In this video, Abhinav is explaining rules on Residential status & Tax Incidence as per Indian tax law.
Video Transcript below (kindly note auto transcript can have errors):
Hello and welcome. This is Abhinav, and I welcome you. In this video, I’m discussing, in the earlier video, I discussed about the residential status, in USA, how to calculate residential status as per the IRS tax code. In this video, I’m discussing the residential test residential status, how to calculate as per the Indian tax law. Right?
So under the Indian tax law, income tax act, it is governed by Section 6. Right? Okay. Now the residential status in US, if you see, it is as per the calendar year, which is Jan January to December. However, in India, it is determined by the financial year, which is April to March.
Now there are certain basic conditions and additional conditions, through which we check. So there are basically three kinds of residential status. Right? Mainly two kinds, resident, non resident. Now even within resident, there are 2 categories, resident and ordinarily resident, which is ROR, and resident and not ordinarily resident.
Right? So in all, we have 3 categories, but, broadly, 2 categories, resident and non resident. Right? So, basically, how is the scheme of, kind of calculating the residential status in Section 6 is that there are basic conditions. Through the basic condition, you check whether a person is a resident or a non resident.
Right? Through the basic condition, you check that. Then there is a additional conditions through which you check whether a person is a ROR, resident and ordinary resident, or the person is a RNOR, resident and not ordinary resident. So we’ll understand both the things. Right?
So first, let’s understand what is the basic condition. Right? The basic condition is basically within basic condition, there are 2 conditions in the basic condition. Right? First condition is the person should be in India for 182 days or more in that year.
Right? Which year? Financial year, April to March. The person should be 180. So this is talking about the physical stay in India.
Now go back to the USA tax, law where the emphasis is on citizenship. If the person is a citizen or a lawful permanent resident, which is a green card holder, then for all matters, like the person is treated as a as a, a resident, of United States. Right? However, in India, the emphasis is on the days that the person is present in India, right, during that financial year. So if you are 182 days or more in a particular year, you straightaway become a resident.
So there are two conditions. 1st is 182 days or more or right? If you don’t meet this condition, then in the financial, like, for example, April 2023 to March 2024, 60 days or more in that particular year, and 4 years prior to that year, you should be in India for 365 days or more. So, for example, you are you are saying that I was not if you are 1 82 day days and more in that particular year, you straight away are a resident. No questions.
Right? The matter ends there. You say that I was not for 1 80 2 days. I was less than 1 80 2 days. Then the second condition is to be checked that, okay, are you 60 days and above?
Right? Then, yes, then 4 years prior to that year, were you 365 days and above? If that is checked, then you become a resident. Now, if you are saying that I was not even 60 days or more in that particular previous year in India. For example, you came to India for a small visit and you went back.
So it was like you were only, like, for 20 days or something. Then you straight away, you don’t fulfill any of these two conditions and you become a non resident. Right? So this is the basic condition. Now here a bit complication starts.
Now the basic condition 2. Right? What is the basic condition 2? 60 days and 4 years preceding 3 65 days. Now this condition does not apply in 2 cases.
Right? What are the cases? First, a person who is a citizen of India, not a PIO. Remember, if you hold a US citizenship, this you’ll not take the be able to take the benefit of this. The person has to be a citizen of India who leaves India in any previous year as a member of a crew of an Indian ship or for the purposes of employment outside India.
Now understand here, you have to leave India. Right? You cannot be outside India. You have to you were there in India, and you leave India as part of a crew of an Indian ship or for purposes of the employment. If you do that, then the condition 2 will not apply.
Then only the first condition will apply. What is the first condition? 182 days and above in that particular year. Now second case is citizen of India or PIO. Here, PIO is also eligible.
Right? So if you’re a US citizen, you can or a green card holder. No. Sorry. US citizen who, being outside India, comes on a visit to India.
Now here what happens is that you are a citizen or a PIO. You were living outside India, but that in that previous year, like April 2023 to March 2024, you come on a visit to India for whatever purposes, meeting your family or for medical treatment or whatever. Right? And in case of such person, right, this is the second condition. Now now there is one more small thing that has been added, here is that if that person has more than 15 lakhs income in India during that previous year.
Right? Indian income in that previous year, the basic condition 2 will have 120 days instead of 60 days. So the basic condition 2, generally it is not applicable in those two cases, but in this case, instead of 60 days, it will become 1 20 days. Now now, basically, what they have done is that this now, basically, these 2 are kind of beneficial provisions. Right?
See, the thing is, if you are 182 days and more, you are definitely a a a resident. But this second was like a kind of a trap that, okay, 60 days or more, you are there, still you can be. But these in these two cases, they were given like a kind of concession. That if you are living for employment outside India, or if you are a person who is living outside India but come for a visit, they, like, kind of Indian tax department is, like, sparing you that, okay, We will ensure that if you don’t cross the 1.82 days barrier, we will threshold, we will not tax you. However, for 15 lakhs above cases, they have made the provision as 1.20 days.
