How to Deal with Dual Residency as per the Income Tax Act

Last Updated at: Feb 02, 2021
1989
How to Deal with Dual Residency as Per the Income Tax Act
The NRIs can expect the Union Budget 2021 to reward them with certain ease of compliance under the Income-tax Act, 1961. The Indian diaspora has been instrumental of late in making India one of the leading recipients of remittances from abroad.

 

According to the Income Tax Act, Section 6 defines the guidelines regarding the tax residency of an Indian citizen. Recently, the CBDT issued a circular that stated a clarification regarding the determining of NRI residential status. The national lockdown, travel bans and stoppage of international air traffic as a result of the COVID-19 has led to several thousands of NRIs being stuck in India. With them not knowing when they will be able to get back to their country of work, almost everyone is anxious to see how this situation will change their taxation policies. In this article, we will take a look at how the Income Tax Act deals with Dual Residency.

  1. Residency Policies in the Income Tax Act

  2. Who is an Indian Resident?

  3. Concept of Dual Residence

  4. Double Taxation and Dual Residency Relief

  5. Tie-Breaker Rules for Dual Residency

Residency Policies in the Income Tax Act

The most important reason for including policies to determine the residency status of individuals in the Income-tax Act is to help determine taxability. Most countries have particular laws when it comes to the computation of Income Tax. These laws provide guidelines for the calculation, liability and applicability of Income Tax on an individual. In most cases, a person is the resident of a country under whose Income Tax laws he or she is liable to pay tax. However, sometimes this can get quite confusing as people can be tax residents of more than one country. Hence, they may be liable to pay income tax as per the domestic tax laws of both nations. That results in the individual having to pay income tax for their global income, rather than the income earned while working in a country. 

Who is an Indian Resident?

 As per Section 6 of the Income Tax Act, 1961 to become an Indian resident, an individual must meet the following criteria;

  • Resides in India for 182 days in a year
  • Lives in India for 365 days in the four years before the current year, while also remaining in India for 60 days in the current year

Double Taxation and Dual Residency Relief

Having to pay tax for a global income can put stress on individuals as they will be liable to double the income tax. Hence, many countries provide relief to their citizens in a bid to prevent double taxation. India provides dual residency or double taxation relief to its citizens by entering into DTAAs with other countries. As per Article 4 of the Income Tax Act, these treaties help nations provide relief to its citizens by negotiating guidelines regarding dual residency. The clause defines a tie-breaker that helps in determining the tax residence of an individual, and hence, allows jurisdictions to allocate income tax between themselves. 

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Tie-Breaker Rules for Dual Residency

Permanent Home

If you have a permanent home in a country, you will be considered as a resident of that country. A permanent home refers to any place of residence that is available as a means to stay, even if it is rented or on lease. However, places of residence taken out for short-term accommodation does not count as a permanent residence. Examples of such accommodation include guest house rooms and hotel rooms taken out for shorter periods. 

Economic Relations

In case you have permanent homes in both countries, then the residency depends on your personal and economic relations with the nations. Whichever country you share a closer personal and financial connection will be considered your country of residence. This will also be your centre of interest, and personal relations extend to familial bonds and other social ties. Your social connections, partaking in social events and other activities will also have a weightage when considering your relationships with a place. Economic relations will consider several factors like place of business, administration, occupation and employment, along with assets associated with you.

Habitual Abode

In case you do not have a permanent home in either country. But, the authorities cannot determine your place of interest. Then they will consider this rule. Such cases arise when you are a frequent traveller. This is for whom keeps shuttling between the two countries for personal or economic reasons. It can also be considered if you do not have a home in either country. Choosing instead to stay in short-term accommodations. Habitual abode refers to a place where the individual resides typically, and the individual’s residency is to the nation wherein they possess such an abode.

Nationality

In case the individual has a habitual abode in both nations as well, then the Income Tax laws will look at the nationality of the individual. This is also the case if the person has habitual abodes in both countries. During such situations, the residency of the individual depends on their nationality. Additionally, consider the residents of the country of which they are a national.

Mutual Agreement Procedure

If tax residency cannot have an establishment, then it depends on a Mutual Agreement. It is undertaken by both countries. A Mutual Agreement Procedure is followed by which both the countries decide on which nation will get the tax residency claim. However, before arriving at this, all the steps mentioned above must be followed sequentially. You cannot skip to the next rule or not follow any of the previous rules. In case following these rules lead to you becoming a Non-Resident in India, then you must file all the subsequent Income Tax returns and file accordingly.

Concept of Dual Residence

Dual residency affects an individual as it plays an important role in determining their tax liability. It primarily has an impact on individuals who have to keep travelling between India and various other countries. Since India follows a residence-based system of taxation, taxation occurs on the global income of residents. However, when it comes to non-residents, taxation occurs only on the income soured or acquired in India.

The confusion arises when an individual starts living in a foreign country and becomes a resident there. In such cases, they have the option of taking up dual residency to avoid further taxation. Most countries have laws to negate dual taxation of such individuals, or they might have a Double Taxation Avoidance Agreement with the foreign country. Article 4 of the Income Tax Act deals with the DTAA guidelines regarding tie-breakers rules which have already been explained.

Today’s global economy requires such constant shifting and travel between countries. The rules under Article 4 of the Indian Income Tax Act have become quite popular recently. To escape the risk of becoming a Dual Resident, taxpayers must ensure that they comply with the norms. This is necessary to become either a resident or non-resident of the country. Also, since the laws regarding Double Residency tend to be a little subjective. In such cases, conclusions depend on facts and also how the facts present. In case you need any help navigating the complex laws regarding taxation, feel free to reach out to us, at VakilSearch for further assistance.