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Deemed residency implications for NRIs in zero tax jurisdictions
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Learning about zero tax jurisdictions
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Understanding deemed residency and its implications
The below content is purely for informational purposes and is not intended to constitute advisory of any kind. Please note, these are in-depth articles which are best viewed on large screen devices like laptops, desktops and tablets. The position reflected in this article has been updated as of May 31, 2024.
Certain countries around the world, such as Bahrain, the United Arab Emirates (UAE), Malta, etc., offer zero rates of taxation. Non-Resident Indians (NRIs), settled in these zero/low tax jurisdictions were previously not liable to pay tax in any other country or jurisdiction. To address this, the Indian Government introduced the concept of deemed residency in the Finance Act, 2020.
This article aims to familiarise you with the concept of zero tax jurisdictions, deemed residency and its implications for NRIs.
What are zero tax jurisdictions?
Zero tax jurisdictions are countries/territories with a zero taxation rate on various income categories, including personal income, capital gains, dividends, corporate profits, etc.
For example, Gulf Cooperation Council (GCC) countries like the UAE, Oman, Bahrain and countries like Malta do not have personal income tax. Additionally, a few of these countries offer citizenship, golden visas or residency based on stay or investments made in these countries.
The Indian Government treats Indian citizens settled in these countries as deemed residents subject to their residency status and other criteria. Once they qualify as a deemed resident, they are liable to pay taxes on their Indian-sourced income.
Did you know?
If all the conditions outlined in the Indian income tax laws are fulfilled, Non-Resident Indians (NRIs) residing in low-tax jurisdictions like the Cayman Islands, may also be treated as deemed residents.
How to know if you qualify as a deemed resident?
Residential status plays an important role in determining your income tax obligation in India on your global income or income which is accrued or received in India. The determination of the residential status depends on your physical presence in India. Let us understand these conditions to determine if you are considered a deemed resident in India.
Firstly, you will be considered a Non-Resident (NR) if you do not satisfy both the conditions mentioned below:
- Your stay in India is 182 days or more in a financial year (April-March) and
- Your stay in India is 60* days or more in a financial year and 365 days or more in four years immediately preceding that financial year
To understand how you will qualify as an NRI, click here.
Once you qualify as an NRI, you will be treated as a deemed resident of India in any financial year if you meet all the conditions mentioned below:
- You are a citizen of India
- Your total Indian income (other than foreign sources) is in excess of ₹15 lakh in that financial year
- You are not liable to pay tax in any other country due to your domicile, residence or any other similar criteria in nature
Did you know?
Once you qualify as a deemed resident, your residency status for taxation purposes in India will be ‘Resident but not Ordinarily Resident of India’ (RNOR). As an RNOR, you will be liable to pay taxes on the Indian-sourced income and the income earned from a business controlled or set-up in India.
Tax implications of deemed residency on NRIs
NRIs who qualify as deemed residents in a particular year will see a shift in their residential status from an NR to an RNOR. This shift can impact their tax obligations. Here's a breakdown of some of the key tax implications for deemed residents:
- Income from a business controlled or set up in India will also be taxed in India
- Certain provisions of the income tax laws that apply to NRs will no longer apply to deemed residents. This includes preferential tax rate of 20% on dividend income earned from shares of an Indian company as per the income tax laws
- Like NRs, deemed residents can also claim the preferential tax rate on their Indian-sourced income, provided their country of residence and India have a Double Taxation Avoidance Agreement (DTAA)
Let us understand this better with the help of an illustration.
Illustration 1
Aayush is an Indian citizen who is residing and running a business in Bahrain, which is controlled from India. He visited India for 90 days during the financial year 2023-24. He earned a total income of ₹33 lakh during the year, consisting of:
- Income earned in India: ₹20 lakh
- Income earned outside India:
- Income from a business controlled in India: ₹4 lakh
- Income from a business not controlled in India: ₹9 lakh
In this scenario, Aayush is considered a deemed resident in India as he meets all the relevant conditions outlined in the income tax laws. Since he is a deemed resident, he will be treated as an RNOR, and his income will be taxed accordingly. His income from Indian sources is ₹20 lakh, and he earns an additional ₹4 lakh from a business controlled in India. Therefore, from a deemed residency perspective, his total taxable income will be ₹24 lakh (₹20 lakh + ₹4 lakh), and taxes will be determined as per the applicable slab rates depending on the tax regime opted by him.
Illustration 2
Arjun is an Indian citizen residing in Dubai. He works as an engineer for a Dubai-based firm. He visited India for 110 days during the financial year 2023-24. His earnings during the year were as follows,
- Indian-sourced income:
- Interest income from fixed deposit: ₹20lakh
- Dividend income from shares of an Indian company: ₹10lakh
- Salary income earned in Dubai: ₹80lakh
Arjun is meeting all the relevant conditions outlined in the income tax laws for qualifying as a deemed resident during FY 2023-24. Since he is a deemed resident, he will be treated as an RNOR, his Indian-sourced income will be taxed accordingly. In this illustration, Arjun's overseas income will not be taxed in India. However, his Indian-sourced income of ₹30 lakh (₹20 lakh + ₹10 lakh) will be subject to tax at an applicable slab rate depending on the tax regime opted by him.
Please note, due to a shift in his residential status from an NR to an RNOR, he cannot claim a preferential tax rate of 20% on the dividend income* as specified in the income tax laws.
*As per section 115A of the Income Tax Act, 1961.
As per India-UAE DTAA, in case Arjun meets all the required conditions as laid down in the income tax laws and DTAA, then he might be able to claim the beneficial tax rate of 12.5% on his interest income from fixed deposits and 10% on his dividend income from shares of an Indian company. Arjun should seek support from a tax expert in order to claim such a preferential rate on his Indian sources of income.
To know more about the Indian income tax slabs, click here.
As a deemed resident, an NRI should comply with applicable tax laws and procedures. To better understand your tax obligations as a deemed resident, you should get in touch with your tax advisor.
Conclusion
As an NRI settled in a zero tax jurisdiction, you must ascertain whether you qualify as a deemed resident of India as it will determine your tax liability. You will be liable to pay taxes on income arising from a business controlled or set-up in India. Certain provisions applicable to an NR may no longer apply due to a change in the residential status from an NR to an RNOR. You may also be eligible to claim benefits under DTAA. You should consult with a tax expert to understand deemed residency and its implications better.
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The contents of this article/infographic are meant solely for informational purposes. The contents are generic in nature and are not intended to serve as a substitute for specific advice on any matter whatsoever. The information is subject to updation, completion and verification and the applicable norms may keep changing materially from time to time. This information is also not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to applicable laws or would subject ICICI Bank Limited/its affiliates to any licensing or registration requirements. ICICI Bank Limited/its affiliates and their representatives shall not be liable for any direct or indirect losses or liability incurred arising in connection with any decision taken by any person on the basis of this content. Please conduct your own due diligence and consult your financial advisor before making any decision. Terms and conditions of ICICI Bank and third parties apply. ICICI Bank is not responsible for third party services. Nothing contained herein shall constitute or be deemed to constitute an advice, invitation or solicitation to avail any products/services of third parties.
