By Pranay Bhatia and Deepashree Shetty
Tax residency determination is the ‘epicentre’ of Indian taxation for an individual. It is an initial and crucial step for taxability and undertaking compliances in India.
In the recent months, there have been several changes in the arena of residency laws owing to the amendments in law as per the annual Union Budget and other measures announced by the Indian Government to cope with the COVID-19 situation. If the changes are not fully understood, it could lead to a tax on global income in India and the need for disclosure arises. Changes introduced in the taxation system are largely in line with international development, leading to narrow escape for taxpayers.
A glimpse of the law
The test for tax residency for Individuals in India is linked to their physical presence. Presence is measured for the concerned tax year i.e. a Financial Year (FY) covering period from 1st April to 31st March and may also trace back the past FYs. Indian tax laws have classified the residential status into three categories – Non-resident (NR), Resident but Not Ordinarily Resident (RNOR), Resident and Ordinarily Resident (ROR).
An individual shall qualify as Resident in India if either of the below conditions are fulfilled:
- Present in India for 182 days or more during current FY; or
- Present in India for 60 days or more during current FY and cumulatively 365 days or more during preceding 4 FYs
In case of an Indian citizen or Person of Indian Origin (PIO), who is outside India, visits India the 60 days’ period is further relaxed to 182 days. Hence, such an individual could visit India for less than 182 days and still qualify as a NR for the year.
Once an individual is a Resident, the additional conditions to qualify as RNOR are:
- Present in India for cumulatively 729 days or more during preceding 7 FYs; and
- Was a ‘Resident’ in atleast 2 out of preceding 10 FYs
While individual qualifying NR/RNOR is taxed on income earned or received in India, a ROR is taxed on worldwide income.
COVID-specific relaxation for FY 2019-20
India had suspended international air travel to curtail the spread of COVID-19. This caused undue hardships to individuals who had to extend their stay in India, also resulting in stepping over the threshold of physical presence limits for tax residency and additional tax liability for individuals.
The Indian Government, as part of several COVID-19 relief measures, announced relaxation for individuals who came to India on a visit before 22 March 2020. Depending on the reason for an extended stay in India (unable to leave India due to travel restrictions or quarantine), the certain period is to be excluded for tax residency purposes.
For instance, an Indian citizen working abroad visited his family here in India on 21st January 2020. However, due to the pandemic, international borders of most countries were closing/closed and hence, he could not travel back. Hence, his total stay in India from 21st January to 31st March 2020 would be 71 days. In such a case, it becomes imperative to check if any beneficial position could be availed by him under the COVID-19 specific relaxation provided by the government. This would avoid any additional tax burden for him in India.
The relaxation is surely a welcome measure especially for individuals who were on the brink of stay days qualifying for ROR. A careful analysis of the same will help determine the residency appropriately and avoid any undue taxation.
Key changes for FY 2020-21
As per the amended law, a visiting Indian citizen and PIO shall be Resident if the stay in India exceeds 120 days during current FY and total income (other than foreign-sourced income) does not exceed Rs 15 lakh during current FY.
Another major amendment was to address the issue of avoidance of tax payment by individuals by remaining ‘stateless’ for tax purposes. The amended law would now treat the individual as ‘Resident’ in India who is not liable to pay tax in any country and whose total income (other than foreign-sourced income) exceeds Rs 15 lakh during the FY.
While such visiting Indians and stateless persons are Residents, they will be treated as RNORs and accordingly taxable in India on Indian income only.
These are critical amendments which have widened the ambit of individuals falling under the ‘tax’ net. Also, COVID-19 residency relaxation measures are expected for FY 2020-21. A personal assessment of these changes is necessary for each individual, to ascertain their Indian tax obligations.
(About authors: Pranay Bhatia, Partner and Leader – Tax & Regulatory Services, BDO India and Deepashree Shetty, Director – Tax & Regulatory Services, BDO India)