The lockdown and suspension of international flights have resulted in NRIs extending their stay in India. The non-residents Indians may become tax residents of India if their stay exceeds the threshold, and may need to file tax returns. The extended stay in the country can bring NRIs into the Indian income tax fold.
Tax residence in India:
An NRI visiting India becomes a resident if the stay in India is 182 days or more in a financial year, along with a stay of 365 days or more in the four preceding years. The criteria apply to an NRI, who is a citizen of India or a person of Indian origin.
However, there are certain amendments to the tax residence criteria as per the latest Finance Act, 2020. From FY 2020-21, the period of stay for an NRI visiting India is down to 120 days from 182 days. The lower limit could trigger a tax residence in India for NRIs staying for 120 days or more.
However, an NRI becomes a tax resident with a minimum of 120 days stay only if the NRI is earning Indian income above Rs 15 lakh in the said financial year.
So, in the case of an NRI having less than Rs 15 lakh of Indian income, the threshold of 120 days does not apply. In such a case, the NRI becomes a resident only if the stay in India is 182 days and above.
Hence, on a case-specific basis, where India extends the lockdown or does not resume international flights, an NRI may become tax resident of India. The NRI may also face the issue of dual tax residency or citizenship. Tax residence impacts the tax liability of an NRI in India. They are taxable on their Indian income. A resident and not ordinarily resident also pays tax on their Indian income and certain foreign income. A resident and ordinarily resident pays tax on their global income in India.
An NRI becoming a resident may not immediately make them liable to file a tax return in India. The taxation needs evaluation on a case-to-case basis. An NRI who has taxable income in India above the basic exemption limit of Rs 2.5 lakh should file an income tax return. For example, an NRI who has an Indian income in the form of salary for services rendered in India for three months may have to pay tax in India irrespective of their period of stay.
An NRI who becomes a tax resident may face other issues such as interest from their NRE account may become taxable in India. Similarly, the TDS rate on their Indian income may change upon becoming a resident. NRIs may need to make tax and other compliances if they become a resident in India.
The government may clarify the matter of tax residency of NRIs who are staying due to the suspension of international travel. The Organisation for Economic Co-operation and Development (OECD) has recommended appropriate exemptions or relaxations in residency threshold limits. The Indian government may issue a relaxation in the light of OECD’s recommendations.
In the absence of any relaxation from the Indian government, NRIs may need to file income tax returns in India. However, they need not pay any tax in the absence of income in India. Also, they are not liable to tax on their foreign income in India.
It is vital for NRIs visiting India to consult on the impact of the new tax residency rules in India and fulfil the tax compliances if any resulting from their stay in India.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.