Actually, they should have made it, kind of difficult for that person to be qualified as a non resident. What actually the provision they have inserted is, like, they have kind of done the, kind of it has the consequence has been opposite. Right? But coming back to the thing, basic condition 2 does not apply for a citizen of India, who leaves India for employment, or who comes on a visit to India. Right?
Now there is a deemed residency provision that was instituted in 2021. This is a big development. Till now, our provisions Indian tax law provisions were more on the stay aspect. However, there are many high net worth individuals or, like, digital nomads. What they do is that they plan their stay in various countries to escape the tax law of any country.
They are they do not qualify as a resident of any particular country, so their income is not taxed. To plug that gap, what the deeming residency provision has been instituted is, that if you are a citizen of India, not a PIO. Right? If you are a PIO, if you’re a US citizen, a PIO, then this will not apply to you. If you’re an Indian citizen, if your total income in India is exceeding 15 lakhs for the previous year, you will be deemed as a resident in the country if you are not liable to tax in any foreign country.
Now important word is not liable to tax. Now does this mean that people who are living outside India for in in zero tax countries like Middle East, would they would they qualify? No. Why? Because they are liable to tax.
However, the tax rate is 0. Here, the question is about that the person is due to his, like, how he has structured his stay, he doesn’t get liable to tax in any country for that those kind of people who have more than 15 lakhs of income in India and who are Indian citizens, the Indian government has made a deemed residency provision that such person will be qualified as a deemed resident of India. Right? Okay. Okay.
Now let us come to the additional conditions to check RNOR. Right? Whether a person is if you’re a resident, then the matter ends there. Right? You if you’re a non resident, the matter ends there.
You don’t need to check for this. But if you’re a resident, you can still check whether you’re a ro ROR or RNOR. Why we need to check is because of the tax impact. The tax liability is different with respect to both the statuses, which we’ll come to later. Now additional condition is, first, individual who has been a nonresident in India in 9 out of 10 previous years.
So this needs to be carefully checked, right, preceding that year, 9 out of 10 years preceding that year, or has during 7 previous years preceding that year been in India for the period amounting to 7 29 days or less. Right? So 7 29 days or less, the person has been in India. Now the third condition is that if the person is a citizen of India or a PIO, this again goes back to the earlier condition. Right?
Right? We’ve discussed it. Citizen of India, PIO having total income exceeding 15 lakhs during the previous year, where he has been in India for 1 20 days or more. See, if 1 20 days or less, then, anyways, he becomes a non resident. Right?
He doesn’t qualify. But 1 20 days or more, but less than 182 days, if the person is in that particular bracket, then, the person qualifies as a RNOR. 4th, a citizen of India who is deemed to be a resident of India. Who is deemed to be a resident of India? 15 lakh and above income, and the person is not liable to tax in any of the countries, right, in that particular year.
In these any of these four cases, the person will qualify as a r naught. Right? The person will be will be qualifying as r naught. Right? So these are the basic and additional conditions.
Now let us come to tax in incident. Right? Now your question will be, okay. We have find out the, the residential status, but how it’ll affect the tax liability? Now tax incidents in India is covered in Section 5 of the Income Tax Act.
Now, basically, what Section 5 of the income tax act talks about 3 incomes. Income which is received or deemed to be received in India, income that accrues or arises or is deemed to accrue or arise in India. Right? 3rd is accrues or arises outside India. Three kinds of incomes.
Right? Now for a person who is a resident, an ordinarily resident, all three incomes are taxable. That means income which is received in India, accrued in India, right, and accrued outside India. Even outside India income will be so basically, ROR is the widest taxability, status. That means the person is taxed on all his global incomes.
Right? 2nd, resident and not only resident. These for these people also, all three incomes are taxable. However, for the 3rd income, which basically, the income that accrues for example, a person is a Indian, and he has a business in US. Right?
Now that business will not the income from that business will not be taxable to him in India. Only the income from business or profession will be taxable to him in India if the business or profession is set up in India. Right? Only that particular to that extent. So if you see the r naught, basically, the kind of the liability is reduced.
So the Indian tax liability with respect to incomes outside India is only restricted to a business or profession set up India. For example, a person who is a NRI and who comes back to India, who comes back to India for permanent settlement, he’s a returning NRI and who is an r naught. So, generally, you are r naught for 2, 3 years after return. Now that person, if the person has, like, a 401 k or some kind of, investments outside India which are generating that income to that person outside India or a business outside India for the duration that the person is a r naught, which is, like, 2 to 3 years after return, that those incomes will not be taxable. Right?
