New residency rules can be taxing for NRIs stuck in India amid lockdown

It’s been 41 days since the lockdown was announced in India and flight operations were suspended. Non-resident Indians (NRIs) who came to the country before the lockdown, don’t have any option to return till travel restriction are lifted. However, the number of days these NRIs stays in India decides their onus of income-tax compliance. Recent amendment introduced by the Finance Act 2020 related to the tax residency rules can be a concern for some NRIs.

While earlier an NRI who visited India would be considered a resident if they spent 182 days or more in the previous year in the country, but from this financial year i.e. 2020-21, the threshold period of stay in the previous year has been reduced to 120 days. If the lockdown gets extended or international travel ban does not get lifted in India or in the country NRI wants to travel, in such a scenario some of them may qualify the criteria of being considered as resident for tax purposes, thus facing issues of dual tax residence and citizenship.

However, experts say that the number of days an NRI stays in a financial year is not the only criteria to ascertain tax residency status. “Besides 120 days in a financial year, one should have stayed an aggregate of 365 days or more in the preceding four years. Also, the new rule of lower number of days is only applicable to those NRIs whose total income in India exceeds ₹15 lakh during a FY. For those NRIs having income below ₹15 lakh, rules remain the same as earlier,” said Archit Gupta, founder and CEO, ClearTax, a tax filing and investing portal. So given the additional criteria, very few NRIs will get impacted because of the new rules, even if the lockdown gets extend beyond 120 days in the current financial year.

However, an NRI, whose taxable income exceeds ₹15 lakh and stays in India for 120 days or more in the previous year and had also stayed 365 days or more in the preceding four years, will be treated as a resident individual for income tax purposes. “Some people may face issues, besides requirement to file a tax return, residential status is also related to exemptions and tax rates,” said Amit Maheshwari, tax partner, AKM Global, a consulting firm. For instance, once an NRI becomes resident individual, interest from non-residential external (NRE) account, which is otherwise exempt from tax, becomes taxable and rate of capital gains tax on gains from unlisted shares increases to 20% (with indexation) in the case of long term compared with concessional rate of 10% (without indexation), explains Maheshwari.

Most experts believe that new tax residency rules will not impact many, but still they think the government should come out with a clarification. “Till now, there is no specific exemption or relaxation by the government for such cases. However, considering the genuine hardship of taxpayers and also a recommendation made by the Organisation for Economic Co-operation and Development (OECD) to make appropriate exemptions or relaxations in threshold limits, the government may come up with some policy document, making necessary relaxations,” said Shailesh Kumar, director, Nangia Andersen Consulting - a business advisory firm. OECD has made the recommendation in light of the pandemic for the member countries.

If the government doesn’t come up with a way out or relax the rules for this year, a few NRIs might have to file return if they qualify as resident under the new rules. But there is some relief, in such cases NRI will be treated as "Resident but Not Ordinarily Resident (RNOR),” and thus not required to pay tax in Indian on their foreign income (i.e., income accrued outside India).