Residential Status of Individuals in Finance Act, 2020

The Finance Bill, 2020 brought various changes to Residential status of individuals, including the concept of deemed resident. The Finance Act, 2020 as passed by the Parliament reversed some of them and brought some further changes. The following article explains the 2 main amendments brought in – Reduction of limit to 120 days in case of certain persons, and deemed residence.

But first let's talk about the Basic Conditions of Residence as known to us:

As per Section 6(1), An individual is said to be resident in India in any previous year, if he:

(a) is in India in that year for 182 days or more;(first condition) or

(b) having been in India for 365 days or more within the four years preceding that year, is in India for 60 days or more in that year. (second condition)

Further as per Explanation 1 to Section 6(1), in case of an individual:

(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship, or for the purposes of employment outside India, or

(b) being a citizen of India, or a person of Indian origin who, being outside India, comes on a visit to India in any previous year, the "60 days" in the second condition would be substituted by "182 days"

Amendment 1: Reduction of days to 120

As per the first amendment, in case of the citizen or person of Indian origin(PIO) who, being outside India, comes on a visit to India(covered in sub clause (b) of the explanation above) and has total income, other than the income from foreign sources, exceeding 15 lakh rupees during the previous year, the second condition of residence would apply with 120 days instead of 182 days as provided in the explanation.

However, in case of persons visiting India, having income upto Rs. 15 lakh, 182 days would continue to be applicable. Further, in case of citizen of India leaving India as member of crew or for employment, the limit will continue to be 182 days.

This amendment would include more people in the residence net by requiring them to stay lesser days to become a resident.

It can be summarized with the help of the following diagram:

Amendment 2: Deemed Resident

As per newly inserted clause (1A) of Section 6,

"Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding 15 lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature."

So a citizen of India, who does not satisfy the residence criteria of any country, and accordingly is not liable to tax in any other country, would be deemed to be a resident of India, if his income from Indian sources exceeds Rs. 15 lakh.

After the Finance Bill was tabled, there were concerns that whether global income of such persons would be taxed in India. Such concerns have been addressed by adding sub-clause (c) and (d) to Section 6(6), as described above.

As per sub clause (c) of Section 6(6), all such persons who became a resident due to Amendment 1, and would not have been a resident under the earlier provisions i.e. who stayed in India for 120 days or more, but less than 182 days, would be deemed to be "not ordinarily resident" irrespective of whether they comply with the 2 conditions prescribed for individuals.

As per sub clause (d) of Section 6(6), such a deemed resident as per Amendment 2 would be deemed to be "not ordinarily resident", irrespective of whether he complies with the 2 conditions prescribed for individuals.

Due to promotion of such persons from non-resident to "Resident but not ordinarily resident", income accruing to such persons outside India from a business controlled or a profession set up in India would become taxable, while other income accruing outside India would still not be taxable as the person is not ordinarily resident(Income accrued or received in India is taxable in case of non-resident as well). Such persons would also lose the various benefits provided to non-residents under the provisions of Income Tax Act, 1961.

The Finance bill contained both these amendments without any income criteria, but the Finance Act, 2020 has provided that only individuals having income exceeding Rs. 15 lakh during the previous year, other than income from foreign sources, would be covered by the amendment, to prevent hardships to small assessees.

The Finance Bill had also contained an amendment that changed the twin conditions of "Not ordinarily resident" to a single condition that the individual having been a non-resident in 7 out of 10 previous years preceding that year, would be called "not ordinarily resident". But this amendment has been removed in the Act, and the twin conditions remain as before:

1) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or

2) has during the 7 previous years preceding that year been in India for 729 days or less.

So these are the various changes brought in the Residential Status of an Individual. Hope this is helpful!

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