Subsequent modifications to Indian tax residency rules
In view of the outbreak of COVID-19 pandemic, the Finance Minister of India presented several statutory and regulatory relief measures last week. One of the corporate relief measures relaxed the requirement of an Indian resident director onboard of an Indian company (the requirement is to have atleast one Indian resident director of an Indian company i.e. residing in India for atleast 182 days). It is to be noted that while India is inclined to move towards citizenship-based taxation, the first set of economic reforms do not address any clarification with respect to individuals out numbering their stay in or out of India as a result of pandemic. The tax relief measures announced are primarily in relation to tax compliance.
Today’s blog discusses Indian tax residency rules as residency determines the tax exposure a person has in a country.
An individual is considered as an Indian tax resident, not ordinarily tax resident (RNOR) or nonresident for a financial year (from April to March). Refer our blog ‘Individual: Indian residence rules’ to understand these terms from Indian tax law perspective. In the original Finance Bill, 2020, the Finance Minister has presented proposals to amend the current tax residency rules. Refer our blog ‘Modification of Indian tax residency rules for details’.
On March 21, 2020, the Finance Minister has proposed subsequent amendments (Subsequent Proposal) in relation to tax residency rules. The key tax residency proposals under the Subsequent Proposal are:
- An Indian citizen or person of Indian origin (PIOs): The current residency rules state that an Indian citizen or PIO can be an Indian tax resident if he visits India for 182 days or more during a financial year.
The original Finance Bill, 2020 proposed to reduce the number to 120 days. But, the Subsequent Proposal stipulates below conditions with respect an Indian citizen or PIO:
- stays in India for 182 days or more during the current financial year; or
- stays in India for 120 days or more during the current financial year and has stayed in India for 365 days or more in the four years prior to the current financial year.
- Deemed Indian tax residency for an Indian citizen: The current residency rules do not tax an individual on the basis of holding Indian citizenship.
Finance Bill, 2020, proposed to tax an Indian citizen (having Indian sourced income of more than INR 1.5 million i.e. approx. USD 21,500, during a financial year) who is not taxable in any other country by reason of either his domicile or residency. The Subsequent Proposal clarifies that this provision does not apply to foreign citizens who hold overseas citizen of India card. Further, an Indian citizen earning income outside India with no income derived from Indian business or profession is also not taxable in India, per a separate clarification issued by the Indian tax authority, CBDT.
- Amending RNOR test: The current residency rules state that an individual is a RNOR if either he has been a nonresident of India for 9 out of 10 financial years preceding the current financial year or he has been in India for 729 days or less for 7 years preceding the current financial year.
The original Finance Bill, 2020 proposed to determine an individual as NROR if he has been a nonresident of India for 7 out of 10 financial years preceding the current financial year. But the Subsequent Proposal override the original Finance Bill, 2020 to stipulate that a nonresident will be considered as a RNOR if he:
- stays in India for 120 days or more and less than 182 days during a financial year; and
- has stayed for 365 days or more during the preceding four financial years.
The scope of taxation is primarily dependent on the individual’s tax residency. However, an individual who is a nonresident Indian may still be required to file an Indian tax return if he earns any Indian sourced income. An individual who is a dual resident of two countries may determine his country of residence if the countries in which he is considered to be a resident have entered into a double taxation avoidance agreement. This is generally examined keeping in mind where the permanent home, central of vital interest, habitual abode or nationality of an individual.
While the economic task force set up to address economic relief measures amid COVID-19 pandemic is still reviewing provisions that need to be addressed but an individual residing in or out of India should be aware of the possible tax consequences if he or she is determined to be an Indian tax resident or nonresident.