Determining the residential status of a taxpayer for each assessment year is essential as the taxability and disclosure requirements for a taxpayer’s foreign income and assets depend on the residency status.

In case of residents, their Indian as well as foreign income will be taxable in India. The reporting and compliance requirements are also tougher for residents. For instance, residents have to report in their tax returns, their foreign assets and income earned from such assets. So, for an individual, it is beneficial to be categorised as an non-resident (NR)/not ordinarily resident (NOR) rather than as a resident under the Indian tax laws, if one could do so.

The residency status, which is generally calculated based on the period of stay of the taxpayer in India, has become more significant at a time when there are restrictions in movement due to Covid-19. Doubts regarding the residency status of those who are stuck in India during this year was expected to be clarified this Budget. But the Budget is silent about the issue.

Rules clear for FY20...

For FY20, various representations were received by the IT Department regarding overstay in India . Many involuntarily ended up becoming Indian residents without any intention to do so.

In order to avoid hardship in such cases, the Tax Department on May 8, 2020, announced that for the purposes of determining the residential status, the period of stay in India from March, 22, 2020, to March 31, 2020, shall not be taken into account, if the taxpayer was not able to leave India during that period.

Cheer factor

But NRIs did have something to cheer about.

The FM has announced a relief for resident taxpayers who receive income from a retirement fund opened abroad when they were non-residents in India and resident in those foreign countries.

At present, withdrawal from such funds may be taxed on a receipt basis in such foreign countries, while on an accrual basis in India. Reportedly, such individuals have also been facing difficulties in getting credit for Indian taxes in foreign jurisdictions.

To avoid double taxation of such income, the Budget promises to provide relief to these taxpayers.

While the rules with respect to the same are still awaited, Sunil Gidwani, Partner at Nangia Andersen LLP, says: “The Government will prescribe countries and the manner of taxation of retirement benefit to NRIs who have returned. One hope that if such benefit is taxed in the other country it is fully exempted in India.”

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