Sep 28, 2009

NRIsTax Planning - Residential Status of Returning Indians (Part 2)

Photo by caribb

It’s very important that returning non-resident Indians (NRIs) know the tax implications in advance before their arrival in India so as to better plan their tax affairs.

In continuation of part 1:
NRIs Tax Planning – Residential Status, this post will explain how to maintain your NRI status even after coming back to India and how to minimize your tax liability even after losing your NRI tag for a particular financial year (FY) under Indian Income Tax Act, 1961.

Residential Status: Year of your final return to India
To maintain your NRI status (under tax laws) in the year of your final return to India, you’ve to ensure that

i). Your stay in India during the financial year (FY) of your return is less than 60 days, or,
ii). If your stay in India during the FY of your return is exceeding 60 days but is less than 182 days, then further your total stay during last 4 FYs doesn’t exceed 364 days.

Once your stay in India during the FY of your return exceeds 181 days, you lose the status of non-resident.

So if you’re a returning NRI, ensure that you return to India on or after 1st Feb (Feb 2nd in case of a leap year) of a FY so as no to lose your non-resident status. However, if your aggregate stay in India during 4 preceding financial years doesn’t exceed 364 days, then you may return to India anytime after September 30th of the relevant year without losing your non-resident status under IT Act.

For example, if you’re planning to return back to India during current financial year (i.e., 2009-10), the day of your arrival in India should depend upon your total stay in India during last 4 financial years (i.e., FY 2005-06 to FY 2008-09). If it exceeds 364 days, you should arrive only in the month of February or March 2010 and if it doesn’t exceed 364 days, then you can arrive here anytime from October 2009 onwards.


Another Escape route after becoming resident in India
However, even if you lose your NRI status under the IT Act during a particular FY, there’s nothing to worry about. In such cases, Indian IT Act provides you another escape route to avoid paying tax on your foreign income.

[Note: The following discussion is not relevant for those returning NRIs who won’t have any foreign income after their arrival in India.]

If you’re not a ‘non-resident’ (NR), means that you’re a resident in India for tax purposes. Now, resident tax payers are further divided into two sub-categories: ‘resident and ordinarily resident’ (ROR) and ‘resident but not ordinarily resident’ (NROR).

According to the Income Tax Act, 1961, once an individual becomes a resident in India during a particular financial year due to his/her crossing the threshold limit of physical stay (as discussed in the previous post:
NRIs Residential Status - Part I) he further needs to determine whether he would qualify as resident and ordinary resident (ROR) or resident but not ordinary resident (RNOR) based on his residential status of past 10 years.

How to determine whether you’re ‘ordinary resident’ or ‘not-ordinary resident’?
To acquire the status of ‘resident but not ordinary resident’ for a particular FY under Income Tax Act, 1961, you’ve to make sure that you satisfy either or both of the following two conditions as laid down in section 6(6)(a):

a). You’ve been ‘non-resident’ in India in 9 out of 10 FYs immediately preceding the relevant FY.

b). Your total period of your stay in India during the 7FYs immediately preceding the relevant FY is less than 730 days.

In other words, if you qualify as a resident in India for at least 2 out of 10 FY preceding the relevant FY AND you’ve been in India for at least 730 days during 7 years preceding the relevant FY, then you become a ‘resident and ordinarily resident’ (ROR) in India and there is no escape from paying taxes on your foreign income.

Usually, an NRI coming back to India after a decade long overseas stint will qualify as ROR only in the third year. In other words, a returning Indian who has been a Non Resident in India for 9 years or more (during past 10 years preceding the relevant FY), then for 2 successive years he shall be a resident but not ordinary resident (RNOR).


But what’s the significance of this distinction between ‘ordinary residents’ and ‘not-ordinary residents’?
While in the hands of ‘ordinary residents’ in India, the entire world income is taxable, the foreign income of ‘non-ordinary residents’ is taxable only if it is

i). Business income and business is controlled from India, or
ii). Professional income from a profession set up in India.

Rest all kinds of foreign income is exempt in the hands of ‘not-ordinary residents’ in India similar to exemption provided to non-residents. Put another way, impact of being ‘resident but not ordinarily resident’ in India for tax purposes means that all your passive foreign income (income earned on overseas assets)such as interest, dividend, rent etc. would not be taxable in India (except business or professional income as specified above).

Any questions?


Also see:

1. NRI Tax Planning: An Introduction

2. Difference between NRE & NRO Bank Accounts

3. Starting a Consulting Business in India: Issues Involved

4. 5 Common Stock Investing Mistakes

17 comments:

  1. If a person on NROR status works from India for a US entity and receives payments in US dollars, is that non-taxable income in India? Is there a clause somewhere that states even though the work is physically being done in India, the services has to be rendered as well as 'utilized' in India? If it is utilized elsewhere, this can be deemed as tax-exempt income for NRORies.

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  2. As per section 9(1)(ii) of the IT Act, 1961, salary is deemed to accrue or arise in India ‘if it is earned in India’. Further it is also stated that salary income for ‘services rendered in India’ shall be regarded as income earned in India. There is no mention of ‘utilisation of services in India’. So, accordingly salary in the above mentioned case becomes taxable in India in the hands of ‘resident but not ordinarily resident’ (RNOR).

    Otherwise also if the payment is received in India or ‘deemed to be received’ in India, it becomes taxable.

    One more point worth noting is that the currency in which payment is received is not relevant for the purpose of determining the taxability under Indian tax laws.

