Non-resident Indians who lost their NRI status because of an involuntary overstay during the country’s long lockdown have been handed a temporary reprieve by the supreme court.
Following a petition from an affected NRI, the court directed India’s top tax authority, the Central Board of Direct Taxes (CBDT), to decide within three weeks on reliefs to be granted to NRIs on the payment of income tax for the financial year 2020-21.
The petitioner had gone to India in March 2020 on a visit and could not travel back after 120 days in India.
This involuntary extended stay resulted in his losing the NRI status under the Income Tax Act, 1961, thereby exposing his global income to tax in India.
India’s finance minister, in her 2019-20 budget, shortened the 182-day NRI status eligibility threshold to 120 days.
The reduced limit was imposed to stop Indians from abusing the NRI status that allows various tax exemptions on their global income.
The residential status eligibility criterion was changed as a means to crack down on money laundering.
Many NRIs were caught unawares and stuck in India during the long lockdowns following the covid-19 pandemic spread in 2020, as international flights remained suspended and the host countries stopped accepting incoming passengers.
But the finance minister intervened and directed the CBDT to issue a circular exempting them from the 120-day clause. The tax authority duly issued a circular relaxing the methodology of computing the ‘number of days’ of stay in India for the purpose of defining the NRI status and tax obligation.
The circular stated that stays in India during the lockdown period were exempt from the threshold of 120 days to determine the residential status.
That relief was given for financial year 2019-20 and ended on 31 March 2020.
The finance ministry issued a clarification on 8 May 2020 for financial year 2019-20, on the aspect of residency under Section 6 of the I-T Act wherein various relaxations were provided to NRIs who could not travel back to their country of work/residence because of the lockdown.
As no such clarification has yet been provided for FY 2020-21, those NRIs stayed back in India beyond April 2020 are facing the prospect of losing their NRI status for the purpose of paying tax on their global income for FY 2020-21.
“Though NRIs demanded a repeal of this rule, the finance minister did not heed. As a temporary relief they expected a similar circular from the CBDT. As the government was not relenting, an NRI moved the supreme court and earned an interim order, directing the top tax authority to issue the circular in three weeks,” said Benoy Sasi, international lawyer at DIFC Courts.
“Now that the top court has issued the interim order, it is expected that, like last year, the CBDT will notify exemption for the number of days of stay in India for the purpose of defining the NRI status and tax obligation,” he said.