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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 April 15, 2024.

Certain countries around the world such as Bahrain, United Arab Emirates (UAE), Malta etc. offer zero rate of taxation. High Net-worth Individuals (HNIs) across the globe often plan their stay in such zero tax jurisdiction so that they become a resident of these countries and are not liable to pay tax in any other country or jurisdiction. To address this challenge, the Indian Government introduced the concept of “deemed residency” in the Finance Act, 2020. The Finance Act makes Indian citizens liable to pay taxes on their Indian sourced income based on their country of residence and their citizenship status.

This article aims to familiarise you with the concept of zero tax jurisdictions, deemed residency and its implications on NRIs.

 

What are zero tax jurisdictions?

Zero tax jurisdictions are countries/territories that have a zero rate of taxation on various income categories, including personal income, capital gains, dividends, corporate profits, etc.

For example, Gulf Cooperation Council (GCC) countries like the United Arab Emirates (UAE), Oman, Bahrain and other countries such as Malta, etc. do not have personal income tax. Additionally, few of these countries offer citizenship or golden visa or residency based on the stay or investments made in these countries.

The Indian Government treats such Indian citizens settled in these countries as ‘deemed residents’ subject to their residency status and other criteria. Once you qualify as a deemed resident, you are liable to pay taxes on your Indian sourced income.

Did you know?

NRI residing in low-tax jurisdiction like Cayman Islands where the tax rate is as low as 0% on personal income tax, may be subject to the concept of “deemed residency” if all the conditions outlined in the income tax laws are fulfilled.

How to know if you qualify as a deemed resident?

Residential status plays an important role in determination of your income tax obligation in India on your global income or income which is accrued or received in India. 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 as a Non-Resident (NR) if you do not satisfy both the conditions mentioned below:

  1. Your stay in India is 182 days or more in a Financial Year (FY) (April-March); and
  2. Your stay in India is 60* days or more in an FY and 365 days or more in four years immediately before that FY.

To understand how you will qualify as an NRI in detail, click here.

Once you qualify as an NRI, you will be treated as a ‘deemed resident’ of India in any FY if you meet all the conditions mentioned below:

  1. You are citizen of India; and
  2. Your total Indian income (other than foreign sources) is in excess of ₹15 lakh in that FY; and
  3. You are not liable to pay tax in any other country due to your domicile or 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 considered as a ‘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 business controlled or profession set-up in India.

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 FY 2023-24. He has earned a total income of ₹33 lakh during the year, consisting of:

  1. Income earned in India: ₹20 lakh
  2. Income earned outside India:
    • Income from business controlled in India: ₹4 lakh
    • Income from business not controlled in India: ₹9 lakh

In this scenario, Aayush is considered a deemed resident in India as he meets all the 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 business controlled in India. Therefore, from a deemed residency perspective, his total taxable income will be considered as ₹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

Aayush is an Indian citizen who is residing in Dubai and works as an engineer for a Dubai-based firm. He visited India for 110 days during the FY 2023-24. He has earned the following income during the year, consisting of:

  1. Indian sourced income:
    • Interest income from fixed deposit: ₹20lakh
    • Dividend income from shares of an Indian company: ₹10lakh
  2. Salary income earned in Dubai: ₹80lakh

Aayush is meeting all the conditions outlined in the incometax laws for qualifying as a deemed resident during FY 2023-24. Since he is an RNOR, his Indian sourced income will be taxed accordingly. In this illustration, Aayush does not have any income from business controlled in India, hence his overseas income will not be taxed in India.However, his Indian sourced income of ₹30 lakh (₹20 lakh + ₹10 lakh) will be subject to taxat an applicable slab rate depending on the tax regime opted by him.

However, due to a shift in his residential status from an NR to an RNOR, he cannot claim preferential tax rate of 20% on the dividend income* as specified in the income tax laws.

To know more about the Indian income tax slabs, click here.

*As per section 115A of the Income Tax Act, 1961.

 

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:

  1. Income from business controlled or profession set up in India will also be taxed in India.
    As outlined in illustration 1, Aayush was liable to pay tax on business income of ₹4 lakh earned outside India which was controlled from India.
  2. Certain provisions of the incometax laws that apply to NRs will no longer apply to deemed residents.
    As detailed in illustration 2, Aayush cannot claim preferential
  3. 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).
    For example, in reference to illustration 2, if Aayush 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 as per India-UAE DTAA. Aayush should seek support from a tax expert in order to claim such preferential rate on his Indian sources income.

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 NRIs settled in zero tax jurisdictions, 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 profession set-up in India. Certain provisions applicable to an NR may not apply anymore due to change in 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 in more details.

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