Among the global pandemic crisis and the expected economic confusion, the Finance Bill was passed by the Parliament with some significant relaxations on March 23, 2020. The changes originally proposed in Finance Bill 2020 relaxed at the time of passage of the Bill in the conditions for determining an individual’s residential status in India. This change will directly affect the non-resident Indian (NRI) community. The Finance Bill 2020 has gotten the President’s approval on March 27, 2020, and has now become Finance Act 2020.

Let us understand the major amendments to the criteria that determine ‘residential status’ in the Finance Bill 2020 as passed by the Parliament.

Introduction to NRI Status and Taxation

The NRI tax filling  you pay depends on your residential situation for the year when you live and work abroad. If you meet the Indian resident requirements, the Indian tax law would enforce your total global income. However, only income received or accrued in India is taxable if your NRI status for the year is ‘NRI.’

The following is the basis for NRI income tax:

  • Wages paid for Indian services (Global Income)
  • Economic benefits from the sale of Indian assets
  • Lending revenue from Indian property
  • Fixed deposit profits
  • Bank Savings Accounts Interest
  • Fixed deposit preparation

As an NRI, you can consider a smooth and hassle-free banking experience using NRI Banking from HDFC Bank.

Rules to learn the residential nri status and taxation

A person’s residency status is determined based on his or her presence in India during the financial year (FY). The Honorable Minister of Finance, in the 2020 Budget, has introduced certain amendments to the accommodation provision. Below is a summary of the amendments one needs to keep in mind in order to determine the living conditions.

If a person satisfies any of the following two conditions you will be eligible to become an Indian citizen another person will be eligible to be an NR in that FY:

  1. his stay lasts 182 days during FY or
  2. his stay exceeds 60 days during FY and 365 days prior to 4 FY’s.

If an Indian citizen or Person of Indian descent (PIO) comes to visit India, the 60 days mentioned in point b) above will be extended to 182 days.

There is a new leg of the situation, which is that if an Indian citizen or PIO comes to visit India and the total income from a business and / or business established in India exceeds ₹ 15 lakh per FY, then 60 days will be replaced by 120 days. However, if the limit of ₹ l 15 lakh is not reached, the status of 182 will apply.

NRIs available tax deductions

Currently, a maximum deduction of up to Rs 1.5 lakh is allowable for tax deductions under that paragraph. The deductions are not subject to taxation.

How will double taxation be avoided?

Double taxation is imposed if income tax on the same revenue source is collected twice. In two nations, it is not rare for NRIs to earn income. However, in two countries: the country in which it draws revenue and the country in which it retains citizenship, NRIs must pay taxes based on the same revenue. In order to help NRI avoid this issue, India has signed a Double Tax avoidance (DTAA) with different countries. However, to use this privilege, all required tax documents payable in India must be collected as proof.

Criteria to Determine Residential Status: NRI status and taxation

Until the end of the financial year 2019-20, NRIs (covers Indian citizens and Persons of Indian Origin) included those persons who visited India for less than 182 days in a financial year. In February 2020, the Budget 2020 proposed to lower this period to 120 days for all NRIs.

However, an amendment at the time of passing of the Budget provides that the lowered period of 120 days shall apply, only in cases where the total Indian income (i.e., income accruing in India) of such visiting persons during the financial year is more than Rs 15 lakhIn consequence, visiting NRIs in India with total revenue (which is defined as taxable income) up to Rs 15 lakh will be considered NRIs in the financial year if the stay is no longer than 181 days as it was before.

Therefore, besides observing the number of days present in India, the visiting Indian is also required to keep a tab of his Indian taxable income. This is because once income taxable in India or taxable Indian income exceeds Rs 15 lakh, then provisions related to staying exceeding 120 days, as mentioned above will be applied to the respective NRI.

It should be noted that dividends provided by Indian companies would be taxable in the hands of the shareholders and as such, would form part of the taxable income. On the other hand, since interest on FCNR and NRE deposits are free from it, it will not form a part of taxable income. This amendment is in effect from April 1, 2020, to March 31, 2021, for the current financial year. 

An NRI, whose taxable income is more than Rs 15 lakh stays in India for 120 days or more, then such an individual further needs to check whether his stay in India is 365 days or more in the previous 4 years. Let us think of a non-resident who visits India in FY 2020-21 (having taxable income in the financial year more than Rs 15 lakh) and stays for say 130 days. Further, during the previous 4 financial years (i.e., Financial Years, 2019-20, 2018-19, 2017-18, 2016-17) he was in India for a total of 365 days.

In such a case, the respective NRI will be treated as a resident individual for income tax purposes. While this may ring alarm bells for many NRIs, but in relaxation, they will be treated as “Resident but Not Ordinarily Resident (RNOR)”. This would-be relaxation as their foreign income (i.e., income accrued outside India) will not be taxable in India.

RNOR Criteria liberalized to nri status and taxation

Until and in the financial year 2019-20, an individual was treated as ‘Resident but Not Ordinarily Resident’ (RNOR) if any of the following conditions are satisfied:

(a) an individual who has been a non-resident in India in 9 out of 10 previous financial years previous year, or

(b) has during the 7 previous years previous year been in India for a period of, or periods amounting in all to, 729 days or less.

