Under the income tax law, there are three types of residential status in India: Non-resident (NR), resident but not ordinarily resident (NOR), resident and ordinarily resident (ROR). The rules for determination of residential status has been amended effective FY21 for an Indian citizen or a person of Indian origin. For such an person, residential status is determined on the basis of:
•Physical presence of an individual in India during a financial year (FY), including work days and non-work days, and the preceding 10 FYs and
• Income earned in India
Residential status is dynamic and needs fresh determination for each year.
An individual qualifying as ROR is taxable on his/her worldwide income in India and is required to report all foreign assets in the India income tax return (ITR).
An individual qualifying as NR or NOR is taxable on the following incomes (India sourced incomes): Income accruing or arising in India; income deemed to accrue or arise in India; and income received or deemed to be received in India. Additionally, in case of NOR, income accruing or arising outside India derived from business controlled in or profession set up in India is taxable.
Due to covid, the income tax department had issued a circular stating that physical presence in India during the prescribed period will be disregarded for evaluating tax residential status for FY20.
• Unable to leave India on or before 31 March 2020
• 22 March 2020 to 31 March 2020
• Quarantined in India on or after 1 March 2020 and left India in an evacuation flight on or before 31 March 2020
• Beginning of quarantine period to date of departure
• Quarantined in India on or after 1 March 2020 and unable to leave India on or before 31 March 2020
• Beginning of quarantine period to 31 March 2020
• Left India in an evacuation flight on or before 31 March 2020
• 22 March 2020 to date of departure
So, an individual who is stranded in India due to the flight ban may first determine his/her residential status in India, residential status under the applicable double taxation deal and then explore benefits to avoid double taxation.
Sonu Iyer is tax partner and people advisory services leader, EY India.
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