India’s Budget 2020 (Part 1): Takeaways for NRIs with regard to income tax

The Indian budget released on the 1st of February 2020 brings with itself changes for not only foreign investors/multinationals (to be explained in Part 2 of this serie) but also for individuals such as Non-Resident Indians (NRIs). In Part 1, we will look at changes with regard to NRIs, intended to plug loopholes in the tax system.

Confusion around Budget 2020

Previously when the budget was announced, one of the provisions with regard to tax by NRIs, raised questions. It was assumed that Indian citizens were required to report their global assets and financial interests. This caused confusion for Indian citizens who were either employed or had business interests or were residing outside of India, including in countries which currently do not collect any tax. The Indian government later clarified this confusion and called the provisions concerned “anti-abuse” measures. It further clarified that the provisions only apply to income that is generated locally, in India. It is only a full-fledged Resident pays tax on the global income i.e. income earned in India as well as income earned outside India. A person who is not a Resident, is an NRI.

Residency rule

The basic definition of NRI and residency rules have not been changed. To be considered a Resident for tax purposes in India, one has to have stayed in India for 182 days in the financial year concerned OR 365 days in the preceding 4 financial years and out of which at least 60 days in each financial year. Therefore, the stay does not have to be continuous. 

The 182-days rule will still apply to people who become NRIs for the first time. That means, if you have been a Resident and intend to go abroad on employment or business, thereby becoming an NRI, then the 182-days rule will continue to apply to you. 

The change however is the following. Previously, people who were already NRIs and came to visit India, could stay in India for 182-days without becoming a Resident. Therefore, they retained their status as a Non-Residents. Budget 2020 has reduced this period of 182-days to 120-days. As a result, if an NRI stays in India for 120 days or more while visiting India, they will become a Resident for tax purposes in India. This will make their global income taxable in India.

Bona fide workers

India will not include in the tax net ‘bona fide workers’ – who are also not liable to pay tax in the countries they work in – for the income earned abroad. This is a relief for NRIs working in tax free countries like UAE and other similar countries. 

Deemed resident in India

Indian citizens who are not liable to pay income tax in any other country or jurisdiction shall be deemed to be resident in India for tax purposes. This is an anti-abuse measure. Such individuals, particularly high net worth Individuals (HNIs) stay in different countries, not becoming residents of any country to avoid income tax. They are considered to be ‘stateless Indian citizens.’ 

For deemed residents, income earned outside of India will not be taxed in India (e.g. bona fide workers abroad) unless it is derived from an Indian business or profession.

Note that deemed residency only applies to Indian citizens. 

Returning Indians

Returning Indians or `Not Ordinary Residents’ (NORs), do not have to pay tax for their foreign income unless it is from a business controlled from India or profession set up in India. This provision is mainly useful for returning Indians. It allows them time to settle before their foreign income becomes taxable in India.

Presently, to become an NOR, a person must be a non-resident for at least 9 out of the 10 previous financial years or his/her stay in India should not exceed 730-days in the preceding seven financial years. Budget 2020 has reduced this period to 7 years out of the 10 preceding financial years. The second condition of 730-days stay has been eliminated altogether. Therefore, a returning Indian, who has been a non-resident for 10 years or more, will be an NOR for 4 years and his/her global income will not be taxed during that period. 

The following hasn’t changed

NRIs pay income tax on:

1)    the income for services that are rendered in India, irrespective of being an NRI or where the income is received. 

2)    the rent collected for a house on rent. A tenant deducts TDS (Tax Deducted at Source) before paying/transferring the rent. 

3)    the interest income from fixed deposits and savings accounts held in an Indian bank account.

4)    the income earned by an NRI from a business controlled or incorporated in India.

5)    The income from capital gains.

6)    investments in certain Indian assets.

Are you an Indian citizen visiting India, an NRI or NOR and you have questions or concerns about the implications of India’s budget 2020, please contact Miss Legal India.

 

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