Recently, the Finance Act, 2020 (FA 2020) has made changes to determination of tax residence of individuals under the Indian Income-tax Act, 1961 (IT Act), especially for Indian citizens and persons of Indian origin (PIO).
Earlier regime
Previously, if an individual was present in India for a period of:
- 182 days in the relevant tax year (Tax Year) (Test I); or
- 60 days in a financial year (FY) and had been in India for a cumulative day count of 365 days or more in the previous 4 FYs prior to the Tax Year (Test II);
then such individual was considered a tax resident of India. Further, if an individual was a resident – he/she was considered as 'resident but not ordinarily resident' (RNOR) if certain conditions were satisfied.
The day count threshold in Test II was to be read as 182 days for, inter alia, Indian citizens or PIO coming to visit India. This higher limit was essentially given so that Indians living outside India could visit their family and manage their investments for a longer period.
Revised Regime for Indian citizens / PIO
As per revised residency rule:
- day-count of 182 days in Test II for Indian citizens / PIO has been reduced to 120 days, provided that the Indian-sourced income of such an individual exceeds INR 1.5 million for that Tax Year. However, if the presence in India is more than 120 days but below 182 days in that Tax Year, then such Indian citizen/ PIO will be regarded as an RNOR;
- an Indian citizen who is not otherwise present in India, may still be deemed tax resident of India if:
- he/she is not liable to pay tax in any country by virtue of his/her residence or domicile; and
- has Indian-sourced income exceeding INR 1.5 million in a Tax Year.
Nonetheless, such a deemed tax resident will be considered as RNOR.
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