The Union Budget of 2020 has introduced a new concept regarding a residency rule, known as deemed residency, which applies to Indian citizens. Tax residency in India is generally determined by residing in the country for a period of at least 182 days in a given fiscal year, and in some cases for a cumulative period of 60 or 120 days in a fiscal year (subject to certain conditions). However, now with this newly introduced rule, even if a person has not spent a single day in India within a year, she/he may qualify as an Indian tax resident subject to certain predetermined exceptions. The new provision is effective from the fiscal year 2020-2021 and within this article, we shall closer examine the provision and consequences of this rule.

The new deemed residency concept states that Indian citizens who have an income of over INR 15 lakh (USD 2 million) sourced from India may be viewed as tax residents of India (deemed residents) if they are not subject to taxes in any other country for the reason of their domicile. The new rule attempts to apply Indian tax residency requirements to individuals not based on their duration of stay in the country but on their citizenship. The new provision, however, specifically targets Indian citizens who change their country of residence frequently in order to avoid becoming a tax resident of a country.

By structuring their domicile throughout the year in a certain manner, individuals could remain not subject to taxes in any country of residence as the threshold for the number of days to stay in order to qualify for tax residency is not triggered. This would leave a significant portion of global income untaxed or taxed at lower rates. It has become a popular method to move residence between countries outside of India, and the new provision is in place to target such individuals.

Taxable income of deemed residents will be limited only to that which is originating and is sourced from India and to income which is arising outside of India but only if it is from an Indian controlled business or a profession established in India. All the other global income will not be subject to Indian taxes.

The provision of deemed residence in the Union Budget 2020 emphasizes the efforts of the authorities to effectively tax citizens attempting to minimize their taxes by implementing various tax planning techniques. It moves away from a traditional residence-based taxation to a citizenship-based taxation but how the rule applies in practice remains to be seen.