Are you an NRI? Here's what you need to know about tax residency rules

NRIs and PIOs who landed in India before the pandemic-imposed travel restrictions were imposed found themselves extending their stay and exceeding the limits of physical presence for tax residency.

Are you an NRI Here's what you need to know about tax residency rules

The COVID-19 pandemic has thrown a lot of existing laws and policies out of order, and one area where it has made a seemingly uncomfortable impact are the tax residency laws for Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). On account of the lockdown and restriction on international travel, many NRIs and PIOs who travelled to India before the government-imposed lockdown on March 24 found themselves reluctantly extending their stay due to unavailability of international flights. 

Unfortunately, this resulted in many of them overstepping the threshold of physical presence in the country for tax residency, resulting in additional tax liabilities. So, is there a way out? Let’s find out.

What does the law say about NRI's liability to pay taxes?

The tax residential status of an individual is linked to their physical presence in the country. As per Indian tax laws, a Resident and Ordinarily Resident (ROR) individual has to pay tax in India on total income in a financial year, including all income from foreign sources, whereas a Non Resident (NR) or Resident but Not Ordinarily Resident (RNOR) person needs to file an income tax return only on income earned or received in India.

An individual is considered to be ROR if either of these two conditions are fulfilled:

  • Has lived in India for 182 days or more during the current Financial Year (FY). 
  • Has lived in India for 60 days or more during the current FY, and cumulatively 365 days or more during the preceding four FYs.

Income tax for NRI income and RNOR differs from those considered as Ordinarily Resident. A majority of their income accrues or arises from investments, long-term or short-term capital gains from sale of property, or other assets. As per Section 195 of the Income Tax Act 1961, tax has to be deducted at source (TDS) for conducting any business transaction with a non-resident.
For example, if a person is purchasing a house from an NRI, the buyer will have to obtain a Tax Deduction Account Number or TAN as per Section 203A before deducting TDS on sale of property by NRI. The details of TDS deductions and the applicable rate will also have to be mentioned in the sale deed of the transaction between the two parties. 

Related: Are you an NRI? Here’s how you can claim a TDS refund

The applicable rate of TDS differs from one transaction to another. Listed below are some of them:

  • Income from long-term capital gains under Section 115E – 10%
  • Short-term capital gains under Section 111A – 15%
  • Income from long-term capital gains – 10%
  • Income from investments made by NRIs – 20%
  • Income from royalty – 10%
  • Any other source of income – 30%

Some relief measures for NRIs

In line with the suggestion of the OECD (Organisation for Economic Cooperation and Development), the Central Board of Direct Taxes (CBDT) issued Circular No 11 of 2020, dated 8 May 2020, which discounted the tenure of a prolonged stay in India for the purpose of determining residency status for FY 2019–20. The circular states that any individual who visited the country before 22 March 2020 but was unable to leave on or before 31 March 2020 will have their extended period of stay excluded for tax residency purposes.

Additionally, if a person was asked to quarantine themselves in India on account of COVID-19 between 1 March and 31 March, their period of stay from the start of quarantine to the day of departure would not be taken into account. This relaxation is beneficial for people who had spent a considerable number of days in the country and were closing to exhausting the duration that would help them retain their NRI status. This would also help them avoid any additional taxes in India.

Related: Budget 2020: Impact on NRIs 

New criteria for NRI status and changes in taxes for FY 2020–21

As per the amended law, any individual staying in India for a minimum of 182 days in a particular financial year qualifies to be resident in India for that financial year. For NRIs and PIOs, the minimum tenure of stay to qualify as a resident has been reduced from 182 days to 120 days. This will help address the issue of tax liability for individuals considered ‘stateless’ for tax purposes. Any individual who is not liable to pay tax in another country and whose total income exceeds Rs 15 lakh (excluding income from foreign sources) during the FY will hence be treated as a ‘resident’ individual. 

The amendments mentioned above are going to increase the number of people who fall under the tax net. Individuals will have to make a personal assessment to see if any of the changes impact their residency or tax status. The government is expected to issue a circular on residency relaxation for FY 2020–21 once international flights resume. Look at these list of incomes that will be tax-free under the new tax structure.


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