5 minute read 17 Sep 2021
Tax implications of remote work in India

Stranded in India due to Covid-19? Know the tax implications of working remotely from India

Amarpal S. Chadha
By Amarpal S. Chadha

EY India Partner, People Advisory Services and India Mobility Leader

Global mobility expert with 21+ years of experience, actively engaged in data analytics and automation focussing on people, compliance and reporting. Avid biker.

5 minute read 17 Sep 2021
Related topics Tax CHRO Insights Workforce
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Remote working can lead to tax liability for an NRI and PE exposure for their employer.

The COVID-19 pandemic has created a range of challenges for organizations, especially with employees who are globally mobile. Due to the travel restrictions and border closures, many individuals were stuck in India and ended up working from India, although they were employed by a foreign company.

When employees undertake remote work while being employed abroad, they can unintentionally trigger various implications for both themselves and their employers from immigration, tax (including permanent establishment) and social security perspective. There are various Indian income-tax implications that need to be looked at for individuals who have been/are working remotely from India due to the pandemic.

Under the domestic tax laws, the residential status of an individual determines his/her taxability. A resident individual is taxable on his/her worldwide income in India, while a non-resident/ not-ordinarily resident individual is taxable only on his/her India sourced income. The residential status of an individual is determined basis on his/her physical presence in India.

A resident individual is one who:

  • stays in India for more than 182 days in a financial year or for more than 60 days in a financial year and 365 days in the immediately preceding four financial years; and
  • is a resident in India for at least two financial years out of the immediately preceding 10 financial years; and
  • has stayed in India for more than 729 days in the preceding seven financial years. 

Individuals who do not satisfy both the conditions mentioned in point (i) above, will qualify as non-residents in India. Further, those who satisfy point (i) but do not satisfy the conditions mentioned in both points (ii) and (iii) will qualify as not ordinarily residents in India.

Besides the above, there are separate conditions to determine the residential status of Indian citizens or persons of Indian origin who, being outside India comes on a visit to India, based on their India sourced income.

Resident individuals will be taxable on their foreign sourced income such as rental income, interest income and capital gains, in addition to the salary income earned while working from India. This could lead to double taxation of their income in India and the foreign country. They are also required to disclose the foreign assets held by them in their India tax return. However, resident individuals could be eligible for tax relief/ exemption as per the tax treaty entered into by India with the respective foreign country to avoid double taxation.

Considering the genuine hardship caused to individuals who were stuck in India due to the pandemic during the financial year 2020-21, representations were made to the Central Board of Direct Taxes (CBDT) to relax the rules for determining the residential status of such individuals who unintentionally overstayed in India.

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After examining these concerns, CBDT issued a circular dated 3 March 2021 on ‘Residential status of certain individuals under Income-tax Act, 1961’. As per this Circular, CBDT determined that:

  • Short duration of stay of less than 182 days will not trigger residency in India
  • There may be a possibility of dual non-residency resulting in the individuals not being taxed in any country, if a general relaxation is given to the rule of 182 days
  • In case individuals qualify as residents of both countries, the tie-breaker rule under the tax treaty may be applied to break the residency to one of the countries
  • In accordance with the tax treaty, salary is taxable only in the country in which employment is exercised and if the necessary conditions are met, an exemption may be claimed in India
  • The individuals are eligible for tax credit in India on the taxes paid in the foreign country

Considering the guidelines issued by the organisation for Economic Co-operation and Development, (OECD) and the practices adopted by countries like the US, the UK, Australia and Germany, the CBDT decided that the domestic tax laws read with tax treaties, provide for necessary relief to avoid double taxation. Further, individuals facing double taxation after considering the tax treaty relief were to file an application in Form NR by 31 March 2021 for the CBDT to examine whether a relaxation was to be provided to that individual or a class of individuals. Thus, offering some relief to individuals who inadvertently triggered residency in India due to the pandemic.

Individuals working remotely from India should ensure the following to avoid/minimize double taxation, and consider the tax considerations of remote work:

  • Assess their residential status accurately
  • Determine appropriate taxability in India
  • Claim exemption as per the relevant tax treaty, if the prescribed conditions are met
  • Claim appropriate tax credit in India, in case the income is taxable in the other country as well
  • In addition, employers should assess whether the employee’s presence in India is creating permanent establishment exposure

(Sreenivasulu Reddy, Tax Director, People Advisory Services, EY India has also contributed to this article).

Show resources

  • Download the September 2021 issue of India Tax Insights magazine

    pdf (11 MB)

Summary

Given the continuing nature of pandemic and the fact that the window to file an NR application was available only till 31 March 2021, one may need to wait for further guidance from the CBDT to have clarity on the residential status and the corresponding taxability with respect to financial year 2021-22.

About this article

Amarpal S. Chadha
By Amarpal S. Chadha

EY India Partner, People Advisory Services and India Mobility Leader

Global mobility expert with 21+ years of experience, actively engaged in data analytics and automation focussing on people, compliance and reporting. Avid biker.

Related topics Tax CHRO Insights Workforce
Upvote