The budget for the year 2020 was introduced by the Indian Government in the parliament on February 1, 2020. Certain provisions related to NRIs involving direct taxes were amended by the Finance Bill, 2020. The amendments will take effect from April 1, 2021 and will be applicable from the financial year 2021-22 onwards.

CHANGES BROUGHTS IN BUDGET 2020:

A.     Regarding classification as an NRI under the Income Tax Act

  • For a person to be classified as a Non-resident Indian, the earlier provision needed them to stay outside India for a minimum of 183 days in a financial year.
  • Post the Amendment, a person needs to stay in India for a minimum of 245 days in order to be considered an NRI under the Income Tax Act.
  • This is significant as the NRIs who were earlier having businesses in India, had to stay outside the country for a period of 183 days, now need to remain outside the country for a period of 245 days to avoid taxation in India.
  • The Rationale behind this decision being to prevent the abuse of tax provisions by NRIs. It was discovered that many people were abusing the law by managing their period of stay outside India while conducting business within India to avoid taxation.
  • The government clarified that only income earned in India or from a business the majority of which is based in India will be taxed.

B.     With respect to an Individual and a HUF with respect to “not ordinarily resident” status

  • The earlier provision stated that in order to be “not ordinarily resident” in India, a person or an HUF needs to stay outside India for a combined period of 7 years out of the 10 preceding years or stay in India for 729 days or less during the 7 preceding years.
  • The amended provision replaces the above conditions and provides that for an individual or HUF to be “not ordinarily resident” of India, the individual or the manager of HUF must stay outside India for a period of 7 years out of the preceding 10 years.
  • This amendment does away with the provision where a person or an HUF could stay attain the status within 7 years. It now necessitates a combined period of minimum 7 years in order to attain the “not ordinarily resident” status and get tax exemption.
  • The “Not Ordinarily Resident (RNOR)” is a special status accorded in order to provide some benefits to returning NRIs. For Indian income tax purposes, an RNOR is treated at par with NRIs. That means, an RNOR needs to pay tax in India only on his Indian income. Any income from abroad will not be taxed in India.

C.     With respect to Indian citizens not liable to tax in other jurisdiction

  • The amendment adds a new provision that an Indian citizen not liable to tax in any other country or territory shall be deemed to be a resident in India and be liable to taxes. This provision seeks to tax NRIs or Indian citizens working abroad but evading tax in the respective countries.
  • The government further clarified that this provision is only to prevent the blatant misuse of the provisions of tax exemptions. This would not affect the ‘bonafide Indian workers or businessmen’ abroad.

D.     With respect to Income Earned in India

  • Income earned by citizens belonging to the category of NRIs, RNOR or Indian residents in India is still taxable in India. The above provisions in no way provide for exemption of any tax to be paid on income earned in India.