Salaried NRIs not affected by new Residency Rules of India
Existing Framework for Residency in India
With a population of over 1.3 Billion, there are a large number of Indians who reside and work outside India or have businesses outside India. In India, the tax laws are applicable to only a resident of the country, not non-residents. Before the Finance Minister of India announced the Budget for 2020, an individual (whether an Indian citizen or not) was classified a resident in India if he/she satisfied any one of the following conditions: (i) he/she had stayed in India for 182 days or more in the ongoing financial year; or (ii) he/she had stayed in India for 60 days or more in the ongoing financial year and her total stay in the previous four financial years was for 365 days or more. However, for Indian citizens and Persons of Indian Origin (PIO), the second condition is relaxed. A resident is further categorised as ‘ordinarily resident’ or ‘not-ordinarily resident’. An ordinarily resident is taxable in India on his or her global income, whereas a not-ordinarily resident’s income from sources outside India is taxable in India only if it is derived from a business controlled in or a profession set up in India. Previously, an individual would qualify as ‘not-ordinarily resident’ if he/she had been a non-resident in India for at least 9 out of the 10 previous financial years, or had been in India for an overall period of 729 days or less during the 7 previous financial years. An individual exceeding these limits would qualify as ‘ordinarily resident’ and therefore be required to pay taxes in India on his or her global income.
In the annual budget presented in February, 2020, India proposed a number of changes to the rules for deciding the residential status of an individual. The first of these was to increase the number of days a citizen must stay out of the country to qualify as a Non-Resident Indian (NRI) to 240 days, against 182 previously. While earlier an Indian citizen residing in India for 182 days or more in a financial year was deemed to be a resident liable to pay taxes, it was proposed that this period be reduced to 120 days or more. As a result, if an Indian citizen or a PIO stays in India for 120 days or more while visiting India, he/she will be deemed as a resident of India. Therefore, an Indian national who wants to claim non-resident status cannot stay in India for more than 120 days or more in a year. Changes have also been made to the criteria by which a resident may qualify as ‘not-ordinarily resident’. As per the amendment, an individual who has been an NRI for 7 out of 10 previous financial years would qualify as ‘not-ordinarily resident’ in India. Further, the Finance Bill, 2020 proposed that an Indian citizen who is not liable to be taxed in any jurisdiction would be deemed to be a resident of India. This is an anti-abuse measure directed at individuals who manage their stay in various countries in such a way that they do not become residents of any country in order to avoid a tax liability. They are classified as ‘stateless Indian citizens’. Under this provision if an Indian citizen is not liable to tax in any country on account of period of stay or domicile, he/she will be considered as a resident in India for tax purposes. However, by way of a further amendment, it has been clarified that the liability to pay tax on such deemed resident will be only in respect of business controlled in India or profession set up in India and that too when such income exceeds the threshold of Rs 1,500,000.00 (Rupees fifteen lakhs only). 1
These changes will take effect from 1st April, 2021, and will apply in relation to the assessment year 2021-22 and subsequent years.23
While these changes are aimed at curbing tax avoidance, a lack of clarity about the ramifications of the bill had caused widespread panic amongst NRIs, prompting the Finance Ministry to issue a statement explaining that the new provision is not intended to include those Indian citizens who are bona fide workers/tax residents in other countries. In case of an Indian citizen who becomes a deemed resident of India under the proposed provision, income earned outside India shall not be taxed in India unless it is derived from an Indian business or profession.
It was further clarified by the Finance Minister of India that under the new provisions the government will not tax global income of NRIs and only income generated in India will be taxed. For example, if an NRI residing in UAE owns property in India from which he or she earns rent, this rent will be liable to be taxed. However, the income earned in UAE will not be subject to the taxation regime in India.
1. Ohri, Nikunj. “Amendments To Finance Bill Provide A Breather To NRIs, More Room To Hike Duty On Fuel.” Bloomberg Quint, March 23 2020, https://www.bloombergquint.com/union-budget-2020/amendments-to-finance-bill-provide-a-breather-to-nris-more-room-to-hike-duty-on-fuel. Accessed April 2 2020.
2. Robert, Olga. “3 Changes In Income Tax Rules That Will Impact NRIs.” Good Returns, February 18 2020, https://www.goodreturns.in/personal-finance/taxes/3-changes-in-income-tax-rules-that-will-impact-nris-1138963.html. Accessed April 2 2020.
3. Mentioned in Part H of Finance Bill 2020, page 24. https://www.indiabudget.gov.in/doc/memo.pdf
Effect on NRIs Residing in UAE
Consider an Indian citizen, residing and working in UAE, who has not stayed in India for more than 120 days in the financial year. This individual will fall within the new definition of NRI. Under the UAE tax law, certain corporations with specified income are taxable. However, individuals and others are exempt from tax. Therefore, as and when such exemption is removed, the liability of individuals and other exempted categories to pay tax will arise and as such, they must pay tax in accordance with the laws of UAE.
Further, under the Indo-UAE Double Tax Avoidance Agreement (DTAA), an individual who has spent at least 183 days in a financial year in the UAE is deemed to be a resident of UAE. While such an individual may not be paying taxes in their country of residence e.g. UAE where there are tax exemptions for individuals, they will not be liable to tax on their global income in India either, because of the Double Taxation Avoidance Agreement. The DTAA is a tax treaty signed between India and 85 other countries. According to the agreement, if an Indian national comes under the tax jurisdiction of another country, he/she does not have to pay taxes in India.
The only requirement is that all NRIs must have a tax residency certificate (TRC). For a tax residency certificate in UAE, one has to submit a passport copy (with the visa proof), emirates ID, tenancy agreement, salary certificate or audited financials for dividend, bank statement for the previous six months, and a certificate from emigration confirming stay of more than 180 days. If an individual is proved to be a tax resident of a foreign country, he/she is a non-resident to Indian taxation. Hence, maintaining the 240-day period in a foreign country and obtaining a TRC will allow an individual to continue enjoying all the benefits of NRI status. Therefore, a resident of UAE, holding a residence visa and TRC, will not be affected by the changes proposed in the budget by virtue of the Double Tax Treaty between UAE and India signed in 1993.