DEEMED RESIDENT IN INDIA – CONCEPT & TAX IMPLICATIONS

The concept of deeming a resident has been introduced in the Finance Act, 2020, by the Income-tax Act, 1961. It did this to make sure that Indian citizens who operate their business in such a way that they do not pay taxes anywhere at all will not avoid paying taxes in the first place.

Previously, the residency was established solely based on the number of days of stay in India. However, it was observed that certain high-income individuals were able to avoid becoming tax residents in any coauntry by carefully managing their period of stay across jurisdictions. To resolve this, the law had proposed the concept of deemed residency under Section 6(1A).

1. When is an Individual Treated as a Deemed Resident?

• The deemed residency of India shall attach to an individual in case the following conditions are met:
• The individual is an Indian Citizen.
• The previous year's income (measured in the concerned previous year without any foreign source income) in India exceeds ₹15,000,000, and
• The domicile, residence, or other similar qualifications do not place this individual in tax liability in any other country or territory.

These conditions being fulfilled will imply that the individual will be regarded as a deemed resident of India despite failure to satisfy the normal stay conditions as provided in the Income-tax Act.
 

2. Residential Status of a Deemed Resident

An individual who acquires the status of resident under the above is considered Resident but Not Ordinarily Resident (RNOR) by Section 6(6) of the Act.

The reason why this classification is significant is that taxation on RNOR is restricted for an individual who is fully resident, but not for one who is not.

3. Tax Implications for a Deemed Resident (RNOR)

In the case of an individual who is a Resident not ordinarily resident, the income below is taxable in India:

• The amount of income, which is considered or received in India.
• Income accruing or arising in India
• Income from a business controlled in India
• Income from a profession set up in India

However, foreign income that has no connection with India is generally not taxable in India for such individuals.

Accordingly, the clause does not necessarily lead to taxation of global income, but will avoid tax evasion, in which individuals will be entirely out of the tax bracket.

4. Persons Likely to be Impacted

The provision generally affects:

• High-net-worth Indian citizens living in tax-neutral jurisdictions
• Individuals who structure their stay across countries to avoid tax residency
• Persons who are not liable to tax in any country due to local tax laws
• The rule ensures that such individuals are brought within the Indian tax framework at least to a limited extent.

5. Checklist

When defining a deemed resident or not, the following checklist must be analyzed:

• Knowing whether the person is a citizen of India or not.
• Ensure that during the period of the total income (not including foreign source income) is in excess of 15 lakh in the corresponding financial year.
• Check the liability to tax of the individual to tax in any other country under its own domestic tax laws.
• To be able to check how many days one stayed in India to be normal under the normal residency status of Section 6(1).
• Identify a resident who is not ordinarily resident.
• Identify income earned or received in India.
• Review foreign income connected with a business controlled or a profession set up in India.
• Evaluate the applicability of the Double Taxation Avoidance Agreement (DTAA), if relevant.

Let’s say this rule is mainly about closing a gap that existed earlier. Some individuals managed their stay in different countries in a way that they were not treated as a tax resident anywhere. With the concept of deemed residency, that gap is now covered. If you are unsure how the deemed residency rules apply to your situation, it is important to review your tax position with care.

Visit us at pkpconsult.com now. We help you thoroughly understand these rules and guide you in managing your tax responsibilities in India with clarity and confidence.