If you are a Non-resident Individual and planning for returning to India then you should be well prepare for your financial Plan because sometimes making a quick decision may have an adverse effect. In this article, we will understand the ways in which the NRI, returning to India, can save his taxes even for 3 years after returning to India, through his residential status. I know you get curious to know more about it but before understanding the ways, it is essential that we will understand the meaning of the residential status of the Non-Resident.
Residential Status of a Person
You may hear the term of Residential status heard many times but today will guide you to understand it with very simple language.
Residential status means the time period in which he was the citizen of any country. Section 6 of the Income-tax Act, 1961 has provided the definition of residential status. What would be the tax implication of a person is totally dependent upon his residential status.
Under section 6 of Income-tax act, 1961, An Individual person can be classified into any of the following persons:
- Non Resident
- Resident But Not ordinary Resident(RNOR)
- Resident and Ordinary Resident(ROR)
Here, we have to know 2 questions. First, when an individual is called a non-resident or any other category as specified above, as per income tax act and which income will become taxable for the individual falling any of the above-specified categories. Let’s understand the first question first.
Residential status for an Individual
An Individual will be resident in any previous year if:
- He is a citizen of India who went outside India for the purpose of employment (Job) or business but in that previous year he stays in India for 182 days or more or
- He is a citizen of India who was leaving outside India and came to India for the purpose of Job or employment and his stay in that previous year is 182 days or more or
- In any other case where the individual:
- In India for a period of 182 days or more or
- In India for a period of 365 days or more in aggregate in immediately preceding 4 Financial years from the relevant previous year and 60 days or more in that previous year
Once a person falls in the above definition then it further bifurcated into 2 Parts for which separate taxation provision shall be applicable as per Income tax law. Let’s understand this with a pictorial diagram:
Resident But not ordinary Resident/ Resident and Ordinary Resident
An Individual is said to be resident and ordinary resident if he satisfies both of the following conditions:
- He is a resident in any 2 previous years (or more) out of the last 10 previous year immediately the relevant previous year
- His total stay in India in the last 7 years preceding to the relevant previous year is 730 days or more
If the individual satisfies both of the conditions then he shall be called Resident and Ordinary Resident. However, if anyone or none of the conditions has been satisfied then such an individual shall be called Resident but not ordinary resident. Tax implications of NRI selling property in India
Till now we have discussed the residential status of a person who is coming to India. Now we will understand, how the residential status will affect the Tax implication on such person:
If the individual is a resident of India then the global Income earned by such resident shall be taxable in India subject to other provisions of the income tax act, 1961.
A Non-Resident Individual shall be liable to pay tax on the income which has been
- Accrued or arise or deemed to be accrued or arise in India or
- Received or deemed to be received in India.
For resident and ordinary resident and Resident but not an ordinary resident, we will understand the taxability of income through table chart which is as follows:
|Sources of Income||Taxability of Income|
|Resident and Ordinary Resident||Resident but not Ordinary Resident||Non Resident|
|Income received or deemed to be received in India||✓||✓||✓|
|Income accrue or arise or deemed to be accrued or arise in India||✓||✓||✓|
|Income accrues or arises received to him outside India from:
(i) A business controlled from India
(ii) Profession Setup in India
|Income accrue or arise or received outside India||✓||🗴||🗴|
In simple words, if you an NRI then the income earned outside in India shall not be taxable in India. Here, only those income shall be taxable which has been earned in India. So, as and when you disclosed the residential status in your return as a resident, then the global income earned shall be taxable in your hands.
Let’s understand this with an example:
Mr. Nikhil Bhatia is an NRI and returning to India. He wants to sell the property in the US and buy it in India. So, the consideration received on the sale of property in the US shall not be taxable in India. Hence, he can transfer such consideration into his Indian account for the purchase of property in India.
It is advisable for the NRI returning to India to open the Resident Foreign Currency Account (RFC) Account.
Resident foreign currency account is the account which maintained in foreign currency only for the NRI returning to India. Since it is a specially established account in which the NRI can deposit its foreign currency.
So, with this account, you can deposit your foreign currency in India. Although interest income earned from this account is taxable however if your residential status is resident but not an ordinary resident then such interest shall also be exempt in our hands. This account can be opened as a savings bank account or current account.
If you are an NRI and returning to India, then by reading this article you will be able to know about your residential status and the kind of income which shall be taxable in India and the Bank account that you should open when you return to India.