What is chargeable to tax is only Income. Naturally whatever qualifies as income under section 2(24) , shall be taxed as per the applicable tax rates under the income tax act. A key tangent to decide whether the income earned is taxable in India, is the residential status of the person who is receiving the income. The act follows a residence based rule of taxation, a principle imbibed by many tax laws across the world, which taxes income based on the residential status of a person. As per this rule, a resident ends up paying taxes on income regardless of where the income is sourced from.
However there are some situations where it becomes necessary for the Revenue to adopt the source rule of taxation, which taxes income based on the country in which the income is sourced. Non residents end up paying taxes in India due to the adoption of this rule. The government simultaneously grants relief for double taxation vide tax treaties entered into, with other countries if at all there comes a situation where an Income is taxed twice.So it becomes imperative to understand how the residential status is calculated.
Section 6 of the income tax act guides us on how to calculate the residential status. The primary conditions are as follows,
1. Has stayed in India for a period of 182 days or more in the previous year , OR
2. Has stayed in India for 60 days or more in the previous year, AND 365 days or more in the four previous years immediately preceding the previous year in question.
Additionally to qualify as a Resident and ordinarily resident, a person has to satisfy BOTH the following conditions,
1. A resident for at least 2 previous years out of the last 10 previous years immediately preceding the previous year in question, AND
2. Has stayed in India for 730 days or more in seven previous years immediately preceding the previous year in question.
For Citizens / Persons of Indian origin , who leave India for seeking employment opportunities outside India or those who come to India for a vacation, or temporarily, point (b) above in the primary conditions will apply as if 60 days is substituted with 182 days.
It all boils down to the calculation of the 182 days in the previous year, subject to the 365 days rule that also needs to be checked for the four previous years immediately preceding the previous year in question. It has come to the attention of the government that some people who were planning on keeping their residential status as “Non- Resident” by making sure they do not stay in India for 182 days, were not able to do so due to the travel restrictions imposed by the government in order to curb the spread of the on-going Novel Coronavirus pandemic. With regard to this, the Central Board of Direct Taxes,has exercised its powers under section 119 to mitigate genuine hardships caused to Individuals by relaxing the provisions of section 6.
Circular Number 11 of 2020 by the ministry of Finance has laid down the relaxations available in this matter. The relaxation comes in the form of excluding some specified number of days from their stay in India for the purpose of calculation of their residential status for the financial Year 2019-20. This will help the assessees by way of reducing their number of days spent in India and not become a “Resident” for Tax purposes,thereby foregoing the burden of paying taxes on Income earned all over the world.
|Persons eligible for the relaxation||Period of stay to be excluded|
|Individuals who came to India before 22nd March 2020, but were unable to leave India on or before 31st March 2020.||Period starting from 22nd March to 31st March shall be excluded from the number of days stayed in India.|
|Departed on an evacuation plane on or before 31st March, 2020.||Period starting from 22nd March to 31st March shall be excluded from the number of days stayed in India|
|Individuals who were quarantined on account of Covid-19 on or after 01st March 2020, and left India in an evacuation plane on or before 31st March.||Period beginning from the first day of quarantine and ending with the day on which person has departed India on an evacuation plane.|
|Individuals who were quarantined on account of Covid-19 on or after 01st March 2020, and could not leave India on or before 31st March.||Period beginning from the first day of quarantine and ending with 31st March, 2020.|
By Virtue of this circular, individuals can now maintain their Non residential status even if they had to stay in India due to circumstances beyond their control. This is a welcoming move by the finance ministry, and a similar circular for financial year 2020-21 would be really appreciated as we all know the lock down restrictions have crept into the new year as well.
S SREEKAR- Tax Expert (Direct Taxes)