NRI Tax Residency Status in Pandemic Times

Generally, any individual living less than 182 days during taxable year is considered a non-resident Indian but the pandemic has created confusion regarding this rule as several NRIs were stranded in India for prolonged periods of time due to lockdowns and travel restrictions.

While the covid-19 pandemic has had drastic effects on regular life, the economy, and the world at large; it has had a particular effect for non-resident Indians (NRIs) in terms of their tax residence status. An estimated 28 million non-resident Indians are generally settled outside India, and so tax residency status of NRIs is important to both taxpayers and tax authorities. 2020 was a difficult year for tax residency status as lockdown rules and other travel restrictions meant that various non-residents may have continued to live in India longer than the 182 day mark which could throw residency status into flux.

While the Indian tax authorities had extended the tax filing deadlines for the AY 2020-2021, there had been less clarity on whether NRIs would receive any blanket exemptions during the year. The matter has now been heard by the Supreme Court and the Central Board of Direct taxes (CBDT) has issued a circular clarifying the issue.  

Taxation of Non-Resident Indians:

The Income Tax Act, 1961 (ITA) defines a ‘non-resident Indian’ as being an individual who is a citizen of India or a person of Indian origin, who is not a resident. The ITA has also prescribed further rules to determine residency status of an individual in a taxable period.

The residency rules are integral to taxation in India, as the incidence of income tax is determined according to an individual’s residency status. These residence rules determine which individuals can be classified as a resident of India vs. a non-resident. Full time residents of India are taxed on their entire income (both Indian and global), while non-residents are only taxed on the income that accrue or arise in India. To determine which income arises or accrues in India, the source rule of taxation is applied.

There are three main types of residents for income tax determination: ordinary resident, not ordinarily resident, and non-resident Indian. Section 6 of the ITA lays down the residency rule, and individuals are determined as resident, non-resident or not ordinarily resident based on the following:
  • Resident: An individual who lives in India for a period of 182 days or more in a taxable year. Or, an individual who has lived in India for a period of 60 days or more in a previous year and for a total period of 365 days or more in the four preceding years. In some cases this is changed to 120 days.
  • Non-Resident: In general, an individual living in India for a period less than 182 days in a fiscal year will be a non-resident Indian.
  • Not ordinarily resident: An individual who is a non-resident for 9 out of ten years preceding that taxable year or who has lived in India for a period less than 729 days for the preceding seven years, will be considered a not ordinarily resident.
Once the classification of resident/non-resident is created, the source rule is used to determine which income of the individual is taxable.
According to the source rule residents and non-residents will be taxed in the following ways:
  • Residents: Individuals classified as residents in a taxable period will be taxed on both income arising and accruing in India, and also any income that is arising and accruing from outside India. i.e., they are taxed on both Indian and global income.
  • Non-residents:  Non-resident Indians will be taxed only on the income that arises or accrues or deems to arise or accrue in India.  Similarly, resident but not ordinarily residents will also be taxed on the income that is earned in India and will not be taxed on any global income.
As of 2020, ‘stateless Indians’ i.e. non-resident Indians whose incomes are not taxed in any other country will be taxed in India. This deemed residence status was introduced in 2020 and purports to tax all non-residents that are not taxed in their resident jurisdictions.

Tax Residence during Covid-Times:

Due to lockdowns and travel restrictions across various countries including India in 2020, several non-residents were forced to say in India beyond their estimated visits and would be burdened with facing higher taxes due to the change in residency status. To offset some of the burdens caused by the pandemic, the central government had stated flexibility would be provided for non-residents that had been forced to extend their stays.

In pursuance of this a notification was passed by the CBDT stating that the following concessions would be made for non-residents:
For determining residence status under section 6 of the Income Tax for AY 2019-2020, following will apply for any non-resident individual who came to India on a visit before 22nd March 2020:

1. If they have been unable to leave India on or before 31st March 2020, then the period of stay between 22nd March 2020 and 31st march 2020 will not be considered for the 182 day tax period. 

2. If they were quarantined in India because of Covid-19 on or after March 2020, or was unable to leave before 31st March 2020, then the period of quarantine to the date of departure will not be considered for the 182 day tax period.

3. If they departed on an evacuation flight on or before 31st march 2020, then the period of stay from 22nd March to the date of departure will not be considered as part of the 182 day tax period.
 
