NRI Residential Status for FY 2020-21

The Central Board of Direct Taxes (CBDT) has issued a circular on 3^rd March 2021 in response to the various representations requesting relief in the determination of the NRI residential status for FY 2020-2021. CBDT clarified that Non-Resident individuals facing the issue of double taxation on their income for the Financial Year (FY) 2020-2021 due to extended stay in India because of COVID-19 related travel restrictions have to furnish the specific information in the newly notified “Form-NR” by March 31, 2021. The current article briefs the CBDT Clarification on Residential Status. Also read: Income Tax Return for NRI

Synopsis of Notification

Central Board of Direct Taxes (CBDT) clarified that India will not levy income tax on non-resident Indians (NRIs) who have exceeded the mandated residency limits.

The relaxation will remain in place till March 31, 2021, which means non-residents will not be taxed for the Fiscal year 2021 even if they have overstayed. This comes as a relief for NRIs who had been stuck in the country due to COVID-19 travel restrictions
NRIs and foreign nationals stuck in India due to the COVID-19 pandemic and facing double taxation can submit the details to the income tax department by March 31

Determination of Residential Status of a Person – Section 6 of the Income-tax Act

As we are aware, under income tax, the taxability of the income of any person depends upon his residential status during the relevant Financial Year. The residential status of the person thus plays a crucial role in determining the scope of taxable income and tax payable in India during the Financial Year. Section 6 of the Income-tax Act, 1961 contains provisions relating to the determination of residency of a person. The status of an individual, whether he is resident in India or a non-resident or not ordinarily resident, is dependent on the period for which the person is in India during a previous year or years preceding the previous year.

Form-NR – For Determining NRI’s Residential Status for the Financial Year 2020 - 2021

If any individual is facing the issue of double taxation even after claiming reliefs available in the relevant Double Taxation Avoidance Agreement (Tax Treaty), he/she may furnish the specified information in Form-NR electronically to the Principal Chief Commissioner of Income Tax (International Taxation) by March 31^st, 2021. The main details required to be furnished in “Form-NR” to evaluate the possible situation in which a particular taxpayer is facing double taxation due to the forced stay in India.

The nature of income
Quantum of double-taxed income
Reasons for double taxation
Stay details in India
Current home country
Source jurisdiction

The Form-NR – For Determining NRI’s Residential Status is reproduced below for reference. [pdf-embedder url="https://www.indiafilings.com/learn/wp-content/uploads/2021/03/residency-circular-02-of-2021-8-9.pdf"] Based on the information received from such individuals, CBDT will consider whether any relaxation is required to be provided or not and if it is required than whether general relaxation can be provided for a class of individuals or specific relaxation is required to be given in individual cases.

Earlier Circular – Clarification on Residential Status

Earlier, in May 2020 for the FY 2019-20, CBDT clarified that the period of stay of Non-Resident Indians (NRIs) and foreign nationals in India during the lockdown period would not be counted to determine their residency status for taxation. Further clarification issued by CBDT on Residential Status is discussed below:

Relaxation for determining the residential status for the Previous Year 2019-2021

CBDT issued the following clarification to determine the residential status under section 6 of the Income Tax Act.

Relaxation will be provided for an Individual, If he/she has come to India on a visit before 22nd March 2020 and has been unable to leave India on or before 31^st March 2020, his period of stay in India from and March 2020 to 31^st March 2020 shall not be taken into account for determining the residential status.
If a person has been quarantined in India on account of Covid-19 on or after 1st March 2020 and has departed on an evacuation flight before 31^st March 2020 or has been unable to leave India on or before 31^st March 2020, his period of stay from the beginning of his quarantine to his date of departure or 31^st March 2020, shall not be taken into account for determining the residential status.
If a person has departed on an evacuation flight before 31^st March 2020, his period of stay in India from 22^nd March 2020 to his date of departure will not be considered.

Consideration of Short stay for Determination of Indian residency

The short stay in India

A citizen of India or a person of Indian origin may become resident in India only in one of the following situations:

If his total income from Indian sources (i.e., other than the income from foreign sources) does not exceed Rs.15 lakh rupees in PY 2020-21 and he stays in India for 182 days or more during the PY 2020-2021
if his total income from Indian sources exceed Rs.15 lakh rupees in PY 2020-2021 and he stays during PY 2020-2021 for 182 days or more; or he stays during the PY 2020-21 for 120 days or more and also stays for 365 days or more in preceding four previous years

An individual who is not a citizen of India or a person of Indian origin may become resident in India only in one of the following situations:

If he stays during PY 2020-21 for 182 days or more
If he stays during the PY 2020-21 for 60 days or more and also stays for 365 days or more in the preceding four previous years.

Note: A person will become a resident in India for the PY 2020-21 only if he stayed in India for 182 days or more unless he is covered by the exceptions discussed above.

Possibilities of dual non-residency in case of general relaxation

A person may not become a tax resident in any country in PY 2020-2021 even after staying for more than 182 days or more in India resulting in double non-taxation and end up not paying tax in any country

Tie-breaker rule as per Double Taxation Avoidance Agreement (DTAA)

As discussed above, a person may become a resident in India in some cases even if he stays for less than 182 days in India. In that situation, there may be a case of dual residency. However, due to the applicability of the Double Taxation Avoidance Agreement (DTAA), such a person will become a resident of only one country as per the “tiebreaker rule” in the DTAA. CBDT Clarified that in cases where an individual became a resident in India due to exceptional circumstances, he would most likely become not ordinarily resident in India and hence his foreign-sourced income shall not be taxable in India unless it is derived from a business controlled in or a profession set up in India.

Employment income taxable as per DTAA

The DTAA distributes the taxation rights between the employee’s jurisdiction of residence and the place where the employment is exercised.
Salaries, wages and other similar remuneration are taxable only in the country in which the employee is resident unless the employment is exercised in the other country.

Generally, as per the DTAAs, such other country (the source jurisdiction) has taxation rights only if the employee is present in that country for more than 183 days or the employer is a resident of the source jurisdiction, or the employer has a permanent establishment in the source jurisdiction that bears the remuneration.

Credit for the taxes paid in another country

Further, a resident person in India shall be entitled to claim credit of the taxes paid in any other country following rule 128 of the Income-tax Rules, 1962. Click here to know more about the official notification about the CBDT Clarification on Residential Status: