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For the purposes of levy of tax, the Income-tax Act in India
has classified the status of an individual
assessee into three viz.,
Resident and ordinarily resident (ROR)
Resident but not ordinarily resident (R but NOR)
Non-resident (NR)
The residential status of an Individual is determined based
on the number of days of stay in India. Financial
year (FY) is April to March.
*Not applicable to a resident going outside India for
employment, a resident who leaves India as a member of crew
of an Indian ship, an Indian citizen or person of Indian origin
who is abroad and comes to India for a visit i.e. if such
a person stays in India for less than 182 days, he would be
a non-resident.
In the case of a ROR, his global income is taxed in India
while in case of a Non-resident; only the income earned or
received in India is taxed in India. See FAQs
Existing NRIs for more on taxation of Indian income of
a NRI.
A returning NRI would generally be assessed as a R
but NOR on his return to India. Up to financial year
2002-03, in a given specific situation, a returning NRI was
assessed as a R but NOR on his return to India for nine
years i.e. income earned on overseas assets or income
accruing outside India (unless it is derived from a business
controlled in or a profession set up in India) was not taxed
in India for 9 years. However, with effect from financial
year 2003-04, this particular benefit has been curtailed
from nine years to two years i.e. income earned on
overseas assets or income accruing outside India (unless it
is derived from a business controlled in or a profession set
up in India) would now be taxable in India from the third
year itself. Accordingly, ‘A’ would now pay tax on his world
income sooner than he would have hitherto done.
The impact of R but NOR status is that foreign passive incomes
likes interest, dividend, royalty etc. would not be taxable
in India in respect of a person who is R but NOR. Even share
of profit of a partnership firm or any other business income
would not be taxable in India, if the business in respect
of which such income arises is not controlled from India.
In other words, all foreign sourced income of a R but NOR
is not normally taxable in India unless it is derived from
a business controlled in or a profession set up in India.
Income accruing outside India would be taxed outside India
as well in most cases in accordance with the tax laws of the
foreign country and the Double Tax Avoidance Agreement (DTAA)
signed between India and the foreign country. He would be
entitled to seek relief under the relevant DTAA i.e. avail
credit for foreign taxes paid against income tax paid in India.
However there are certain practical difficulties associated
with the availing credit for foreign taxes paid such as a
possible difference in accounting year of the foreign country
and India.
Immaculate planning of income tax implications in advance
i.e. prior to return to India holds paramount significance
for NRIs intending to return to India.
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