As soon as India’s Union Budget for 2020-21 was released, many people were confused about the ‘optional’ new tax regime – should we or should we not choose the new formula, residents in India asked. However, non-resident Indians who mostly earned their income abroad, who until now didn’t really have to worry so much about how much the Indian government chose to tax people, were in for some confusion.
The Finance Bill 2020 has changed the definition of NRI for taxation purposes. The Bill amends section 6 of the Income Tax Act to say that a person will be considered a resident of India if they’ve lived in the country for 120 days in a year – as against 182 days, which was the earlier requirement. This means that anyone who spends more than four months in the country is liable to pay taxes in India on their income earned abroad. Further, the Finance Bill proposes to tax NRIs who don’t pay taxes anywhere else in the world. These proposals will come into effect on April 1, 2020 – once the Finance Bill is passed by Parliament.
So what does this mean for NRIs who live in countries where they’re not charged an Income Tax – for instance, the UAE, Kuwait, and Monaco?
Scenario 1: Living and working in foreign country for more than 245 days
Let’s take the simplest scenario first: an Indian citizen, living and working in say UAE, and has not stayed in India for more than 120 days. This person clears the definition of NRI, so doesn’t have to worry about that count. And while they may not be paying taxes in their country of residence, they will not have to pay taxes in India because of the Double Taxation Avoidance Agreement (DTAA), say experts.
The Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between India and 85 other countries. According to the agreement, if an Indian is paying taxes in one country, he/she does not have to pay taxes in India. And this includes those who have a resident visa in a different country, say experts.
Balaji Iyengar, a Chartered Accountant said, “The only requirement, as stated by the revenue secretary, is that all NRIs must have a tax residency certificate (TRC). Taxation is based on TRC. If an individual is a tax resident of a foreign country, he or she is a non-resident to Indian taxation. Hence, maintain the 240-day period in a foreign country and obtain a TRC. If both conditions are fulfilled, then the individual can enjoy all the benefits of NRI as always.”
HP Ranina, a lawyer specialising in tax and exchange management laws of India told Khaleej Times, "You are a resident of UAE under the India-UAE Double Taxation Avoidance Agreements (DTAA) and holding a residence visa of the UAE. Therefore, you will not be covered by the law proposed in today's budget. It may be recalled that the Double Tax Treaty UAE-India was signed in 1993."
Scenario 2: Living in foreign country for less than 245 days
For most NRIs though, one point of worry is going to be ‘maintaining’ the NRI status. If you have family in India, or have business interests in India, you will have to ensure that you don’t cross the 120-day limit if you don’t want your global income taxed here.
“In many instances, NRIs are forced to stay back in their homeland for three to four months due to illness or family issues,” MA Vahid, a resident in Saudi Arabia, said. By crossing the 120-day mark, one would be considered a resident.
If the status is ‘resident’, then global income is also taxable in India, noted Abdullah Karuthedakam, the CEO of Taxscan. “In a normal scenario, if your status is ‘NRI’, only your income which is earned or accrued in India, is taxable in India. Salary for service provided in India, income from a house property situated in India, capital gains on transfer of an asset in India, income from fixed deposits or interest on a savings bank account are all examples of income earned or accrued in India. These incomes are already taxable for an NRI,” he explained.
However, now if an NRI stays more than 120 days in India, their salary earned in, say, Kuwait, will also be taxed here.