Budget 2021: Residency problem persists for NRIs, but retirement fund glitches removed

Source: AFP

Contrary to what many income tax experts had expected, finance minister Nirmala Sitharaman did not change the requirement for a person to be classified as a non-resident Indian (NRI). The underlying and existing rule remains intact: those who live in India for 120 days will be considered NRIs, as opposed to 182 days earlier.

But another matter that results in significant litigation has been addressed.

Keeping in view the mismatch in the financial year (the US considers calendar year for taxes) concept and even the point at which an income is taxed, retirement benefits accumulated by NRIs would be taxed differently.

New section proposed

A new section 89A has been proposed to ensure that an NRI opening a specific retirement benefit account in any of the select countries, would not be taxed by India on an accrual basis (transaction based) as long as the other country has collected taxes at the time of withdrawal.

“Currently there is a mismatch in the year of taxability of withdrawal from retirement funds outside India by residents who had opened such fund when they were non-resident in India and resident in foreign countries,” says Dr Suresh Surana, Founder, RSM India.

The Indian Government would release a list of countries for which this facility would be available.

“For the retirement fund benefit, there would be an agreement the Government would have with specific countries that would be notified and the benefit would be linked to the employee benefits during the period of stay in the foreign country. Only these specific retirement benefit accounts would enjoy the special tax treatment,” explains Paras Savla, Partner KPB & Associates.

Additionally, the government paved the way for a one-person company without any restrictions on paid-up capital and turnover. The Finance Minister stated in the Union Budget 2021-22 speech that the one-person company can be started by NRIs in India.

Here as well, the residency rule of staying in the country for 120 days for setting up this company remains, instead of 182 days that was permitted earlier.

The reduction in number of days for stay is in line with change in the last Budget 2020-21.

But, for NRIs, some questions remain unanswered. “Earlier CBDT had announced relief for financial year 2019-20. Clarification or amendment for the exclusion of such stay in India for the determination of the residential status was expected. It appears that non-residents will have to wait for some more time,” says Surana.

Entities such as mutual funds, tenants providing rental income to NRIs, continue to remain confused as to the rate at which they should deduct taxes for such NRIs, as their residency status is under question due to an extended period of stay due to COVID-19.