Income Tax Rules for NRIs in Budget 2020: govt proposes to change rules, provide exemption

Budget 2020 Proposal for NRIs: Budget 2020 has proposed to exempt Non-resident Indians (NRIs) from filing income tax return in certain conditions. Also, the Budget has proposed to modify residency provisions to prevent tax abuse.

Budget 2020 Proposal for NRIs: Budget 2020 has proposed to exempt Non-resident Indians (NRIs) from filing income tax return in certain conditions. Also, the Budget has proposed to modify residency provisions to prevent tax abuse. Earlier, if you spent over 165 days in India a year you were liable to pay tax in India. This has now been reduced to 120 days. The Budget document noted, “Instances have come to notice where period of 182 days specified in respect of an Indian citizen or person of Indian origin visiting India during the year, is being misused. Individuals, who are actually carrying out substantial economic activities from India, manage their period of stay in India, so as to remain a non-resident in perpetuity and not be required to declare their global income in India.”

Changes proposed: The Budget 2020 has proposed that

1. the exception provided in clause (b) of Explanation 1 of sub-section (1) to section 6 for visiting India in that year be decreased to 120 days from existing 182 days.
2. an individual or an HUF shall be said to be “not ordinarily resident” in India in a previous year, if the individual or the manager of the HUF has been a non-resident in India in seven out of ten previous years preceding that year. This new condition to replace the existing conditions in clauses (a) and (b) of sub-section (6) of section 6.
3. an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.

This amendment will take effect from 1st, 2021.

Tax exemption

The Budget 2020 proposes to amend section 115A of the Act to provide that a non-resident, shall not be required to file return of income under sub-section (1) of section 139 of the Act if:

• his or its total income consists of only dividend or interest income as referred to in clause (a) of sub-section (1) of said section, or royalty or FTS income of the nature specified in clause (b) of sub-section (1) of section 115A; and
• the TDS on such income has been deducted under the provisions of Chapter XVII-B of the Act at the rates which are not lower than the prescribed rates under sub-section (1) of section 115A.

As per the Budget document, this amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

What the current rules say

Section 115A of the Act provides for determination of tax for a non-resident whose total income consists of:

• certain dividend or interest income;
• royalty or fees for technical services (FTS) received from the Government or Indian concern in pursuance of an agreement made after 31st March 1976, and which is not effectively connected with a PE, if any, of the non-resident in India.

Sub-section (5) of Section 115A section provides that a non-resident is not required to furnish its return of income under sub-section (1) of section 139 of the Act, if its total income, consists only of certain dividend or interest income and the TDS on such income has been deducted according to the provisions of Chapter XVII-B of the Act.

While the current provisions of section 115A of the Act provide relief to non-residents from filing of return of income where the non-resident is not liable to pay tax other than the TDS which has been deducted on the dividend or interest income, the same relief has not been extended to non-residents whose total income consists only of the income by way of royalty or FTS of the nature as mentioned in point (b) above. Representations have been received to extend this benefit to royalty and FTS income as well.