There are a significant number of Indians who work or have businesses outside their country of origin. NRIs (non-resident Indians) are required to pay taxes on income earned or received in India, if it exceeds annual limits set by the Income Tax rules.
To facilitate some control on those who exploit residency status rules to avoid paying income tax in India, changes were proposed to the law in the Budget 2020.
The Finance Bill 2020 has proposed some changes to the NRI Income Tax implications.
1. Residential status
With effect from 1 April 2021 (assessment year), a person who lives in the country for 120 days or more will be considered as a "resident of India" and will be liable to pay taxes. At present, the bar is set at 182 days or more.
This will mean that Indian citizens or a PIO (persons of Indian origin) with families in India will have to plan their visits to the country accordingly, to avoid losing the NRI status and pay taxes.
2. Stateless citizens
It was further proposed in the Finance Bill 2020 that "an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature."
It means that residential status under the Income Tax Act will be imposed on individuals who are not paying taxes in any jurisdiction, irrespective of how long they stay in India during a year. They will have to disclose their foreign assets.
While this raised fears among Indian citizens working in the Middle East, whose salaries are not taxed in the country of residence, the government clarified that the new provision "is not intended to include in tax net those Indian citizens who are bonafide workers in other countries."
The Finance Ministry also said that there was no intention to impose taxes on income of non-resident Indians earned abroad. However, the contents of the Finance Bill aren't clear on this aspect and we may see changes in the days to come before the bill is passed in the Parliament. Further, the government will also have to define what qualifies one as a "bonafide worker."
3. "Not Ordinarily Resident" status
As a relief for those returning to India after 10 or more years of employment overseas, the Finance Bill has relaxed the applicability of "not ordinarily resident" status for Income Tax purposes.
For a previous year, an individual or manager of an HUF shall be "not ordinarily resident" in India, "if the individual or the manager of the Hindu Undivided Family, as the case may be, has been a non-resident in India in seven out of ten previous years preceding that year."
"These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years," the Finance Bill said.
Presently, an individual is not ordinarily resident for Income Tax purposes if he has been an NRI in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.