A representation was also filed by taxpayer Mr. Gaurav Baid asking for clarity in application of the above notification issued by the CBDT, and for clarity on whether such exemptions would be applicable for the FY 2020-21. An order was subsequently passed by the Supreme Court under Gaurav Baid v. Union of India in February of 2021.

Gaurav Baid was an Indian citizen but a resident of Dubai, U.A.E., had travelled to India on a visit in March of 2020. However due to the subsequent lockdowns in India and the U.A.E, he was unable to travel back before expiry of the 182 day period. The petition was filed asking for clarity of the tax residency status for NRIs in AY2020-21.

The Supreme Court pointed out that the benefit by way of the above notification has been provided by the Ministry of Finance. However, the application for the notification is only for the period of March 2020. There is no clarity on the residency status of individuals who could not travel back after the end of this period. The Supreme Court has directed the taxpayer to make a representation before the CBDT, and directed the CBDT to take up such matters in the next few weeks.

Following the Order by the Supreme Court, a notification was issued by the central government.

Notification by CBDT issued in March of 2021:

On 3rd March 2021, the CBDT issued a notification to clarify the residency status of NRIs that have been stranded in India beyond March of 2020.

The notification reinforces that NRIs stranded in India during the lockdown until 31st March 2020 can avail the benefit which was already provided by the previous notification. Their period of stay during the periods specified will be excluded in the income tax filing for FY 2019-20.

In regard to the residency status for FY 2020-21, the notification has stated the following:
  • That short stay period due to Covid-19 restrictions, will not result in a change in residential status. An individual that has been an NRI for the last several previous years, a continued short stay in India would not affect their residential status for FY 2020-21.
  • A general relaxation cannot be provided as that could cause a situation of double non-residency, and double non-taxation.
  • The tie breaker rule under the double taxation treaties will be applicable in the event an individual qualifies for residency in FY 2020-21 only due to the covid-19 prolonged travel restriction.
  • Employment income will be taxable under the conditions of the double taxation treaty. i.e., the individuals will be able to avail the benefits under the double taxation treaty.
  • NRIs will be provided foreign tax credits for any taxes paid outside of India.
  • If NRIs are facing issues of double taxation, even after the reliefs provided under the notification, then they may furnish the information to the Principle Chief Commissioner of tax who will then decide if any specific reliefs have to be provided.
The CBDT will be investigating whether any general relaxation has to be allowed for the FY 2020-21. Several countries such as United States and Germany have provided general relaxations of up to 60 days for calculating tax residence, and the CBDT will investigate if the same should be followed in India.

Effect of the Notifications:

The notification provided by the CBDT is beneficial for all non-resident Indians who were stuck for a prolonged period of stay in India due to the Covid crisis.  

The second notification applicable for FY 2020-21, has not provided any general relaxations that would be applicable to all NRIs. The rules specified therein of reliefs under DTAs, non-taxability of employment income, etc. are all already applicable to any given year. The CBDT still holds that such short stays should not influence the tax residence status for most NRIs.

The lack of a general relaxation will affect individuals that are already considered not ordinarily residents the most. Such individuals are only taxed on their Indian income and not their global income similar to non-resident Indians. However the status of not ordinarily resident is based on being an NRI for a minimum period of time in the directly preceding 7 or 10 years. If such individuals qualify as resident Indian due to the prolonged emergency stay in 2020, then their full income (both Indian and Global) may be taxed for FY 2020-21.

If a non-resident qualifies as an Indian resident only for the AY 2020-21, they will fall under not ordinarily resident status if they qualify as NRIs for the required time period for the immediately preceding 7 or 10 years (i.e. NRI for 9/10 preceding years or if they have lived less than 729 days for preceding 7 years). Eve as a not ordinarily resident citizen, they will only be taxed on any Indian income for FY 2020-21. The double taxation treaties will also generally protect the employment income earned outside India for NRIs.

However, the ‘not ordinarily residents’ could be at risk of having their status changed ot full resident due to 2020. Such individuals can apply for specific relaxation (latest by 31st march 2021) to the Commissioner of tax citing the unforeseeable circumstances of 2020. Any reliefs they receive will be subject to the discretion of the CBDT. It is to be seen if the central government will still decide to provide a general exemption to all NRIs before the income tax filings become due for FY 2020-21.