Understanding the Impact of Residency Rule Changes on NRIs and PIOs

The Indian diaspora, the largest overseas community globally, faces new challenges with the recent changes in tax residency rules. As of May 21, 2024, there are 35.4 million non-resident Indians (NRIs) and People of Indian Origins (PIOs) living outside India, primarily in the UAE and the US. The Finance Act, 2020, introduced significant alterations in determining tax residency for these individuals visiting India, complicating their tax obligations without substantial benefits to the revenue.

The Graded Extended Residency Rule Explained

Prior to the 2020 amendment, NRIs and PIOs were considered 'non-residents' if their stay in India was below 182 days during the relevant tax year, even if their stay in the preceding four years exceeded 365 days. This meant they were not required to pay tax in India on their foreign-sourced incomes. However, the Finance Act 2020 introduced a graded extended residency rule, which has added layers of complexity to the tax obligations of visiting NRIs and PIOs.

Call for Reconsideration and Roll-back

The Bombay Chamber of Commerce and Industry (BCCI) has highlighted the unintended consequences of these amendments, including the potential negative impact on India's economy. The BCCI's pre-budget memorandum argues for a reconsideration of these changes, suggesting that the amendments fail to meet their original objectives and could deter investment and spending in India by NRIs and PIOs.