The rapid spread of the COVID-19 pandemic has forced all airports to be closed. The Government has been operating repatriation flights to return foreign nationals to their home country, and bring back Indian citizens from abroad to India.
NRIs on a visit to India before the COVID-19 outbreak have had to extend their stay. If their stay exceeds the threshold, they may have to pay income tax in India too, as they may be regarded as ‘resident’ under Section 6 of the Income Tax Act, 1961, and their global income is at risk of being taxed in India. Their foreign income is also at risk of being taxed in India. For instance, interest from NRE accounts may turn taxable in India, TDS rates on Indian income may change in case of becoming ‘residents’, and resultant tax compliances may need to be fulfilled.
This has resulted in a lot of speculation on the impact the additional days spent in India may have on their India tax residency status. The tax residency rules for the financial year which ended on March 31, 2020, and the current financial year beginning April 01, 2020, are as below:
FY 2019-2020: If the stay in India is for 182 days or more in the FY, or, the stay in India has been for 60 days or more in the FY, and 365 days or more in the 4 years preceding the FY. In case the taxpayer is an Indian citizen or a ‘Person of Indian Origin’, the requirement of having to spend 60 days or more in the FY gets extended to 182 days.
FY 2020-2021: If the stay in India is for 182 days or more in the FY, or, the stay in India has been for 60 days or more in the FY, and 365 days or more in the 4 years preceding the FY. In case the taxpayer is an Indian citizen or a ‘Person of Indian Origin’, the requirement of having to spend 60 days or more in the FY gets extended to 120 days. Visiting NRIs whose taxable income in India is up to Rs 15 lakhs during the FY will continue to remain NRIs if the stay does not exceed 181 days, as was the case earlier. (As per Finance Act 2020)
There are many cases of high net worth individuals (HNIs) forced to stay in India because of the travel restrictions, technically making them tax residents. In addition, there are non-resident executives deputed to India, and travelers from foreign countries, who may risk being treated as tax residents, despite being genuine tax residents of other countries. The Income Tax Department & the Central Government are working together to ensure that tax residency issues do not arise, and the tax computations are hassle-free.
India’s tax regulating body, the Central Board of Direct Taxes (CBDT) put an end to the uncertainty by coming up with a circular in May 2020. It stated that an extended stay in India will not be taken into account while determining the residential status for FY 2019-20 for those individuals stuck in India owing to the lockdown, and ‘stay-at-home’ directives.
Category 1: Individual has been unable to leave India on or before March 31, 2020.
The relaxation provided for Category 1: Period of stay in India from March 22, 2020, to March 31, 2020, will not be counted for determining residential status.
Category 2: Individual has been quarantined in India due to COVID-19 on or after March 1, 2020
a) Has departed on an evacuation flight on or before March 31, 2020
b) Has been unable to leave India on or before March 31, 2020
The relaxation provided for Category 2: Period of stay in India from the beginning of his quarantine to the date of his departure or March 31st, 2020, will be excluded from the days of stay to determine the residential status.
Category 3: Individual has departed on an evacuation flight on or before March 31, 2020.
The relaxation provided for category 3: Period of stay in India from March 22, 2020, until the date of departure will be excluded for determining residential status.
This notification is for FY 2019-2020 (AY 2020-2021).
To explain the tax residency status better, let us consider an example.
Mr. Dhruv arrived in Goa on 25th September 2019 and was to fly back to Lisbon on 25th March 2020. However, he was unable to move out of India owing to COVID-19. Relief is due in the form of CBDT’s notification through which his involuntary stay in India from 25th March 2020 through to 31st March 2020 will be discounted when determining his tax residency status for 2019-20. Hence, he will remain a non-resident despite having exceeded the 182-day staying period in India.
Similarly, Mr Jacob, having arrived in India on 22nd September 2019, and later evacuated to Berlin on 16th April 2020, will have the days of involuntary stay in India discounted for the financial year 2019-20. In addition, the 16 days of involuntary stay in India in 2020-21 are also likely to be discounted by CBDT with future directions.
More information on the exact dates that can be excluded will be issued after the resumption of international flights. The CBDT is yet to provide additional information on whether the term ‘quarantine’ includes self-quarantine without a health official’s recommendation, and whether any special cases that do not fall under the notification’s scope can be represented to tax officials. Greater clarity on the relaxations for FY 2020-21 can be expected on the complete lifting of the lockdown, and complete resumption of international flight services.
The COVID-19 pandemic has resulted in tax residency status conflicts for individuals who travel across the globe throughout the year. NRIs can get in touch with GKM’s team of international tax advisors to discuss more on their tax residency statuses, and tax planning.