New residency rules may prove to be a challenge for some NRIs
The new tax residency rules might not impact many, but the government should issue a clarification
It’s been 44 days since the lockdown was announced in India and flight operations were suspended. Non-resident Indians (NRIs), who came to India before the lockdown have no way of returning, and this may have implications on their NRI status and taxes, especially in light of the recent amendment introduced by the Finance Act 2020 related to the tax residency rules for 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. There is a chance that the lockdown will get extended further or the international travel ban will not get lifted right away.
In such a scenario, some of the NRIs may qualify the criteria of being considered as resident for tax purposes. They may face issues of having dual tax residence and citizenship. “This is a genuine difficulty being faced by individuals, who were supposed to travel out of India, but are stuck due to the travel restrictions imposed in light of the covid-19 outbreak, and likely to exceed the threshold limit," said Shailesh Kumar, director, Nangia Andersen Consulting, a business advisory firm.
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 financial year. Those NRIs having income below ₹15 lakh, for them 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 lockdown extends beyond 120 days in the current financial year.
However, an NRI, whose taxable income exceeds ₹15 lakh and he or she stays in India for 120 days or more in the previous year and had also stayed 365 days or more in India in the immediately preceding four years, they will be treated as a resident individual for income tax purposes. “Some people may face issues, besides the requirement to file a tax return; an individual’s 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 the rate of capital gains tax on unlisted shares increases to 20% (with indexation) in case of long term compared with the rate of 10% (without indexation), explained 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. “So far, there is no specific exemption or relaxation by the government for such cases. However, considering the fact 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, which would make the necessary relaxations," said Kumar. OECD made the recommendation in light of the pandemic for the member countries.
If the government does not come up with a way out or relax the rules for this year, a few NRIs might end up having to file their tax return if they qualify as resident under the new rules. But there is some relief. In such cases an NRI will be treated as resident but not ordinarily resident (RNOR), and thus will not be required to pay tax in India on their foreign income (i.e., income that is accrued by them outside the country).
What should an NRI do?
Given the change in rules, NRIs need to keep track of the number of days they spend in India in a financial year. Aside from this, they also need to estimate the income they are generating from assets, investments and business they are running and operating from India, as these would factor into their taxable income in India. One should also keep in mind other changes in estimating taxable income. For instance, since the dividend distribution tax has been done away with, from this financial year dividends distributed by Indian companies would be taxable in the hands of the shareholders and as such, would form part of the taxable income.
Changes in tax rules are likely to cause difficulty for high net-worth NRIs, who have substantial sources of income from India, to determine their tax residence. They may end up having to file tax returns in India, as well as in the country they reside in.
In the absence of a tax treaty between India and that country, NRI might need to face double taxation on his incomes.