The above 2 additional circumstances have been kept as per the current law. Moreover, it has been noted above that due to the amendment made, an individual whose taxable income is more than Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual will still be considered as “Resident but Not Ordinarily Resident (RNOR)”.

In the case of RNOR individuals, the foreign income (i.e., income obtained outside India) will not be taxable in India.

Foreign sources mean income that is obtained or arises outside India (excluding income derived from a business controlled in or a profession set up in India).

How taxable are the revenues from ROR, RNOR, or NRI?

Depending on your home status your tax responsibility depends on. If you’re ROR, India would tax your global profits. However, only to the degree that income accrues in or occurs in India is taxable if you qualify as RNOR or NR. However, one minor difference between RNOR’s and NR’s tax liabilities is significant. An RNOR shall be responsible for taxing income in India from a controlled/established business/trade unit, while an NR shall not be taxed.

The Indian government’s reason for tightening the residence provisions was to put super-rich people under the tax net, who previously structured their stay to hold NR’s around the world and escape taxes. The Government has certainly taken an intelligent step and will take a long way to avoid tax fraud and wages.

How NRIs Can Save Taxes?

Maintain an NRE or FCNR Account

The Foreign Exchange Management Act (FEMA) rules do not permit resident Indians to maintain a savings account in India. You can open an NRE (Non-External Resident) account to deposit your foreign-owned capital.

The ultimate benefit of an NRE account is, the interest earned on this account is tax-free. Instead of maintaining a normal savings account that can levy penalties, NRIs can maintain an NRE account and take advantage of the free repatriation and tax-free benefits. There are several kinds of NRE accounts like Savings, deposits, etc.

The non-resident foreign currency (FCNR) account is the NRI’s long-term savings account. NRIs are required to receive an FCNR account or an NRE deposit account instead of receiving a normal fixed deposit account. In major foreign currencies, an FCNR account can be maintained. The key sum and the interest rate are also non-taxable on these accounts.

Interest on a Home Loan

If an NRI owns or receives any rent from a house or property in India, he is required to pay tax according to taxation requirements. One way for NRIs to recover the rental tax is by loaning the land. NRIs are entitled to demand refunds, as are the Indians if the property has been loaned under a home/property loan.

In accordance with section 80C, the NRI can demand the capital sum in respect of a home loan up to Rs. 1.5 Lakh (p.a.).

As per Section 24, the deduction is available for the repayment of interest on home loans up to 200,000 annually. This deduction is accessible under the head ‘Income from house property’.

NRIs are eligible to claim a 30% standard deduction on rental income.

So, NRIs who own a house in India and paying interest on the home loan can claim the refund.

Health Insurance

NRIs who have health insurance back in India can get a deduction under Section 80D. The maximum deduction that can be gotten is Rs.50,000/- in the case of senior citizens and Rs.25,000/- on self-insured or family (spouse, children).

An NRI who has health insurance can get a deduction of up to Rs.75,000 including ‘resident‘ senior citizen parents, self-insurance, or health insurance for kids or spouse. An additional Rs.5000 can also be deducted from the taxable amount if there are any health check-ups taken by the respective NRI.

But, it is noteworthy that deductions under Section 80DD, Section 80DDB, and Section 80U can not be availed by NRIs.

ELSS (Equity Linked Savings Scheme)

Currently, the most favorable option for NRIs to save tax is ELSS which is the short form of Equity Linked Savings Scheme. It is a mutual fund scheme with a lock-in period of 3 years. This is the only mutual fund scheme that can be availed for tax deductions under Section 80C Deduction of the Income-tax Act, 1961. It applies to NRIs as well.

NRIs who invest in ELSS can claim for deduction of up to 1.5 Lakhs annually.

The returns gained on ELSS can be high and the lock-in period is less which makes it a most preferred option as compared to other conventional fixed deposits and investment schemes. 

Indian Government relaxed residential provisions for FY20 : NRI status and taxation

A number of people holding the RNOR or NRI status were stranded in India at the end of fiscal year 2019-20 as a result of the pandemic at COVID19. The unable to travel back would affect its residential status in India and its tax liability. The Indian Government, therefore, has relaxed residential provisions, particularly for the FY 2019-20, in order to avoid genuine harm to such persons. The deadline for consideration of physical presence in India was reduced to 22 March 2020 instead of 31 March 2020, excluding the physical presence estimate of the lock-down period COVID-19.

Conclusion

NRIs need to seriously consider the total Indian income and plan their travel itinerary based on the amendment for their period of stay. The bright side is that in most cases, NRIs can continue to visit India for up to 181 days in the financial year and even in other cases where the period of stay in India is 120 days (and also for 365 days or more in the previous 4 years) or more or in case of Indian citizens who are not tax residents of any other country and are deemed to be tax residents of India, the status would be RNOR and consequently, foreign income shall not be taxable in India.