How NRIs stuck due to pandemic will be taxed in India for FY 2020-21

The new rule was announced before the pandemic-induced travel restrictions. It can unintentionally impact all those NRIs/PIOs who had come to India and had to spend longer time in the country in FY 2020-21 due to travel restrictions or health concerns..

In Budget 2020, it was announced that NRIs/PIOs will qualify as tax residents in India if they spend a minimum of 120 days in the relevant financial year (subject to certain conditions) in addition to a minimum of 365 days in the preceding four years.

However, these amendments were announced before the pandemic-induced travel restrictions. This new rule can unintentionally impact all those NRIs/PIOs who had come to India and had to spend longer time in the country in FY 2020-21 due to travel restrictions or health concerns thanks to the novel coronavirus pandemic . So, how will such individuals be taxed in India during FY 2020-21?

Curtailment of privilege for certain class of NRIs/PIOs

NRIs/PIOs were given certain privileges under tax residency laws to enable them to stay longer in India without becoming tax residents. Till FY 2019-20, these NRIs/PIOs coming to visit India would have become tax residents only if they spent a minimum of 182 days in a year. Whereas any other foreign national would have become a tax resident even if they had spent a minimum of 60 days in a year and 365 days in the preceding four years.

However, as mentioned above, Budget 2020 introduced certain changes to the residency rules to curtail the above privilege. From FY 2020-21, a new category of NRIs/PIOs having income from Indian sources in excess of Rs 15 lakh in a financial year was carved out. These NRIs/PIOs would qualify as tax residents if they spend a minimum of 120 days in the relevant financial year in addition to a minimum of 365 days in the preceding four years.

Interestingly, these amendments were proposed prior to the onset of the pandemic and were targeting individuals carrying on substantial economic activities in India, while managing to not qualify as tax residents by restricting their period of stay to below 182 days in a year.

Be that as it may, the changes may impact all those NRIs/PIOs who had come to India and were compelled to spend longer time in India in FY 2020-21 due to travel restrictions.

New concept of "deemed resident"

There is another significant change in the residency rules with effect from FY 2020-21, which is likely to impact NRIs. Any non-resident Indian citizen, who has annual income from Indian sources in excess of Rs 15 lakh, will be deemed to be a tax resident of India if he is not liable to tax in any other country by reason of his domicile or residence or any other criteria of similar nature.

This provision was specifically introduced to tackle the so-called " stateless persons", who arrange their stay in different countries in such a way that they don't qualify as tax resident of any of the countries and thus, escape substantial tax liabilities on their global income. This arrangement was typically employed by high net worth individuals (HNIs) and such double non-taxation was not desirable in the current global tax environment.

This anti-abuse provision seeks to treat such "stateless" NRIs as deemed resident of India by virtue of their Indian citizenship. Interestingly, the concept of deemed resident is not dependent on the individuals period of stay in India. Thus, an Indian citizen can be "deemed resident" even if he has not spent a single day in India during the relevant year. This is coming from reading of Section 6 which defines the laws related to residential status of an individual. However, he/she will be considered as "deemed resident" only if certain conditions are satisfied.

Scope of income taxable in India

So, how will these changes in residency rules impact the tax exposure of NRIs/PIOs in India? In case of a resident (and ordinarily resident), the global income is taxable in India. However, an NRI/ PIO, who qualifies as resident only by virtue of the recent amendment, i.e., who has stayed in India for more than 120 days, but less than 182 days, will be treated as a resident but not ordinarily resident (RNOR). Similarly, an NRI who falls within the definition of "deemed resident" is also treated as RNOR.

In case of a RNOR, the entire global income is not taxable in India. The scope of taxable income of a RNOR is limited to the following: (i) income received (or deemed to be received) in India; (ii) income accruing or arising (or deemed to accrue or arise) in India; and (iii) income accruing or arising outside India provided such income is from business controlled in or profession set up in India.

An NRI/ PIO may have had to stay in India for a prolonged period due to the pandemic. During such stay, he/she might have managed his overseas business/profession from India. The tax department may possibly argue that income of RNOR from such overseas business will be taxable in India.

Those NRIs/PIOs who also qualify as tax residents of any other country may be eligible for certain relief from double taxation in terms of the applicable tax treaties, subject to fulfilment of various conditions. However, NRIs who are treated as "deemed resident" may not be eligible for any tax treaty benefit, as they are not tax residents of any other country.

Conclusion

The recent amendments made in the tax residency laws in India were intended to tackle certain abuse or misuse of privileges granted to the NRIs/PIOs. Be that as it may, the unplanned stay of some of the NRIs/ PIOs in India due to the pandemic might have ended up changing their residential status during the FY 2020-21 and exposing them to potentially more taxation in India. Further, the new "deemed resident" may put a spoke in the wheel of some of the Indian HNIs, who had managed to spread their stay across multiple countries to substantially reduce their tax liability.