The Income Tax department recently extended the deadline to file the income tax returns for the Financial Year 2020-2021 till December 31. This has probably fetched some more time for scores of non-resident Indians (NRI), who are still grappling with their taxpayer status because they had to prolong their stay in India due to the multiple COVID-19 travel restrictions. The main conundrums are, “Am I an NRI or an Indian resident due to the forced stay?” and “Will I be taxed in both countries?”
During FY 2020-21, many NRIs — who earn income in a foreign country, pay taxes and reside there — had to stay back in India for 182 days (six months) or more due to lack of commercial flights, an illness or other unforeseen circumstances. Every country has the 183-day rule of residency for multiple administrative purposes, including taxation. Under this rule, a person residing in the country of work — the host country — for 183 days or more during a given year will be considered a resident or tax resident of that country for that year.
Since many NRIs could not return to their host country within the stipulated time, will it jeopardise their residency status? Will it make them liable to pay taxes in the home country (India) as well as the host country?
Well, there is no binary answer. The key to navigating the complex system and determining if you would be taxed as a resident of India or non-resident is the number of days spent in India, read with a set of criteria.
In March 2021, the Central Board of Direct Taxes (CBDT) issued a circular to give clarity on the residential status of certain individuals under the Income-tax Act, 1961 for FY 2020-21. “The Indian government is making sure the NRIs are not taxed in two countries, and at the same time, they are not left untaxed in any country,” said Ramya Ganapathy, a Chartered Accountant based in Chennai.
The CBDT has also introduced Form NR to help NRIs facing a double taxation situation despite the relief provided by the Double Taxation Avoidance Agreement (DTAA) — an agreement between India and 80 countries to ensure NRIs pay taxes on income earned only in one country. However, to navigate this, it is pertinent to understand the residency status first. Here is a chart to help determine that.
If you are a “resident” of India, then you will be liable for taxes in India. However, thanks to DTAA, NRIs who earn income abroad and pay taxes there but have turned into a resident in India due to the pandemic, need to pay tax only in one country. In this case, they have to pay taxes in India and show their foreign income and/or income earned from Indian sources (such as rental income and income from mutual funds, stock market investments).
DTAA allows NRIs or foreign nationals to claim tax credit from the host country. Foreign Tax Credit essentially reduces the tax liability by directly deducting an amount or credit, owed to the foreign government, from the total payable tax. In the ‘forced to stay in India’ scenario, if the host country has deducted TDS (tax deducted at source) from the (foreign) income, the individual can use the credits to reduce the amount payable towards taxes in India.
“A resident person in India shall be entitled to claim credit of the taxes paid in any other country in accordance with the rule 128 of the Income Tax Rules, 1962,” the CBDT said in its March 2021 circular.
“If you have earned foreign income on which TDS or any form of tax has been deducted, you may need help from an expert to obtain a Tax Residency Certificate (TRC) and make sure the correct DTAA is applied. This will ensure you can take credit for the foreign tax deducted,” said Ramya.
There are several countries where the DTAA does not apply; for example, in many Gulf countries where NRIs don’t have to pay taxes on their income earned there. Such NRIs who had to stay beyond the 182 day period in India in FY 2020-21, will be considered residents of India.
Incidentally, the Finance Act 2020 introduced a new section to the Income-Tax Act, 1961 — section 6(1A) — from FY 2020-21. Under this, an Indian citizen shall be a resident of India only if his/her total income (other than income from foreign sources), is more than Rs 15 lakh during the previous year or financial year. “However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature,” said the Income Tax department.
Therefore, NRIs from the Gulf and other countries, where they do not pay taxes on the income earned and earns an income of more than Rs 15 lakh from Indian sources, will be residents of India, making them liable for taxes in India.
> at least 2 years out of 10 years, and
> 730 days or more during seven years immediately preceding the relevant years.
If the individual does not satisfy both conditions, he will be considered RNOR.
However, from FY 2020-21, RNORs have to satisfy one of the two conditions —
(1) Stayed in India for 120 days or more but less than 182 days, the income (other than foreign sources) should be more than Rs 15 lakh;
(2) Indian resident as per Section 6(1A). For RNORs, foreign income will not be taxable in India.
“NRIs will not be taxed in two countries, but where they are getting taxed is the challenging question. This is mostly determined on a case-to-case basis by the Income Tax department,” said Ramya.
For example, some IT and software companies, which have establishments in the US and India, have made some international adjustments when their employees were stranded in India, to make sure their income is being issued from the Indian component. Such arrangements have been made by the employer.
There have been cases where companies did not have establishments in India. “In such cases, it becomes a foreign-originated income. They will become a resident of India and pay taxes in India, but not in the foreign country also,” she stressed.