Taxability of Residents but nor Ordinarily Residents

Under the Income Tax Act, it is important that the residential status of an individual or company who is a taxpayer is determined and this becomes important when the return of income of the assessee is being filed. This is major because it is based on this residential status that the taxability and the tax liability of the individual will be determined.
In short, we can say that the taxability of an individual in India and under the Income Tax Act of the country depends on their residential status. This term, i.e., residential status has been distinctly defined by the Income Tax Act such that it is not confused by any assessee or taxpayer with the individual’s citizenship. This is because, an individual who is a citizen of India might end up being a Non-Resident of the country due to his place of residing being in any other foreign country, and this might also change from year to year. At the same time, an individual who is a foreign citizen or holding the citizenship of some other country might end up being a resident of India by satisfying certain conditions specified by the Income Tax Act for determining the residential status. And the basis for determining the residential status for each of the taxpayers like individual, company, firms, trust, etc. would change from one to another one as per the provisions stated by the Income Tax Act.

Determination of Residential Status

The Income Tax Act classifies the taxable persons of the country as;

Resident
Resident but Not Ordinarily Resident (RNOR)
Non-Resident (NR)

Let’s see how the residential status of each of these above listed taxable persons will be determined;

Resident:

Under the Income Tax Act, an assessee shall be qualified as a resident if he or she satisfies one of the following two conditions:

A person stays in India for a year is 182 days or more, or
A person is staying in India during the 4 years which isdirectly preceding the current year for 365 days or more and 60 days or more in the previous year or the financial year which is in question or is relevant one.

Resident but Not Ordinarily Resident (RNOR)

Once we have determined if a person is a resident, then the next step would be to determine the satisfaction of some additional conditions for determining if the person is an ordinarily resident or a not ordinarily resident. If the person satisfies the below-enlisted conditions, then he or she shall be a Resident and Ordinarily Resident (ROR). The conditions include:

The person has been holding residential status in India in at least 2 out of total 10 years directly preceding current previous year in question, and
Has stayed in India for at least 730 days in the 7 years immediately preceding the current previous year.

Hence, if the taxpayer or the assessee fails to satisfy any one of the above two additional conditions specified by the Income Tax Act itself, he or she shall become a Resident but Not Ordinarily Resident (RNOR).

Non-Resident

An individual who does not satisfy either of the conditions given under the heading ‘Resident’ would become a Non-Resident for the previous year.
For example, David is a person of Indian Origin and has been working in South Africa for the last 15 years. But he comes to India and visits his relatives every year and stays in India for 30 days without missing the same any year. But during the PY 2020-21 he started a business in India for which he stayed back for 6 months and went back on 31^st of December 2020 after arriving on 1^st of June 2020. So, for determining the residential status of Mr. David we can first check the basic conditions which are;

The stay of such a person in India for a year is 182 days or more, or
The stay of such assessee or person in India for the directly preceding 4 years is either for a period of 365 days or more and a period of 60 days or more during such previous or financial year which is the one in question.

So, Mr. David stayed for more than 200 days in India during the FY 2020-21 satisfying the first basic condition which makes him a Resident. And now for checking if he is a resident and ordinarily resident or resident and not ordinarily resident, we should check the additional conditions which are:

A person who is a resident of India in at least for 2 out of 10 years which is coming immediately prior the current relevant year, and
Has stayed in India for at least 730 days in the 7 years immediately preceding the current previous year.

Checking the first condition we can say that during PY 2019-20 and 2018-209 Mr. David has stayed in India only for 30 days which puts him out of the purview of being a resident and thereby making him a resident but not ordinarily resident.

Amendment regarding the Persons who were stranded in India due to Pandemic

It is to be noted that from the through Circular No.2 of2021, F. No. 370142/1812020-TPL from the Government of India, there was a significant amendment made with regard to the determination of residential status for individuals for Financial Year (FY) 2020-21), which is stated below:

Short or a Lower Period in India stay will not result in Indian residency

In certain cases, there may arise scenarios or cases where a person, who was a non-resident during the previous year 2019-20, had to stay in India due to the reason of the COVID19 pandemic and the subsequent lock down for some time during the previous year 2020-21 CPY 2020-21. In these scenarios, there are lesser chances that the person would get the residential status in India as resident during the PY 2020-21 and which shall be only for these reason that has been explained below: –

A person who is the citizen of India or is a person of Indian origin may become resident in India only in or by satisfying one of the following situations: –

(i) if his income in total from sources located inIndia (i.e., other than the income from foreign sources) is not exceeding INR 15 Lakhs during the PY 2020-21 and his tenure of stay in India is for 182 days or more during the relevant PY 2020-21; or
(ii) the total income earned by him from sources that are located in India (i.e., other than the income from foreign sources) is exceedingINR 15 Lakhs during the PY 2020-21, and
(a) his tenure or time of stay during PY 2020-21 is for 182 days or more; or
(b) his stay in India during the PY 2020-21 was for a period of 120 days or more and also stays for a period of 365 days or more in the preceding four previous years.

An assessee or person who is not a citizen of India or a person of Indian origin may become resident in India only in any one of the following situations: –

(i) if his stay in India during PY 2020-21 was for 182 days or more; or
(ii) if the person stayed back in India during the PY 2020-21 for a period of 60 days or more and he also stays for a period of 365 days or more in the earlier four previous years.
Thus, generally, we can say that a person will hold the residential status in India as resident for the PY 2020-21. And this shall be applicable only if he stayed in India for 182 days or more unless he is covered by the exceptions discussed above.

Taxability of RNOR

The taxability of such persons shall be restricted to the income they earn in India (if any). These assesse’s are not required to pay any tax on the income which they have earned in any foreign country like a resident. And in case of any double taxation on income earned by them due to residing in any other country, they can resort to the Double Taxation Avoidance Agreements (DTAA), which India have entered into with other countries or his or her country of residence such that the possibility of paying double tax is eliminated.
Hence, we can conclude that an RNOR should be paying tax only on the income which he or she has earned in India and not on any foreign income which he or she might have earned in the foreign country.