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NRIs: Three changes to tax rules that decide residential status

Some persons, particularly HNIs, manage their stay in various countries in such a way that they do not become residents of any country for tax purposes

February 18, 2020 / 09:08 AM IST

Sanjeev Pandit

A large number of Indians work outside India or have businesses outside India. They visit India, at times for an extended period, or after a stint abroad, even return to India. Tax Liability in India in such cases depends on whether a person is a resident or a non-resident. If an individual is not a resident in India, only then is the income that is earned in India or which is received in India is taxable in India. So, to avoid world income becoming taxable in India, one must be careful about the period of stay in India.

The Finance Minister, in the Budget that she presented last month, has proposed three changes to the rules for deciding the residential status of an individual.

New resident rules

An individual becomes a resident in India if he satisfies any one of the following conditions: (i) he has stayed in India for 182 days or more in the financial year; or (ii) he has stayed in India for 60 days or more in the financial year and his total stay in the earlier four financial years is for 365 days or more.

However, in the case of Indian citizens and Persons of Indian Origin (PIO), the second condition is relaxed. The relaxation enables them to stay longer in India without becoming liable to tax on their world income. Presently, if an Indian citizen or a PIO visiting India stays in India for less than 182 days, he/she retains his status as a non-resident. The Finance Bill proposes to reduce this period of 182 days to 120 days.  As a result, now, if an Indian citizen or a PIO stays in India for 120 days or more while visiting India, he/she will become a resident of India. This may make his/her world income chargeable to tax in India.

The second change proposed is an anti-abuse measure. Some persons, particularly high net worth Individuals (HNIs) manage their stay in various countries in such a way that they do not become residents of any country for tax purposes. They are classified as ‘stateless Indian citizens.’ The Finance Bill proposes to introduce a new provision for such stateless Indian citizens. Under the new proposal, if an Indian citizen is not liable to tax in any country on account of his/her stay or domicile, he/she will be considered as a resident in India. As a result, she/he may become liable to pay tax in India on her/his world income.

Tax fears

This proposal created a genuine fear that Indians working in countries such as the UAE, which do not levy income tax, will be deemed as residents. In such a case, they will have to pay tax in India on their salaries earned abroad. The government immediately issued a press release stating `The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. In some section of the media the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. This interpretation is not correct.’ The government’s communication also stated that in the case of Indian citizens who become deemed residents of India under this proposed provision, income earned outside India by them shall not be taxed in India unless it is derived from an Indian business or profession and, if required, necessary clarification will be incorporated in the law. Let us hope that it is done when the Finance Bill is passed.

While the two proposals considered above are restrictive, the third proposal relaxes and simplifies the criteria to become a `Not Ordinary Resident’ (NOR). In the case of an NOR, although he/she is a resident, his/her foreign income is not chargeable to tax in India unless it is from a business controlled from India or profession set up in India. This provision is particularly helpful to returning Indians. It gives them time to arrange their affairs before their foreign income becomes taxable in India.

Presently, to become an NOR, a person must be a non-resident for at least nine out of the 10 previous financial years or his/her total stay in India should not be more than 730 days in the preceding seven financial years. It is now proposed that an individual will be an NOR if he/she has been non-resident for at least seven years out of the 10 preceding financial years. The other condition of `not more than 730 days stay’ in India is being deleted. Now a returning Indian, who has been a non-resident for 10 years or more, will be an NOR for four years and his/her foreign income will not be taxed when he/she is an NOR. A welcome change, indeed!

(The author is a Chartered Accountant and views are personal)

first published: Feb 18, 2020 09:08 am