NRI Tax Return- At time of Pandemic

by EzyBiz India Tax & Accounting Consulting Firm

Due to COVID-19 pandemic since March, 2020, many individuals who came to India for particular durations were compelled to stay for longer time periods. This is due to the reason that there were many travelling restrictions as well as many countries have completely banned people arriving in their territory from other countries.

The Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) who came to India before March, 2020 but could not leave due to lockdown have a confusion regarding their residential status in India for the matters related to taxation.

Usually, the NRIs and PIOs plan their visit duration to India in such a way that their income accrued overseas is not liable to taxes in India and no need to show such income during NRI Tax Return filing. But the pandemic situation has changed their residential status for the same due to the longer stay period in the Indian Territory.

NRI Tax Return liability on basis of Residential status

The liability to pay taxes in India and filing NRI tax return depend upon the residential status of Non Resident Indians in a particular financial year. The residential status of an individual is determined by the number of days of their stay in India during the relevant fiscal year and as well as the previous ten financial years. On the basis of their period of stay, the following categories in residential status are provided by the Income Tax Act, 1961-

1. Resident of India

2. Non-Resident Indian (NRI)

3. Resident but Not Ordinarily Resident (RNOR)

As per the provisions of the local laws in India, the NRIs are liable to pay taxes only on the Income they have earned in India and not on their overseas income and the same are to be shown while filing NRI Tax Return. In case of Residents, their global income is taxable in India. In case of RNORs, the income accrued or generated in India as well from any profession or business controlled or commenced in India are chargeable with taxes.

But by any chance if the NRI or RNOR or PIO have an extended stay in India crossing the time limit provided in the Act, then they would become Resident in India and in such case, even the income accrued by them overseas, will be liable to tax in India and they would be liable to file Income Tax return in India.

Benefits available under the Double Tax Avoidance Agreements (DTAAs):

India has signed various bilateral tax treating and DTAAs with major countries across the globe. These treaties and agreements help the residents of both the countries to avoid being charged with double taxes on the income accrued by them. It helps the taxpayer to avoid double taxes and by giving taxation rights in place where they are a tax resident of. The taxpayer is usually being provided with Foreign Tax Credit (FTC) in their residence country in order to protect them from paying double taxes.

The same is the case for NRIs, PIOs and NRORs in India whose residential status got changed due to unplanned stay in India all because of COVID restrictions. They are being given the benefit of the DTAA and are provided with FTCs in India to help them to avoid paying taxes on the income they have accrued in India.

Foreign Tax Credit (FTC) provided in India:

If an NRI or PIO or RNOR qualifies as a tax resident of India, they are eligible to claim credits on the taxes paid by them in other countries while filing their NRI Tax Return in India. But this is subject to the terms and conditions prescribed under Rule 128 of the Income Tax Rules.

It states that the Foreign Tax Credit must be allowed on the corresponding income that was offered to tax in India in the particular year. The FTC can be claimed by the person by filing the prescribed Form 67 along with prescribed documents which support their claim.

To claim FTC in India, a person is required to have a certified statement or certificate that specifies the income, its nature and the tax deducted from it. The same can be obtained from the following-

a. From the tax authorities of the foreign country where the taxes were paid.

b. From the person who is responsible to deduct such tax amount.

c. Acknowledgement of the online transaction/ bank receipt/ challan/ tax deduction proof etc. duly signed by the taxpayer or assessee.

Any one of the above stated document is to be attached by the taxpayer in order to provide a proof of the taxes paid for claiming FTC in India.

The pandemic has indeed caused a stir in the taxation matters for NRIs, RNORs and PIOs and their way of filing income tax return. But the Government of India and the taxation department has taken care about the same to help them by reducing their burden regarding the residential status issue and also by letting them claim FTCs.