Only the Indian incomes will be taxable, or if he’s doing a business which is set up in India, that income will be taxable. 3rd is a nonresident. Nonresident, like, who doesn’t fulfill any of the two basic conditions, the person who is a nonresident, who is basically like a, person who is living in US, right, only for that person, only 2 incomes, received or deemed to be received in India, all the incomes that accrue or arise in India. Only those incomes. So so for that person, if the person, like, is, like, in US, he’s doing a business in US or earning salary income in US, he is a nonresident for Indian tax purposes, his US income will not be taxed to India, and that is the benefit of being a nonresident in India.
Right? So the primary approach is to try to be a nonresident. Right? 2nd is to be a RNOR. Within RNOR, you get some advantages.
For example, your foreign incomes are not taxed in India. And the third is r o r, where then you don’t have any respite. Everything across the global income is tax taxable. Then there are other things like foreign tax credit and DTA and all those provisions, which are separate provisions. Here, we are talking about the taxability as per India’s tax code.
Right? Okay. So these are the three ways. Now when we talk about income which is deemed to be received in the previous year, it has been defined in Section 7 of income tax act. What are the incomes?
In accretion to the balance in recognized provident fund, transferred balance in a recognized provident fund, and the employer’s contribution to NPS. Now these three things, if it happens to you, irrespective of your residential status, whether you are a ROR, RNOR, NR, the incomes will be taxable to you in India because the incomes are deemed to be received in the previous year in India. Right? So they are taxable to everyone. Then there is this thing about incomes deemed to be accrued in the previous year.
Now incomes deemed to be accrued in the previous year is covered in Section 9, which is Section 9 is a, like, a heavyweight Section. Right? It’s a big Section, very complicated, and subject to lot of, tax rulings. So Section 9, I’ve just simplified it for people, especially, like, people who are US NRIs or US citizens. Right?
Who or anyone who has India US transactions. Right? So now what is the income deemed to be accrued in the previous year is the income from any business connection. Right? That means, basically, if you have any business connection in India, there is a concept of significant economic presence.
Now this is like this is requires a detailed one video on that particular thing. But, basically, any business you do in India or any business connection, any income that you have from that business connection is taxable to you in India. 2nd, any property. For example, in India, so you have a property or you have a land in India or a property in India, any income from that property, it will be taxable. Any asset or source of income, that means any, equity mutual funds or any securities or any, post office schemes, any asset or source this is very, very wide definition.
Any asset or source of income in India, if it is there, then it will be deemed or accrued in the previous year too. So all these incomes will be taxable to everyone, resident or nonresident, everyone. Then transfer of a capital asset situated in India, that means you have a property in India and you transfer it. The capital gains that you have, the income that you have, it will be taxable in India irrespective of your residential status. Then salary for services rendered in India.
If you render any services in India, it that services that you render may be for a US employer. For example, you are a resident, an ordinary resident, and you are doing some work for a US employer and the US employer is paying you, you are based in India and performing your services in India. It will be taxable. India will have the right to tax it. It’s given even the DTA also, the same provision is there.
India will tax this income. Right? So you will be taxable. For example, you are a nonresident, and for some time you came and you did some services in India. Even though you are a nonresident, but the and the but the services were rendered during your physical stay in India, it may be Indian or US company, whichever company, it will be taxable to you in India.
Then dividend, any dividend paid by an Indian company. If Indian company pays dividend to you irrespective of your residential status, it is taxable. Interest, royalty, FTS, which is paid by government or a resident is taxable. Now there are few ifs and buts in all these provisions. I’m just kind of talking to you from a broad standpoint so that you understand.
Then there is a new provision that is coming from 1st April 2024. That means a gift by a resident to a nonresident or a resident and not ordinary resident outside India. So even those transactions have come into this calendar of the government, and they have made this provision that any gift that is received by a nonresident or an r n o r from a resident. Right? The person who is giving the gift is a resident, and the income is taxable to you.
Right? Now understand this, income to a close relative, if you go to Section 56 of the income tax act, the income to a relative, the gift to a relative is nontaxable for certain relatives, but if it is a kind of non relative or a friend. Right? So if even if that gift is made, the gift is taxable to the nonresident, And since the person who is giving the gift is a resident, right, that gift is deemed to accrue in the previous way. So even if the donee is a nonresident or a r naught, he will have to he or she will have to offer the gift income in India to tax.
Right? So this is the provision. Right? So this is basically I have talked about the residential status in India and the corresponding tax incidents that happens in India. The provisions are a bit complicated as tax law always is, so please do feel free to share your, your thoughts, your feedback, or your queries in the comment Section, and I will try my best to answer them.
Thank you so much for watching this video. Thank you so much.