Tax implications for individuals working from India due to covid pandemic
PremiumA non-resident or NOR individual is taxable only on his/her India-sourced income
It has been more than a year since the pandemic began to rage across the world. During this period, travel restrictions were imposed, and borders were closed by countries to contain the virus. This phase saw many individuals returning and working from India, although they were employed with a foreign company. Also, there have been instances of foreigners extending their assignment or stay in India due to the pandemic.
Working from India while being employed abroad can trigger various implications for both employees and employers from immigration, tax, social security, etc. depending on the employment arrangement. Let us delve into the India income tax implications for individuals who are working from India due to the pandemic.
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Taxability of an individual is determined by his/ her residential status in India (see table).
An Indian citizen or person of Indian origin who, being outside India comes on a visit to India, will qualify as NOR (not ordinarily resident) in India, if he/she spends more than 120 days and less than 182 days in India in the relevant financial year and has India- sourced income of more than ₹15 lakh in the relevant financial year.
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A non-resident/NOR individual is taxable only on his/her India-sourced income, while a resident individual is taxable on his/her worldwide income in India. This means that for resident individuals, in addition to the salary earned by them for the services rendered in India, they will also be taxable on their other sources of income such as rental income, interest income, capital gains, etc., which may have been earned and received from outside India.
This could lead to a situation of double taxation of income in India and the foreign country. However, resident individuals may be eligible for tax relief according to the relevant tax treaty to avoid double taxation.
Also, they will be required to disclose the foreign assets held by them in their India tax return.
Keeping in view the above aspects, and the genuine hardship caused to individuals who were stuck in India due to the pandemic during the financial year 2020-21, several representations were made to the Central Board of Direct Taxes (CBDT) to relax the rules to determine the residential status of such individuals, who unintentionally overstayed in India.
The CBDT, after examining the matter, has issued a circular dated 3 March 2021 on “Residential status of certain individuals under Income Tax Act, 1961".
According to this circular, the CBDT determined the following:
• Short duration of stay of less than 182 days will not trigger residency in India.
• In case a general relaxation is given to the rule of 182 days, there could be a possibility of dual non-residence resulting in the individuals not being taxed in any country.
•Salary is taxable in the country in which employment is exercised and an exemption may be claimed in India if the necessary conditions are met.
•The individuals are eligible for foreign tax credit in India on the taxes paid abroad.
After taking into consideration the practices adopted by countries such as the US, the UK, Australia and Germany, the CBDT had decided that individuals facing double taxation after considering the tax treaty reliefs should file an application in Form NR by 31 March 2021 to examine whether a relaxation is to be provided to that individual or a class of individuals. It offered relief to individuals who inadvertently triggered residency in India due to the pandemic.
In case an individual becomes taxable in India, he/she needs to ensure the following to avoid/minimize double taxation:
•Determine residential status accurately.
•Evaluate appropriate taxability in India.
•Claim exemption as per the tax treaty, if the prescribed conditions are met.
•In case the income is taxable in the other country as well, claim appropriate tax credit.
Amarpal Chadha is tax partner and India mobility leader, EY India.
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