    ReplyDelete
  3. Thanks so much. Is there a difference or advantage in operating as a Individual or setup a firm in trying to work from India for a US client? I assume as a consultant, I could claim tax deductions on travel and such. Would business setting enable tax deductions on rent if operating from home? BTW, any recommendation of folks who can advice me either in US/India regarding this would be appreciated.

    ReplyDelete
  4. I’ll be answering your question in detail in a separate post in next few days.

    ReplyDelete
  5. As promised, your query is answered. Please click the link given just above the comment section.

    ReplyDelete
  6. Hello,

    I am a US citizen (PIO/OCI card holder) but employed by a US based company ie. get my Paycheck in US. I have been in India for more than a year now and may stay much longer. Where should I file my taxes? Can i still claim NRI benefits?

    Thanks
    Ketan

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  7. Hello,

    I am a US Citizen (acquired citizen ship in March, 2009), Holding a PIO/OCI card, currenlty employed/salaried by a US based Company. In Jan '2009 my company sent me to India to outsource some projects. Since then they have asked me to continue here in India. I have NRE/NRO account where my salary income is transferred. I do make some interest on NRO deposits which are taxed at source (15%). I am now confused about my tax status. Can someone direct me to the right person?

    Thanks
    Ketan

    ReplyDelete
  8. Ketan: I can’t see any reason to feel confused.

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  9. I have ppf, senior citizen as well as post office acct opened when I was Resident Indian. Now I am an NRI but would get back to India as overseas Citizen of India in 2013 for life. I have no foreign income. Can I become a resident indian again for IT purposes and thereafter can I again open senior citizen., ppf and post office acct

    sundaram

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  10. Sundaram,

    First understand that residential status for tax purpose (defined in IT Act) is different than residential status for investment purposes (FEMA). For more details go to archives and see post no. 6, September 2009.

    Accordingly, for tax purposes your residential status in the year of your arrival and subsequent years will depend on your date of arrival in India and your physical stay in India during previous years as already discussed in this post.

    For investment purposes, the moment you arrive in India (if you’re coming to India for good), you’ll become a resident in India. It will not matter whether you’re a citizen of India or overseas citizen of India (OCI) at that point of time.

    ReplyDelete
  11. Dear Fisher,

    Your articles have been very helpful. Thank you!

    If a returning NRI would like to pull out his US retirement funds (after paying US taxes/penalty) after losing his RNOR status (ROR status), will that money be taxed in India.

    Thanks
    N'CharanDas

    ReplyDelete
  12. N’CharanDas,

    Sorry, can’t say anything for sure!! You should refer Indo-US DTAA.

    ReplyDelete
  13. Dear sir, I have been reading your articles on NRI and they are all fantastic. I donot find any article on DTAA RELIEF (Between US & India). I have a major query. I shall be grateful if you please find answer for me.

    My son has visited US in Nov 09 end for the first time on H1B Visa (as Indian-Software Engineer). Effective December 2009, his Salary being paid in US Dollars by the foreign company after deducting withholding Tax at source @ 29.30% as per US law (comprising Federal Tax @21.65% & Social Security including Medical Tax @ 7.65%). However, for DTAA relief, (I understand that) only Federal Tax is considered / allowed.

    His period of stay in US is uncertain, but I am most worried about his Current Financial Year just ended on 31st March 2010, that for F Y 2009-10, his status as per Income-tax would be Resident as he has already spent over 182 days in India.

    In order to avail DTAA relief, obtaining the relevant proof of withholding tax paid in US is Must. (Please guide me whether my understanding is correct.)

    But as per US law their Current Financial Year is the same as Calendar Year 2010 ending on 31st December 10, under which his entire salary drawn in US $ (Dec 09 to Mar 10) would now be reckoned. Therefore, relevant TDS certificate would only be available in the year 2011. Whereas my son is required to file return in India for his F Y 2009-10 before 31st July 2010 by that time obtaining the necessary evidence from US is totally impossible.

    Under the circumstances, how do we deal with such situation when he has fully discharged his tax liability in US?
    His average tax payable in India works out to be 21.50% of Total Taxable income for the Financial Year ended on 31st March 2010. Thus, his tax liability in India is almost equivalent to Federal Tax @ 21.65% being withheld in US and I understand the same would only be considered for DTAA relief. Kindly correct me if my understanding is wrong.

    Without any documentary proof from US but on the basis of declaration, Can he file Provisional Return of Income in India for the time-being, claiming the available DTAA relief? So that he does not need to repeat tax payment in India unnecessarily and no further interest or penalties would get attracted.

    After obtaining the necessary documents from US in 2011, can he file his Revised Return?

    I shall be very much grateful to receive your expert advice please.
    With regards,

    Ram GP

    ReplyDelete
  14. Ram GP,

    Take the opinion of a tax consultant or an accounting firm dealing in international taxation.

    ReplyDelete
  15. Dear Fisher,
    I earn Salary in Hong Kong and would be moving back.
    I moved out of India in Oct 3, 2003 - just missing the 182 days.
    However in 7 years from 2004-05 to 2010-11, I was in India for 215 days. In the 4 years from 2007-08 to 2010-11, I stayed for 172 days.
    Now in 2011-12, I will be in India for 205 days.
    My question is will there be tax on my salary that I earn here. I will have no further income from HK after I return to India.
    Could you please help clarify the position?

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  16. Can RNOR able to extend the PPF after maturity for further 5 years block with money deposition same as before maturity.

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  17. Did RNOR status individual required to pay tax on his FD in NRE account ?

    ReplyDelete

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