How to deal with tax issues if people come back to India for an extended stay after emigrating

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Depending on circumstances, many non-resident Indians (NRIs) move back to India, either temporarily or permanently, owing to a variety of reasons including medical treatment, employment, supporting families, etc. During the pandemic, too, several NRIs either got stranded or stayed on in India for an extended period due to personal or economic considerations. However, while staying in India for a lengthy period, one should be cognizant about the income tax implications in India. Let’s try to understand some of the key aspects in this regard.

India taxes global income for resident and ordinarily resident (ROR) taxpayers and largely India-sourced income for non-resident and not ordinarily resident taxpayers. Hence, keeping a track on the residential status that may undergo a change during an extended ‘visit’ to India or in the year of permanent migration back to India becomes vital.

The income tax law allows you to stay 182 days before you are classified as resident during the year of visit. This extended threshold of 182 days is available only to an Indian citizen and person of Indian origin (PIO). However, if you are a citizen or PIO whose annual income (other than income from foreign sources) exceeds Rs 15 lakh, then the threshold stands reduced at 120 days. This is a recent change brought about by the Finance Act, 2020, to curb potential misuse of provisions.

Further, during the pandemic, the definition of ‘visit’ has assumed more importance for NRIs who travelled to India for a limited period of stay before or during the pandemic but could not travel back to their overseas country due to suspension of international flights.

The term ‘visit’ has not been expressly defined under the Income-tax Act and is subject to interpretation. Based on legislative history, the interpretation of the term ‘visit’ for an Indian citizen /PIO who is based outside India alludes to visiting India to oversee personal investments/meet relatives /medical reasons/casual visits/leave, etc.

Hence, to claim the extended period of 182/120 days of stay in India one will have to really assess that the travel to and stay in India qualifies as a visit.

Due to an extended stay in India, the possibility of dual residency and double taxation of income could also arise on account of the differences in tax years, income tax laws, residency rules, etc. applicable in different countries. As a result, an individual could continue to be taxed on his worldwide income in India as well as the overseas country.

In such a situation of double taxation, one can take recourse of relief available under the double taxation avoidance agreements (DTAA), if any, between India and applicable host country depending on the facts and circumstances of each case.

One such relief that is available under various DTAAs is in respect of emigrants who are employed abroad and have come to India on a short-term basis. An exemption (commonly referred as short-stay exemption) may be evaluated by a resident of a foreign country under the DTAA in respect of the remuneration received by him as an employee of a foreign entity for services rendered by him during his stay in India during a particular financial year. Such short-stay exemptions can be claimed subject to the fulfilment of the specified conditions including the need to produce a tax residency certificate (TRC) issued by the relevant overseas taxation authority to substantiate the tax residency in the overseas country.

In case such exemption is not available, the individual would need to explore the possibility of claiming credit of taxes paid in India on the India work days against the tax liability on the overseas country on the same income.

Not just income tax, if the individual while in India is working in or in connection with an Indian establishment the provident fund implications may also need a careful evaluation.

Thus, it is pertinent that the emigrants who wish to stay in India for an extended period or relocate back permanently are adequately aware of aforesaid aspects and be compliant to alleviate any possible tax litigation for any potential non-compliance.