NRI Guide: Role Your Residential Status Plays In Taxation

The IT department of India recently announced the extension of the deadline to file the income tax returns for the FY 2020-21 till December 31. This would probably be beneficial for NRIs who are still grappling with their statuses as taxpayers due to their prolonged stay in India as a result of the multiple Covid-19 travel restrictions. The primary concern is “because of the forced stay in India, will I be considered as an NRI or an Indian resident?” 

During FY 2020-21, many NRIs stayed back in India for six months (182 days) or beyond due to a lack of commercial flights or several other issues caused by the pandemic. Every country has the 183-day rule of residency for multiple administrative purposes, including taxation. Under the residency rule, a person staying in a country for work purposes for 183 days or more during a given year is considered a resident or a tax resident of that country for that year. 

Do NRIs, who got stuck in their host countries beyond the stipulated time, need to pay taxes in their domestic country as well as the host countries? Well, it completely depends on the number of days NRIs spent in India. 

The Central Board of Direct Taxes (CBDT) issued a circular in March 2021 to clarify the residential status of certain individuals under the IT Act, 1961 for the financial year 2020-21. Besides, to help NRIs facing double taxation despite the relief offered under the Double Taxation Avoidance Agreement (DTAA), the CBDT has also introduced Form NR. DTAA is an agreement between India and 80 countries that ensures NRIs pay taxes on income earned only in one country. 

If you get considered as an Indian resident (after counting the days you spent in India), you will be liable to pay taxes in India. NRIs, who have foreign income and file taxes there but have become Indian residents due to the pandemic, need to pay tax only in one country, thanks to the DTAA. In such a situation, they need to pay taxes in India and show their foreign income or income earned from India through several investments like mutual funds, stock market, etc. 

Under DTAA, NRIs or foreign nationals can even claim a tax credit (IT returns) from their host country. Foreign Tax Credit essentially reduces the tax liability by deducting an amount of credit directly, owing to the foreign government from their total payable tax. 

In case of the forced stay in India, if the host country has levied tax deducted at source (TDS) from the foreign income, the NRI can use the credits to reduce the amount payable as taxes in India. 

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