India’s citizenship-based tax: A primer for NRIs

Non-resident individuals should make that they are compliant with the tax laws, especially due to the changes in determining the residential status of an individual.

Kavya Balaji   /   March 12, 2021

The Indian government has improved the Indian tax regime to help taxpayers. The government has taken measures to increase transparency while reducing compliance burden and uncertainty. Even taxation for Non-Resident Indians (NRIs) has been improved to simplify the tax filing. Here are the tax laws NRIs should know. 

NRI tax residency provisions

The most important change relating to the determination of residential status of individuals has been done. This is applicable from 2020-21 onwards. The definition for Indian citizen and Person of Indian Origin (PIO) has been modified.

Earlier, any Indian citizen/PIO residing abroad could remain a Non-Resident in India for tax purposes if they have been in India for at least 181 days. Now, this time frame has been reduced to 120 days for Indian citizens/PIOs. However, this is applicable to only those Indian citizens/PIOs whose total income in India exceeds Rs. 15 lakhs. Their taxable income accrued in India has to be up to Rs. 15 lakhs in a financial year.

So, any Indian citizen/PIO who stays in India for more than 120 days and less than 182 days will now be ‘Not ordinarily resident’ and not Non-Resident in India.

Citizenship-based taxation

The government has introduced the concept of deemed residency to better the residency provisions for individuals who stay in multiple countries during a financial year. This is citizenship-based taxation in India. For this, after checking for their stay in India for the present financial year, NRIs need to determine whether they have stayed in India for more than 365 days in the preceding four years. For instance, if an NRI has stayed in India for more than 120 days this financial year (FY2020-21), he needs to see if he has stayed a total of more than 365 days in the past 4 financial years (FY 2019-20, 2018-19, 2017-18, 2016-17).

If an NRI has stayed for more than 365 days in India for the previous four years, he/she will be deemed to be Indian resident for tax purposes. However, they will be ‘Resident but Not Ordinarily Resident (RNOR)’. This is only if the NRI’s Indian sourced income exceeds Rs. 15 lakhs and he/she is not liable to taxes in any other country. 

Earlier, a RNOR was only someone who has been a Non-Resident in 9 out of 10 previous financial years or one who has been in India for 729 days in the previous 7 financial years. How much of the foreign income is taxed in India? If RNOR have foreign income, that income will not be taxed in India.

Note that apart from the income accrued in India, RNOR will be liable to pay tax if the RNOR earns income in foreign countries from businesses controlled in India or from a profession set up in India.

Another provision is that an individual who is a citizen of India will be deemed to be an Indian resident in any previous financial year, if he/she is not liable to tax in any other country/territory by reason of their domicile or residence. However, note that this provision will be applicable only if their total income that has accrued in India during the financial year is more than Rs. 15 lakhs. This provision was introduced last year. This tax provision for determining residential status of a stateless individual is not applicable for Overseas Citizens of India (OCI) card holders or foreign citizens.

Dividend taxation for NRIs

The Indian government provided for dividend distribution tax (DDT) where Indian companies distributing dividend will be required to pay taxes on the dividend distributed. The income from dividends was exempt in the hands of shareholders in India. This was till March 2020.

Now, with effect from 1st April 2020, the government has chosen the classical method of taxing dividend in the hands of taxpayers. This is because for many NRIs, if dividends received from such companies were also taxed in their home country, they were not able to claim credit of the DDT in their home country.

Now, the DDT has been abolished and dividends will be taxed in the hands of the individuals at the applicable tax slabs. For Non-Residents, the Indian company will be required to withhold tax while distributing dividends to Non-Residents. This is not applicable to Foreign Portfolio Investors (FPI). 

For NRIs, the company will withhold tax at either 20% (plus applicable surcharge and cess) or rates as per the prevailing tax treaty rate, whichever is lower. This will help NRIs claim the credit for the tax that was withheld by the company when tax is payable in their home country.

You can invest in India as an NRI and claim tax benefits. Need help with your investments? Get in touch with your wealth expert at wealthzi.com now.

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