Changing Residency Status in India: Tax Implications

The levy of income tax under the Indian taxation system is based on residence rule i.e. it levies tax on individual based on residential status of any individual as per the Income Tax Act, 1961 and different provisions are applicable depending on whether any individual is resident or non-resident as per the Income Tax Act,1961.

Residential status for income tax purposes

Residency for tax purposes is independent of the citizenship of any individual and it is decided based on a person’s physical stay in India. under section 6, there are three categories of residency for an individual:

1.    Resident individual: An individual is said to be resident if he fulfils any of the two below conditions:

2.    Not Ordinarily Resident (NOR) Individual: If an individual approved as resident of India then the next procedure is to know if they are a Resident Ordinarily Resident (ROR) or Not Ordinarily Resident (NOR). He will be a ROR if he meets both of the following conditions:

Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.

3.    Non-Resident (NR) Individual: A person is non-resident in India if the taxpayer does not fulfil any above mentioned rules needed to be considered as a resident but not ordinarily resident and ordinary resident.

4.    Company: a company is resident if it is incorporated in India or has its permanent establishment in India. The concept of Permanent Establishment is explained below:

In the Double Tax Avoidance Agreement between countries and Income Tax Act 1961, the concept of PE is clearly defined. The foreign enterprise would consider as a Permanent Establishment in India if the foreign enterprise would have a fixed place of business in India or doing a business in India through:

If a foreign company is considered to have a permanent placement in India then the income from business of such foreign organization is attributed as business carried out in India and is eligible to pay tax in India as per Income Tax Act 1961 in India i.e. all the compliances would be applicable as if the foreign entity was an Indian entity.

Hence before filing the income tax return, one must know the residential status as per Income Tax Act, 1961.

Taxability of income based on residential status in India

For a Resident Ordinarily Resident (ROR), his global income is taxable in India, however for Not Ordinarily Resident (NOR) and Non-Resident (NR) only the incomes accruing or arising in India or received or deemed to be received in India are taxable. A summary of scope of total income taxable in India as per section-5 is given below:

Particulars	Resident & Ordinary Resident (ROR)	Not ordinary Resident (NOR)	Non-Resident (NR)
If the income is obtained or accounted to be received in India whether earned in India or anywhere else	Taxable	Taxable	Taxable
Income which is gained or arise or is considered to be gained or arise in India in the previous year, whether received in India or elsewhere	Taxable	Taxable	Taxable
Income which is gained or arise outside India and received outside India from a business controlled from India	Taxable	Taxable	Non-Taxable
Income which is gained  or arise outside India and received outside India in the previous year from any other source	Taxable	Non-Taxable	Non-Taxable
Income which is gained  or arises outside India and received outside India during the year preceding the year and remitted to India during the previous year	Taxable	Non-Taxable	Non-Taxable

Taxability for Income for Other Assessee:

Sl.No	Income	Resident	Non-Resident
1	Indian Income	Taxable	Taxable
2	Foreign Income	Taxable	Not Taxable

Rates of tax & calculation of tax for foreign investors    

If no Permanent establishment (PE) is constituted as per above provisions, then the following rates are applicable to a foreign investor

1.    Interest, Fees for Technical services and Royalty:

• the amount of income tax calculated on the income by way of interest received on loan given in foreign currency to Indian concern or government of India, if any, included in the total income, at the rate of 20% plus surcharge and health and education cess.
• the amount of income tax calculated on the income by way of interest received on loan given to Indian concern from source outside India in  foreign currency:
  • under a loan agreement at any time on or after the first day of July 2012 but before the first day of July 2023.
  • in the form of  long-term infrastructure bonds at any time on or after the first day of July 2012 but before the first day of October 2014; or
  • In form of any long-term bond including long-term infrastructure bond at any time on or after the first day of October 2014 but before the first day of July 2020, as approved by central government, at the rate of 5% plus surcharge and health and education cess.

• the amount of income tax calculated on the income by way of interest received on loan given to Indian concern with respect to money borrowed by it from outside source by way of issue of rupee denominated bond before the first day of July 2023 and to the extent to which such interest does not surpass the amount of interest calculated at a certain rate decided by the central government in this behalf, having regard to the terms of the loan or the bond and its repayment, at the rate of 5% plus surcharge and health and education cess.
• the surcharge on income more than INR 10 million but less than INR 100 million is 2% on income tax and any income exceeds INR 100 million is 5% on income tax. The health and education cess is 4% applicable on income tax (inclusive of surcharge if any).

