INTRODUCTION
In this case study, we’ll be looking at how Covid and lockdown essentially caused Kashyap and Neeraj to exceed the allotted timeframes in the US and India respectively. How did that impact their tax implications and liabilities?
From Kashyap’s Perspective
Born and raised in Mumbai, Kashyap always knew he would join his family business: an interiors design and furniture factory. His work allowed him to travel, spend time with his family, and build a legacy his father had built. Kashyap is in his mid-sixties and could retire, but he likes to stay involved and still hopes his son might join the business soon. Kashyap’s son lives in California, and Kashyap had planned to visit his son for a month in February 2020 for the birth of his granddaughter.
Problem
Due to borders soon closing and flights being cancelled, Kashyap had to stay for a few months longer than he intended. By the end of August, Kashyap, an Indian citizen, had been in the US for over 180 days. He has met the Substantial Presence Test and may be considered a US resident for tax purposes.
Solution
Kashyap and his son needed to scrutinize the details of US tax laws. They found that Kashyap needed to prove that he is a tax resident in India and thus, would not have to pay income tax in the United States.
EXPLANATION
You will be considered a US resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this, you must be physically present in the US on at least: 31 days during the current year and 183 days during the 3-year period that includes the current year and 2 years immediately before that, counting all days you were present in the current year, 1/3 of the days present in the previous year, and 1/6 of the days in the year prior to that.
Generally, anyone even on a visitor’s visa can be liable to file taxes as a resident in the US (most people don’t know this)!
However, even if you meet the Substantial Presence Test, you can be treated as a non-resident if you:
- Are present in the US for less than 183 days during the year
- Maintain a tax home in a foreign country during the year
- You have a closer connection during the year to a foreign country in which you have a tax income
- You are subject to tax as a resident under the laws of either foreign country for the entire year or subject to tax as a resident in both foreign countries for the period during which you maintained a tax home in each foreign country.
From Neeraj’s Perspective
Neeraj moved to the US for his undergraduate studies in 1998 and has been living in California ever since. After an engineering degree, he worked in the tech space for a few years before getting an MBA, and he now heads sales for a startup that builds software applications. Neeraj’s parents and his sister live in Mumbai, and he visits them at least five times a year.
Problem
As he boarded his flight to Mumbai in February, Neeraj was already sending emails to his colleagues to schedule meetings two weeks later when he would be back. Within ten days of arriving in Mumbai, international flights were cancelled, and Neeraj would have to stay for longer. As a visiting NRI who spent more than 182 days in Mumbai, he needs to figure out if he is now considered a resident and be liable to pay taxes in India.
Solution
Neeraj must test that he does not meet the requirements to be treated as a resident for income tax purposes. He must not exceed Rs. 15 lakh of income in India during the financial year, and if he does, not exceed 365 days or more in the immediately preceding 4 years. Neeraj can also pass the DTAA tie breaker test.
In Neeraj’s case, due to lockdown, he would have spent more than 182 days in Mumbai, but his income in India does not exceed Rs 15 lakh (his US income does not count). He would be deemed to be a non-resident under the Income Tax Act. He also passed the DTAA test, and so is only required to file a US resident return and not be subject to filing responsibilities in India.
EXPLANATION
The rules in India to determine the residential status of NRIs state that:
- Till end of FY 2019-20, NRIs include those individuals who visited India for less than 182 days in a financial year. In February 2020, the Budget 2020 proposed to reduce this period to 120 days for all NRIs. However, an amendment provides that the reduced period of 120 days shall apply only in cases where the total Indian income (i.e. income accruing in India) of such visiting individuals during the financial year is more than Rs 15 lakh.
- Accordingly, visiting NRIs whose total taxable income in India is up to Rs 15 lakh during the financial year will continue to remain NRIs if the stay does not exceed 181 days.
- An NRI whose taxable income exceeds Rs 15 lakh and stays in India for 120 days or more further needs to check whether his stay in India is 365 days or more in the immediately preceding 4 years. In such a case, he will be treated as a “Resident but Not Ordinarily Resident (RNOR)”, and his foreign income (i.e., income accrued outside India) shall not be taxable in India.
As per the New residency rule, to achieve resident status in India, an individual should spend 120 days in the current year, as they have income under Rs 15L for the FYE March 31, 2021 and 365 days or more days in last 4 years.
The DTAA tie breaker test, which must be read and satisfied in serial order, applies the following tests:
- A permanent home test
- If someone has a home in both countries, then test the asset or net worth, and whichever country has the higher value is deemed the country of residence
- A habitual abode.
In this case, the person visiting India (Neeraj):
- Has a permanent home in the US
- His assets are largely concentrated in the US
- His wife and children are in the US making his habitual abode the US
- And he is a citizen of the US
Contact Ventura Pranas, for such customised solutions to complicated tax-related issues.
