Photo: iStock
Photo: iStock

NRI taxation: Residential status needs to be fixed afresh every FY

It is always advisable to verify the exact period of stay in India in the current and earlier years

I returned to India in February 2017 after 20 years in UAE. I filed my tax returns as a non resident Indian (NRI) for financial year 2016-17. Can I file tax returns for 2018 on the basis of RNOR (resident but non-ordinary resident) and avail tax exemption for another couple of years?

—Bala Menon

Residential status is dynamic and needs fresh determination for each financial year. Residential status in India is determined based on physical presence in India in the current financial year (FY) and the preceding 10 FYs.

If the individual satisfies any of the basic conditions mentioned below, the individual would qualify as a resident; otherwise he or she would qualify as a non-resident.

Basic conditions:

(a) Physical presence in India during the relevant FY is 182 days or more; or

(b) Physical presence in India during the relevant FY is 60 days or more and 365 days or more in the preceding 4 FYs. The period of 60 days is substituted by 182 days in the following circumstances:

(i) For a citizen of India, who leaves India in the relevant FY for the purpose of employment outside India or as a member of the crew of an Indian ship; or

(ii) For a citizen of India or a person of Indian origin, who being outside India, comes on a visit to India during the relevant FY.

A resident may either qualify as an ordinarily resident or not ordinarily resident. If both the additional conditions mentioned below are met, then the individual would qualify as an ordinarily resident; if not, such a person would qualify as a not ordinarily resident.

Additional conditions:

(a) Resident in India (as per the basic conditions mentioned above) in any two out of the 10 FYs preceding the relevant FY and

(b) Physical presence in India is 730 days or more in the seven FYs preceding the relevant FY.

An individual qualifying as ordinarily resident is taxable on his worldwide income in India and is required to report assets held outside India in the Indian tax return.

However, an individual qualifying as not ordinarily resident or a non-resident is taxable only on the following conditions:

(a) Income received in India or deemed to be received in India and

(b) Income accruing or arising in India or deemed to accrue or arise in India.

In your case, as you have returned to India after 20 years, it is likely that the additional conditions may not be satisfied. Accordingly, you may qualify as not ordinarily resident in India and taxable only on India sourced income (as mentioned above). Your overseas income earned outside India and received outside India may not be taxed in India till you qualify as not ordinarily resident in India in the relevant FY.

However, it is advisable to verify the exact period of stay in India in the current and earlier years, according to the rules explained above before claiming residential status as not ordinarily resident. You may file your income-tax returns in India accordingly.

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Sonu Iyer is tax partner and people advisory services leader, EY India.

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