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Key Aspects You Need to Know About Deemed Residency

In the era of global mobility, where borders for businesses and personal pursuits are open worldwide, understanding on the concept of “deemed residency” for tax purposes has become more important than ever. The Income Tax Act, 1961, recognizes this complication and introduces the concept of “deemed residency” to ensure that individuals who technically escape tax payment due to their global stay at large, must not ignore this provision entirely.

What Is Deemed Residency?

Deemed residency is a provision under Section 6(1A) of the Income Tax Act, 1961, introduced by the Finance Act, 2020. It targets Indian citizens who earn significant income in India but are not liable to pay tax in any country due to their domicile, residence, or similar criteria.

In simple terms, if an Indian citizen earns more than ₹15 lakh in India (excluding foreign income) and isn’t taxed elsewhere in the world, the law considers that person a “deemed resident” of India, even if such person was not present in India on a single day during the financial year.

Purpose of Introduction

The primary reason for introducing deemed residency was to prevent tax avoidance by certain Indian citizens who were:

Earning significant income (over ₹15 lakh) from Indian sources
Not liable to pay tax in any other country due to their domicile or residency status

This loophole allowed some individuals to exploit tax havens and avoid paying taxes in India despite having substantial economic interest in India.

The Technical background

To be classified as a deemed resident under Section 6(1A), the following conditions must be met:

Must be a citizen of India
Must have total income exceeding ₹15 lakh (excluding income from foreign sources)
Must not be liable to tax in any other country due to reasons like domicile or residence

If these conditions are satisfied, the individual is deemed to be a resident of India for that financial year. However, such individuals are treated as “Resident but Not Ordinarily Resident” (RNOR), which limits the scope of their taxable income in India.

The government noticed that some high-net-worth individuals were deliberately structuring their affairs to avoid residency in any country, thereby escaping global taxation. Deemed residency ensures that such individuals are treated as Indian residents for tax purposes if they meet the specified conditions.

Examples

Given ahead are some unique scenarios that illustrate how deemed residency works in practice.

Raghav -A Freelance Consultant

Consider Raghav, an Indian citizen who works as a freelance consultant for companies in Dubai, Singapore, Welington, Melbourne Delhi and London. He travels constantly and doesn’t spend more than 50 days in any country in one year . His income from Indian clients totals ₹20 lakh, while his foreign income is ₹10 lakh.

Since Raghav isn’t liable to pay tax in any country (including India, due to his non-resident status), and his Indian income exceeds ₹15 lakh, he becomes a deemed resident under Section 6(1A). He’ll now be taxed in India on his global income, but only to the extent permitted under RNOR rules.

The Island Resident , A person who is citizen of India

Meera, an Indian citizen, lives in a Caribbean island that doesn’t levy income tax. She earns ₹18 lakh from rental properties in Mumbai and ₹5 lakh from a boutique she runs locally. Because her Indian income crosses ₹15 lakh and she isn’t taxed in her country of residence, she qualifies as a deemed resident in India for Income Tax Levy.

The Corporate executive

Amit, a senior executive, works for a multinational company and is posted in different countries every few months. In the previous year, he earned ₹16 lakh from dividends and interest in India but didn’t stay long enough in any country to be considered a tax resident. Despite his stay out of India most of the time during last financial Year, Amit is deemed a resident of India.

Tax Implications for Deemed Residents

Deemed residents are classified as RNORs. This classification has specific tax consequences:

Income earned or accrued in India is fully taxable.
Foreign income is taxable only if it arises from a business controlled or profession set up in India.
income outside India is not taxed unless it has a nexus with India.

This RNOR status offers some relief, especially for those with substantial foreign income, but it still brings them under the Indian tax net for domestic earnings.

practical challenges

While the law is clear in its intent, practical challenges remain:

Determining tax liability in other countries can be complex. Some jurisdictions have ambiguous tax laws or don’t issue tax residency certificates.
Tracking income sources—especially for freelancers, digital nomads*, and crypto investors—can be tricky.
Double taxation concerns may arise if foreign countries later claim tax rights over certain income.

To mitigate these issues, individuals often seek professional advice and maintain meticulous records of their income, travel, and tax filings.

*A digital nomad is someone who leverages technology, especially the internet, to work remotely while traveling or living in different locations. Instead of being tied to a single office or city, digital nomads often move from place to place, blending work with exploration

The deemed residency provision is a balancing act between fairness and enforcement. It ensures that individuals benefiting from India’s economic ecosystem contribute their fair share to the exchequer. At the same time, it respects the rights of genuine non-residents who have legitimate reasons for their mobility across boarders .

Planning Ahead: What Can Be Done?

For those who might fall under deemed residency, proactive planning is essential:

Structure income sources to ensure clarity between Indian and foreign earnings.
Maintain tax residency certificates from other countries, if applicable.
Consider tax treaties between India and other jurisdictions to avoid double taxation.
Consult tax professionals to optimize compliance and minimize liability.

Deemed residency under the Income Tax Act, 1961, is a reflection of India’s evolving tax landscape. It acknowledges the realities of a globalized world while safeguarding national revenue. For Indian citizens with international footprints, understanding this provision isn’t just a legal necessity—it’s a financial imperative.

Whether it’s the consultant travelling frequently between continents, the entrepreneur living tax-free on a tropical island, or the executive without a fixed address, the message is clear: earning in India comes with responsibilities, no matter where the person is spending time in the world .