Plans to drastically cut the number of days citizens living overseas could spend in India each year without being deemed resident have been watered down.
The changes were outlined in the February budget and prompted significant nervousness across the Indian diaspora.
It would have seen individuals fall into the Indian tax net if they spent 120 days in the country in one year, rather than the previous 182-day limit.
But changes were made to the residency tests in the final bill, which was approved on 23 March, according to law firm Withers.
It came into effect on 1 April 2020.
Days and money
People of Indian origin (PIOs) and NRIs will continue to be treated as resident if they spend at least 182 days a year in India, wrote Withers partner Mahesh Kumar in a recent update.
They may also become resident if their income from sources in India exceeds INR1.5m (£16,186, $20,032, €18,210) in any year; and they spent at least 365 days in the country over the last four years and 120 days in the current year.
Also, those living in zero tax jurisdictions and receiving income from sources in India exceeding INR1.5m in a year would be deemed resident.
The proposal to deem Indian citizens as Indian tax resident if they are not liable to tax in any other country, regardless of whether they meet the residency test, has been dropped.
Pass the test
The changes retain the existing criteria for residents who are not ordinarily resident (RNOR), but with two additions.
NRIs or PIOs whose Indian-sourced income is greater than INR1.5m may be considered RNOR if they spend between 120 and 182 days a year in the country.
NRIs living in zero tax countries would also be treated as RNORs.
However, according to Kumar, unlike ordinary residents, RNORs are taxed on income sourced in India or foreign source income derived from a business controlled in India.
They are not required to disclose overseas trusts, bank accounts or financial interests.
Specific risks
While it may seem that RNORs are broadly taxed is the same way as non-residents, there are specific risks that they have to consider, wrote Kumar.
They may still be viewed as a resident in India for the purpose of automatic information exchange under the common reporting standard.
Also, an RNOR who exercises control over companies and trusts outside of the country, may create Indian tax residency risks for the overseas entities.
There is also a risk that foreign-sourced income may be taxed on the basis that the RNOR controls the overseas entities that distribute the income.
