax liability.

Taxation of Income Depending on Residential Status

The following table briefly summarizes the taxation of different types of income based on the residential status.

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 FY, or
• For less than 365 days cumulatively during the preceding four years from the FY and less than 60 days during that FY

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

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 financial year provided you have been:

• An NRI in 9 out of 10 years preceding the financial year under consideration, or
• In India for less 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 into the period of stay, total income and residential status.

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. 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 Income Tax Act.

Taxability of Income for Individual and HUF

Taxability of Income for Other Assessee

Final Word

Depending on the residential status, not only the taxable income differs, the taxpayers may also have to comply with additional requirements such as Schedule FA an Schedule FSI disclosures. They may also become ineligible for simpler ITR form slike ITR-1 and 4. Therefore, determining the residential status for an applicable financial year becomes crucial and foremost step in the income tax filing process.