Income Tax Bill 2025: Indian citizen-deemed residency

Income Tax Bill 2025: Concept of Indian citizen-deemed residency

Meaning of deemed residency:

The introduction of a new Resident but Not Ordinary Resident category aims to strike a balance between preventing tax avoidance and ensuring preferential tax treatments are still available in certain cases. The Income Tax Bill 2025 retaining the deemed residency clause from the Finance Act 2020 indicates that the government continues to focus on taxing global Indian citizens who are not tax residents in any country.  As per Section 6(1A) of the Income Tax Act, an individual will be deemed to be a resident in India if:

• Their total income (excluding foreign-sourced income) exceeds INR 15 lakh in a financial year, and
• They are not liable to tax in any other country or territory due to reasons like their domicile, residence, or similar criteria.
• deemed residency Applies to Indian citizens earning INR 15 lakh+ from Indian sources who are not liable to tax in any other country. This provision does not apply to individuals who already qualify as residents under other provisions of Section 6.
• This provision mainly targets stateless persons—typically Indian citizens who do not qualify as residents in any country but earn significant income from Indian sources.  Section 6(6): Such deemed residents are taxed in India as Residents but Not Ordinarily Residents u/s 6(6). This means:
  • They are taxed on Indian-sourced income and income from a business/profession controlled from India
  • Their foreign income remains tax-free in India, unless it arises from an Indian-controlled business.

Improves clarity without altering substantive tax implications.

• The Income Tax Bill 2025 retaining the deemed residency clause without any modifications indicates continuity in tax treatment for NRIs.
  • No change in residency definition: Section 6 remains largely the same.
  • Deemed Residency Clause retained: Indian citizens earning INR 15,00,000/- from Indian sources and not taxable elsewhere continue to be deemed residents.
  • Minor language simplification: “For the purpose of employment outside India” replaced with “for employment outside India.”
  • No relief for NRIs on TDS for property sales. The high 20%+ tax withholding on gross sale proceeds remains, leading to cash flow issues and refund delays
  • The INR 15,00,000/- threshold for determining deemed residency in India includes:

• • • Income accruing or arising in India or income deemed to accrue/arise in India (e.g., salary, capital gains, rental income from Indian properties, interest on Indian bank accounts).
    • Income received in India or income deemed to be received in India.
    • Foreign income derived from a business controlled in India or a profession set up in India (e.g., consultancy or freelancing work for an Indian entity while living abroad).
    • Exempt income should not be included in the INR 15,00,000/- threshold (e.g., agricultural income, PPF interest, or specific tax-free allowances).

Concept of ‘Liable to Tax’ in Deemed Residency:

The term ‘liable to tax’ means that a country has the right to impose tax on an individual, irrespective of whether it actually exercises that right. It is different from terms like ‘subject to tax’, ‘exempt from tax’, or ‘not paying tax’ due to legal provisions.  Meaning of liable to tax: Section 2(29A) “liable to tax”, in relation to a person and with reference to a country, means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country;

– Condition of actual liability

– However, actual payment of tax is not necessary if there is an exemption provided.

Key Implications:

Taxable but Exempt Income: If an individual’s income is taxable in a foreign country but is exempt due to specific conditions, they are still considered ‘liable to tax’. A person in Country X has tax-free income due to certain conditions, but if the country’s tax law allows taxation, they remain ‘liable to tax’ and will not be deemed a resident of India.

Zero-Tax Jurisdictions (UAE, Middle East, etc.): Countries with no personal income tax do not impose taxation on individuals, meaning there is no concept of being ‘liable to tax’. India may treat such individuals as deemed residents if their India-sourced income exceeds INR 15,00,000/-. Some high-net-worth individuals (HNIs) moved to zero-tax jurisdictions but retained  significant economic ties with India while avoiding taxation in any country. The deemed residency provision ensures that such individuals cannot escape Indian taxation altogether, at least on Indian-sourced income.

Mitigation through DTAA: If India considers them deemed residents, they can claim tax residency in the foreign country under the Double Tax Avoidance Agreement. If they qualify as tax residents of the foreign country under the treaty, they can avoid being treated as Indian tax residents.

Pending Clarity from Indian Authorities : Since official guidance is awaited, taxpayers in zero-tax jurisdictions should assess their DTAA eligibility and explore structuring their residency status to avoid unintended Indian taxation under the deemed residency rules.

Retaining Benefits of NR Tax Treatment in Certain Situations: Even though Resident but Not Ordinary Resident are not taxed on foreign income, they are still considered residents for other tax provisions, including:

• • Capital Gains Treatment on Unlisted Shares: NRs currently enjoy a more favorable tax rate on capital gains from unlisted shares than RORs or Resident but Not Ordinary Resident. By classifying more individuals as RNOR, they lose preferential NR tax treatment and may pay higher taxes.
  • Tax Treaty Benefits on Dividend Income: Under domestic tax laws, residents pay tax on dividends at slab rates (up to 30% + surcharge + cess). NRs, however, enjoy concessional tax rates under treaties (e.g., India-UAE – 10%, India-Hong Kong – 5%). An Resident but Not Ordinary Resident qualifying as a resident under Indian law but a non-resident under a treaty’s tie-breaker rule can still avail treaty benefits.

Whether applicable to UAE residents:

For Indian citizens working in UAE, issue arises as to whether they are liable to tax as per the definition given above. Answer is no because currently there is no individual taxation in the UAE, except where there is business. Potentially there could be liability in the future, but that is not relevant for 2(29A). Therefore, they will be covered under the deemed residency provisions.

Potential Impact on NRIs:

• Tax burden remains unchanged – NRIs continue to be taxed on their Indian income.
• Higher TDS on property sales – No relaxation despite calls for TDS based on capital gains rather than gross sale price.
• Possible litigation & appeals – Some NRIs may explore DTAA relief or advance ruling mechanisms to reduce tax burden.
• Deemed residents will be taxed on their global income unless they can prove tax residency elsewhere. Those covered by DTAA may still seek relief. Individuals falling under the deemed resident category need to ensure proper tax planning to avoid unnecessary taxation on foreign income.
• Given these challenges, the lack of TDS relief for NRIs is a missed opportunity in the new Bill. Do you want a detailed analysis of possible ways NRIs can optimize tax liability under the existing framework?

Strategic Tax Planning for PIOs & Indian Citizens:

Given the amendments, individuals must carefully manage their stay and income to maintain tax efficiency. New RNOR category does not impose taxation on foreign income, but it subtly removes favorable NR tax treatments, making it crucial for individuals to plan their residency and income sources carefully. After this income tax amendments, PIOs and Indian Citizens individuals must carefully manage their stay and income to maintain tax efficiency. To retain full NR status:

• Limit stay in India to below 120 days
• Ensure India-sourced income remains below INR 15,00,000/-.
• For Indian citizens in zero-tax jurisdictions (UAE, Monaco, etc.): Maintain residency in the foreign country to avoid being taxed as a deemed resident under Indian law.
• The new RNOR category does not impose taxation on foreign income, but it subtly removes favorable NR tax treatments, making it crucial for individuals to plan their residency and income sources carefully.