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What do the terms “liable to tax” and “deemed residency” mean to NRIs?

By: Adil Zawahir, Team,

India has a huge number of NRIs or Non-Resident Indians living outside of India- what could the recent set of amendments in income tax law mean to them. Read on to know more.

From the 1st of April, more than 100 amendments to the Finance Bill, 2021, came into effect. The 29th amendment laid down the definition of the term "liable to tax", which is described to mean “that there is an income-tax liability on such person under the law of that country for the time being in force”. This change in law effectively makes Indians residing outside the country and making an income of Rs 15 lakh or more from domestic sources liable to pay tax. This tax liability will extend to what they earn outside as well if that global income is not taxed under any jurisdiction.

The interesting part of this amendment is that there is no statutory exception to countries that do not impose any income tax, such as the UAE. The earlier practice had provided leniency in case of deemed residency and their foreign income was exempt from being taxed in India. Post-amendment, however, income from a business controlled from/set up in India may become liable to tax in India.

Earlier, a person was only considered a resident if he spent 180 days or more in the country, or spends 120 days or more whilst having a domestic income upwards of Rs 15 lakh. The new "deemed residency" rule negates the requirement of days spent, as specified under Section 6(1) of the Income Tax Act, and any NRI having such income will automatically be deemed to be a resident of India.

This amendment to taxation laws in India had led to confusion and misdirected outrage from the public, as well as from Members of Parliament such as Mahua Moitra and Shashi Tharoor among others, on social media. This led Finance Minister Nirmala Sitharaman to clarify that the salary income of NRIs living in such countries would be exempt from taxation and the new amendment merely brought a general definition to the term "liable to tax" in the Income Tax Act. The amendment also does not seek to impact income sourced in tax-neutral countries, so long as such income does not arise from a business set up in India. This clarification will certainly provide some relief to the 85 lakh NRIs residing in the gulf region and the Middle East which does not tax income.

This amendment has definitely made individuals revisit their business models and operating structures and has compelled them to take tax into consideration for choosing their country of residence. The amendment may also give rise to more innovative methods of evasion as businessmen will look to employ the services of tax consultants and Chartered Accountants and also classifying the income generated as alternative sources of income. It has also inadvertently reduced the appeal of tax havens as many rich businessmen and businesswomen are also re-routing a part of their income through UK, Singapore and Hong Kong where direct onshore income is taxed at low rates. There is still ambiguity about the new "deemed residency" concept and this move to redirect their income could be subject to scrutiny by the Income Tax department.

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