2.     Dividend Income: received by a non-resident or of a foreign company, taxable at a rate of 20%

3.    Tax on Capital gains:


4.    Other Incomes:


Foreign Companies with an income which exceeds Rs. 1 Crore but does not exceed Rs. 10 Crore: 40% plus surcharge of 2% plus 4% health and education cess on income tax inclusive of surcharge and will therefore have an effective rate of 42.432% (being 40% of the net taxable income plus surcharge of 2% and 4% health and education cess on income tax inclusive of surcharge).

Foreign Companies with an income of up to Rs. 1 Crore are exempt from paying the surcharge applicable to foreign companies and will therefore have an effective rate of 41.6% (being 40% of the net taxable income plus 4% health and education cess).

(B) Foreign individuals:

Taxable Income Range (Rs)	Tax Rate (%)
Equal/Less Than Rs 250,000	Nil
Between Rs 250,000 To 500,000	5
Between Rs 500,000 To 1,000,000	20
More Than Rs 1,000,000	30

Surcharge for individuals: If Total Taxable Income Exceeds certain amount, then there are surcharge also applicable on all foreign individuals. Surcharge is levied on basic tax calculated as per the Tax Slabs. Rates of surcharge are as follows

• 10% If Taxable Income Exceeds Rs 50 Lakh
• 15% If Taxable Income Exceeds Rs 1 Crore
• 25% If Taxable Income Exceeds Rs 2 Crore
• 37% If Taxable Income Exceeds Rs 5 Crore

Cess on individuals: On the tax calculated as per above calculations, @4%cess is charged on tax calculated above.

Double Taxation Avoidance Agreements (DTAA)

1.    Double tax relief is available in respect of income where income tax has been paid either in India or abroad. General agreements are available with more than 130 countries, such as Japan, UK, the US, Germany, France, Italy, Spain, China, Canada, Australia, Russia, Netherlands, Brazil, Hong Kong etc. Besides this, limited agreements in relation to income of airlines/merchant shipping also exist with more than 15 countries.

2.    DTAA- Double Taxation Avoidance Agreement is an agreement which helps individuals or entities to mitigate the issue of paying the tax twice on the same income in both countries. It allows foreign investors to claim tax relief in their home country for the tax paid in India. The DTAA also helps to prevent tax evasion and promote transparency in tax matters.

The taxation and set offs under DTAA depend on the provisions of the agreement and the nature of the income earned by the investor. Here are some of the key features of taxation and set offs under DTAA in India:

Foreign Assets and Disclosure

• Non-residents do not need to report foreign assets, as they are only taxed on income earned in India. However, if they earn income in India and have a Resident status (during a portion of the year), they must comply with the relevant reporting requirements for foreign assets.
• Residents are required to report foreign assets and income under the Schedule FA of the Income Tax Return (ITR).
• Tax Deducted at Source (TDS)
• In the case of an individual becoming a non-resident after being a resident, their tax liability on income earned in India will be governed by the TDS rules applicable to non-residents, which may involve different tax rates.
• For non-residents, TDS is typically applied on income earned in India at a higher rate. For example, TDS on interest income for non-residents can be higher than that for residents.

Repatriation of Funds

• Non-residents are subject to FEMA (Foreign Exchange Management Act) guidelines, which restrict how and when they can repatriate their earnings from India.
• Residents can freely repatriate money abroad from India. However, there are limits on the amount that can be remitted under the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI).

Practical Scenarios

1.    Returning to India: If someone has been a Non-Resident for several years and then returns to India to take up residence, they may qualify as a Resident (and Ordinarily Resident or RNOR). This would mean their global income will be taxed in India, although the first year of residency may have exemptions based on their RNOR status.

2.    Leaving India: If someone is leaving India and becomes NRI then their income which they earn from foreign source will not be liable to pay tax in India. But if they have generated income in India such as interest, capital gains etc then it is taxable in India.

3.    Shifting Between Resident and Non-Resident: If people continue to switch their statuses, then their period of stay and location of income will be determined whether the income is taxable in India and how much tax is due.

Compliance and Planning

• Tax planning is essential when changing residency, especially for those with foreign income or assets, to leverage treaties, exemptions, and planning opportunities to minimize tax liability.
• Individuals must update their residency status with the Income Tax Department when their status changes. This will ensure the correct taxes are paid.