Understanding the New Definition of Non-Resident Indians (NRIs) and the Recent Changes in Taxation

Understanding the New Definition of Non-Resident Indians (NRIs) and the Recent Changes in Taxation

The definition of a Non-Resident Indian (NRI) has recently undergone several amendments in light of the Union Budget 2020. This updated definition has significant implications for Indian citizens living and working abroad, as well as for the taxation policies relating to NRIs.

What is the New Definition of NRIs?

Previously, an Indian National who wanted to claim the Non-Resident status needed to stay abroad for 182 days in a year. However, the new guidelines specify that an Indian now has to stay outside India for at least 240 days in a year. Conversely, if an Indian citizen stays in India for more than 120 days in a calendar year, they will no longer be considered as NRIs.

Government Clarification on NRIs

On February 2nd, the government issued a press release to clarify the new provisions regarding the taxation of NRIs. It is important to note that the new provision is not intended to apply to Indian citizens who are genuine workers in other countries. According to the release:

“The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. In some sections of the media, the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries including the Middle East and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. This interpretation is not correct.”

The government further added that if an Indian citizen becomes deemed a resident under the proposed provision, their income earned outside India will only be taxed in India unless it is derived from an Indian business or profession. The statute may need to be amended for clarity on this point.

Taxation Regulations for NRIs

Under the Finance Bill 2020, a new sub-section 1A has been introduced in section 6. This stipulates that an Indian citizen will be deemed a resident of India if they are not liable to tax in any country or jurisdiction. These changes have been introduced to ensure a more comprehensive and accurate determination of an individual's residency status for tax purposes.

Application of Tie-Breaker Rules

The revised definition of NRIs may raise questions about the application of tie-breaker rules, especially in countries like the United Arab Emirates (UAE). The Article 4 of India-UAE Double Taxation Avoidance Agreement (DTAA) provides the framework for resolving such cases. Here are some key scenarios:

Permanent Home: If an Indian citizen has a permanent home only in India or UAE, the tie breaker test is resolved in favor of the country where they have a permanent home. Center of Vital Interest: If an individual has a permanent home in both countries, the center of vital interest is evaluated. Economic relations and professional ties are crucial in determining the center of vital interest. For instance, if an individual is employed only in UAE, they would be deemed resident there for taxation purposes. Habitual Abode: If an individual has a permanent home in both countries and a strong connection to both, the tie breaker will resolve in favor of wherever they habitually reside. This is determined by the period of time they stay in a particular country.

To illustrate, an Indian citizen with only a permanent home in India who starts working or residing in UAE would need to follow the tie-breaker rules prescribed by Article 4 of the India-UAE DTAA. Specific factors, such as employment, sources of income, and economic ties, will determine whether they become deemed a resident of India or UAE for tax purposes.

Conclusion

The recent changes in the definition of NRIs and the associated tax regulations have significant implications for Indian citizens abroad. It is crucial for individuals to understand the new criteria and ensure they comply with the guidelines to avoid unnecessary taxation. For further guidance, individuals may consult with a professional tax advisor or refer to the India-UAE DTAA for detailed information.