Tax residency rules for NRIs (Non-Resident Indians) can seem complex, given the detailed criteria for determining tax residency status in India. Here’s a guide to simplify these rules and explain their implications for NRIs.

1. Understanding Residential Status under the Income Tax Act

• An individual’s tax liability in India depends significantly on their residential status.
• The three residential statuses under Indian tax law are:
  • Resident and Ordinarily Resident (ROR): Taxed on global income in India.
  • Resident but Not Ordinarily Resident (RNOR): Taxed on income earned in India and from business/profession controlled from India.
  • Non-Resident (NR): Taxed only on income accrued or received in India.

2. Determining Residential Status for NRIs

• Basic Rule: An individual qualifies as a Resident if they are in India for:
  • 182 days or more during the financial year (April 1 – March 31), or
  • 60 days or more in the financial year and 365 days or more in the preceding four financial years.
• For NRIs, the 60-day criterion changes to 182 days if they are on a visit to India, making it easier to qualify as Non-Resident.

3. Additional Provisions for NRIs

• Reduced Stay Clause: Effective from 2020, if an NRI’s total Indian-sourced income exceeds ₹15 lakh in a financial year, they can be classified as a Resident if they:
  • Spend 120 days or more in India, and
  • Have stayed 365 days or more in the previous four years.
• Deemed Resident Provision: Indian citizens with taxable income over ₹15 lakh who are not liable to tax in any other country may be classified as deemed residents, taxed only on Indian-sourced income.

4. Impact of Residential Status on Taxable Income

• Resident and Ordinarily Resident (ROR): Liable to pay tax on global income in India.
• Resident but Not Ordinarily Resident (RNOR): Only income from sources within India and income arising from businesses or professions controlled from India is taxable.
• Non-Resident (NR): Only income that is earned or received in India is taxable. Overseas income is not taxed.

5. Special Provisions for Tax on Foreign Income

• Double Taxation Avoidance Agreement (DTAA): India has DTAA treaties with several countries to prevent double taxation, allowing relief through exemptions or tax credits.
• Foreign Tax Credit (FTC): If NRIs pay taxes on income in another country, they can claim FTC in India, provided that country has a DTAA with India.

6. Recent Changes to Tax Residency Rules

• 2020 Amendments: The government revised the tax residency rules, reducing the stay requirement to 120 days for NRIs with significant income from India (over ₹15 lakh).
• Deemed Residency Clause: Introduced to prevent NRIs from claiming zero tax residency worldwide. Applicable to Indian citizens with over ₹15 lakh income in India who aren’t paying taxes in any other country.

7. Reporting Requirements and Tax Filing for NRIs

• Filing of ITR: NRIs must file an Income Tax Return (ITR) if they have taxable income in India, typically due by July 31 (October 31 if an audit is required).
• Disclosure of Foreign Assets: ROR individuals need to disclose foreign assets, bank accounts, and foreign income.
• Form 67 for FTC: NRIs claiming Foreign Tax Credit must file Form 67 before the ITR due date.

8. Common Mistakes to Avoid

• Incorrect Calculation of Days in India: Miscalculating days can impact residential status.
• Misunderstanding RNOR Benefits: NRIs may mistakenly assume RNOR means no tax on foreign income, which is only partially true.
• Ignoring FTC Documentation: Proper documentation is essential for claiming FTC to avoid complications.

This overview provides clarity on tax residency rules for NRIs and their impact on income tax in India. Let me know if you’d like more details on any section or further information on specific DTAA rules or tax implications!

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