In a world hit by the COVID-19 pandemic, NRIs and foreigners visiting India can heave a sigh of relief, as the Central Board of Direct Taxes (CBDT) recently issued a circular with respect to determining residency under section 6 of the Income Tax Act. This circular was issued after multiple representations, as well as guidance from the OECD (Organisation for Economic Cooperation and Development) for the relief and adjustments to be made. This clarification from the CBDT has been put into effect for the financial year 2019-2020. A similar clarification circular should be expected for financial year 2020-21 as well, once there is more clarity on the resumption of international flights and the lifting of the lockdown.

Why was it needed?

A large number of visiting NRIs and foreigners had planned to come to India for a particular duration and return to their respective countries. However, due to the cancellation of international flights and lockdowns imposed, they were stranded in India, which was unplanned. Since the tax status of an individual, that is, whether the person is a resident of India or a non-resident, or resident but not ordinarily resident, is determined by the period for which the person is in India for the last financial year, or the past few financial years. They may have undergone a status change from a taxation perspective, even though they had no such intent of changing their tax status. On the basis of the residency determined by the period of time spent in India, India taxes global income for resident Indians, whilst for NRIs only their India generated income is taxed in India.

For example, for a Non Resident Indian, interest earned on NRE deposits is tax free in India, but would become taxable if the tax status was to turn to being a resident. Besides, the need for filing tax returns in India as well as possible complexity of double taxes in their country of residence, would have created challenges. This clarification will therefore come as a relief.

-For persons who came to India before March 22, 2020, the period of stay from March 22 to  March 31, 2020 will not be taken into account for determining the number of days of stay in India.

-For persons who have been quarantined in India due to COVID-19 on or after March 1, 2020 and have either not been able to leave India prior to March 31 2020, or were able to leave India on an evacuation flight on or before March 31, 2020, the period of the stay from the beginning of the quarantine till March 31, 2020 or the date of departure, as applicable, will not be taken into account for determining the number of days of stay in India.

-For persons who have departed on an evacuation flight on or before March 31, 2020, the period of stay in India from March 22, 2020, to the date of departure, shall not be taken into account for determining the number of days of stay in India.

Considering the slew of changes in determining the tax residency status that were announced in the Union Budget earlier this year, and which came into effect from FY 2020-21, in terms of the number of days to determine tax status changing to 120 days, if the NRI had stayed in India for more than 365 days in the previous four years, and had an income of more than Rs 15 lakhs in India, this relief makes it easier to deal with these changes.