What are the income tax implications for current investments if a resident becomes an NRI?

The Finance Acts of 2020 and 2021 have made significant modifications to the way individuals' residence status is determined. These reforms, which take effect in Financial Year (FY) 2020-21 and beyond, have had a direct impact on the NRI community. Over 30 million NRIs are living in the Middle East, the United States, the United Kingdom, Canada, Singapore, and other nations.

Let's have a look at the new criteria for assessing NRI's "residential status.'

NRIs' residency status is determined by a set of rules.

Source: Yadnya Investment Academy

NRIs (Indian citizens and persons of Indian origin) were defined as individuals who visited India for less than 182 days in a financial year till the end of FY 2019-20 (i.e. the financial year ending March 31, 2020). In circumstances when such visiting individuals' total taxable Indian income (i.e., income accruing in India) exceeds Rs 15 lakhs throughout the financial year, the Finance Act 2020 decreased this time to 120 days. Accordingly, visiting NRIs whose total income (considered as taxable income) in India during the financial year is up to Rs 15 lakhs would continue to be NRIs if their stay does not exceed 181 days, as was the case last year.

As a result, in addition to keeping track of the number of days spent in India, visiting NRIs must also keep track of their taxable income in India. This is because once an individual's taxable income in India surpasses Rs 15 lakhs, laws relating to stays of more than 120 days become relevant.

Deemed Residential Status is available to Indian citizens who are Global Non-Residents based on Indian income criterion under section 6. (1A)

An individual who is an Indian citizen is assumed to be a resident in India in any previous financial year if he is not "liable to tax" in any other country or territory due to his domicile, residency, or other comparable factors. This provision, however, will only apply if his total taxable Indian income for the year exceeds Rs 15 lakhs.

The Income Tax Act did not have such a provision till FY 2019-20. For OCI (Overseas Citizen of India) card holders, foreign citizens, or PIOs, this clause of determining residential status for a stateless individual is not applicable.

Finance Act 2021 defines "liable to tax."

The phrase "liable to tax" was defined in the Finance Act of 2021 in terms of a person and a country. It means that such person has an income-tax liability under the law of that country for the time being in force, and it includes a person who has been exempted from such liability under that country's law.

The following rule has caused uncertainty in the situation of individuals residing in Middle Eastern nations that do not levy any income tax. The Central Board of Direct Taxes (CBDT) has issued a press release as a relief to such NRIs working in such nations, stressing that the aforesaid law is an anti-abuse provision and is not meant to tax bona fide foreign workers. It is also stated that if a person becomes a Resident under Section 6(1A), no tax will be levied on foreign income unless it comes from an Indian company or profession.

A path forward

NRIs must carefully examine their overall Indian income and arrange their travel schedule for the duration of their stay (depending on the new residential status provisions). The positive aspect is that NRIs can visit India for up to 181 days in a financial year in most cases, and even in other cases where the period of stay in India is between 120 days and 181 days (and also for 365 days or more stay in India in the preceding four financial years) or more, the status is RNOR (if their Indian income does not exceed Rs 15 lakhs) and thus foreign income is not taxable in India. Similarly, if an Indian citizen is not a tax resident of any other nation but is judged to be a tax resident of India, their status is RNOR (provided their Indian income does not exceed Rs 15 lakhs) and their overseas income is not taxable in India.