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The government is set to clarify on tax residence rules for FY21, giving relaxation to non-resident Indians (NRIs) and others who visited India and had to extend their stay due to the suspension of international flights.

The idea is to provide guidance on what period could be excluded while computing tax residence, which determines a person’s tax liability in India.

“As per our last communication, we had stated that a decision on this would be taken once international flights were resumed," said a government official, indicating that a circular will be issued in due course. The official, however, did not specify when it is expected.

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International flights are yet to get normalized, but India started establishing bilateral travel arrangements called air bubbles from mid-July, which has been expanded to cover 24 nations as of 10 December. Given that clarity on the issue is vital for paying taxes on income, experts say announcement is likely in the Union budget for FY22.

According to the Income Tax Act, any person would become an Indian resident for tax purposes, if he spends 182 days in India in the year of earning the taxable income. Indian citizens and persons of Indian origins who visit India can also become residents for tax purposes if they had spent 365 days here in the preceding four years and have spent either 120 days or 182 days in the year the tax liability arises, depending on the income level. Those with 15 lakh or more income from Indian sources, the lower 120-day threshold will apply and in the case of others, 182 days. This 120-day threshold for FY21 was over at the end of July 2020 during most of which, international travel remained restricted. A resident’s global income gets taxed in India while a non-resident only has to pay taxes on India income.

Central Board of Direct Taxes had excluded the period of covid-19 related extended stay for tax residence calculation of FY20. Expectations are rife that exemption for stay for a part of FY21, say up to July or September, for all stranded individuals may be announced in the budget, said Rakesh Nangia, chairman of Nangia Andersen India, a consultant. Sonu Iyer, national leader–people advisory services at EY India, too said she was expecting a relaxation in the number of days to be considered for determining tax residency for stranded employees for FY21.

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