Union Budget 2020: Updates in the Definition of Tax Residency

The Union Budget 2020 has made many amendments to the Finance Bill and introduced several new schemes and programmes. These schemes have the potential to put more money in the hands of the public and uplift the nation’s economy. Alongside, the announcement also amended the definition of tax residency of an individual in India. The residency status determines a person’s income tax liability for a particular financial year.

A change affecting Indian citizen/Person of Indian Origin (PIO) visiting India

As of now, one of the following two criteria must be satisfied for a taxpayer to qualify as a resident of India:

1. Stay in India for a minimum of 182 days in a year.
2. Stay in India for a minimum of 365 days during the immediately preceding 4 years and a minimum of 60 days during the relevant financial year.

An individual who does not meet both the criteria qualify as a ‘Non-resident’. The tax laws recognise that an Indian citizen or Person of Indian Origin (PIO) who live outside India usually maintains strong relations with India and visit India to look after their properties, family, or for other purposes. Currently, relaxation is granted to such Indian citizens/PIOs enabling them to visit India for longer periods of time without qualifying as a ‘resident’ for income tax purposes.

But, it has been observed that some individuals have misused the relaxed provisions to avoid qualifying as a resident by staying in India for less than 182 days and escaping the taxation on their global income while carrying out significant economic activities within India. Therefore, in order to prevent abuse of relaxed provisions, the Finance Bill 2020 proposes to reduce the period to 120 days in a financial year coupled with 365 days in previous 4 years for an Indian citizen/PIO visiting India. This will inevitably impact non-residents who have business or family ties in India and plan longer visits to India.

Change in criteria to qualify as ‘Not-Ordinarily Resident’

Finance Minister Nirmala Sitharaman proposed that if an individual has been a resident in India for at least four out of the last ten financial years, the individual will qualify as ordinarily resident. Currently, this period is two out of ten financial years. 

Also Read: ITR-1 and ITR-4 Forms Notified for AY 2020-21 for Resident Individuals

Likewise, for a Hindu Undivided Family (HUF) to qualify as ordinarily resident of India, the Karta of such HUF will have to be resident in India for at least four years out of the last ten financial years. The condition of an individual being present for more than 729 days in the last seven years to become ordinarily resident is to be removed. 

This new move will be making the lives of tax authorities a lot easier in determining the residential status of individuals eliminating the need for asking their passport copies. Individuals need not hold on to their old passports in order to prove their physical presence in the earlier years in India if their income tax returns are filed. 

A step ahead towards citizenship-based taxation

In addition to the aforementioned amendments, an individual, i.e. a citizen of India, shall be deemed as a resident in India for a financial year if he is not liable to tax in any other country or territory by reason of his domicile, residence, or any other criteria of similar nature. This clause is only applicable when the nature of income is from a business/profession from India.

The Finance Ministry has issued a clarification regarding the deemed residential status announced in Budget 2020. This is an anti-abuse provision and it has been observed that Indian citizens shift to low- or no-tax jurisdictions to avoid the payment of taxes. 

It is now clarified that an Indian citizen who becomes a deemed resident of India under the specified provision will not be taxed for the income earned outside India unless it is derived from an Indian business or profession.

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in.