A tax shadow looms over professionals returning to India from the United States, pensioners returning after decades away, and former US employees working remotely from India. Until they become “full residents” in India, they are now exempt from paying taxes on their profits from the United States. This advantage of the US-India tax deal may suddenly vanish. Following Washington’s recent remark on the OECD Tax Convention, which establishes guidelines for nations to prevent tax evasion and avoid double taxation, returning Indians are in a precarious position.
Requirements to be met by RNOR
An NRI who spent less than 182 days here in the previous year is only taxed on Indian income (such as interest from FDs with Indian banks, dividends, and capital gains from the sale of shares, etc.), whereas a “ordinary resident” is taxed on her global income, which includes earnings from both India and overseas. For returning Indians who are classified as “resident but not ordinary resident” (RNOR) for tax purposes, the Act has a carve-out. Only an individual’s Indian earnings are subject to taxation until they remain RNOR. One of the following requirements must be met by an RNOR, (1) spends more than 120 days but less than 182 days in India annually and earns at least 15 lakh from India, provided that the individual has spent at least 365 days in the previous four fiscal years; (2) has been an NRI, meaning they have spent less than 182 days in India in nine out of ten fiscal years; or (3) has spent no more than 729 days in India in seven fiscal years.
After two to three years in India, an RNOR usually becomes a full ordinary resident. Since the person is regarded as a “tax resident” in India during this time, the US gives lower treaty rates while India does not tax her US income.
Reduced withholding tax rates
However, the US has since said that a person will not be regarded as a tax resident of the contracting state (in this case, India) if they are subject to limited taxation. Because RNORS are not taxed in India on their worldwide income, Washington may now refuse to consider them Indian residents for treaty reasons. This change only comes from the US side. This goes right to the heart of a person’s treaty entitlement. Reduced withholding tax rates on dividends, interest, and payments for technical services, among other things, may be denied by the US. Furthermore, it might restrict the availability of treaty-based exemptions, such as those that apply to technical service fees and annuities. Closer examination would be necessary for many cross-border fund agreements built on the assumption that treaty residency was unaffected by RNOR status. According to Ashish Karundia, founder of the CA firm Ashish Karundia & Co., “people will need to reevaluate how income flows, investment structures, and timing of return because the Indian tax position itself has not changed, but the ability to rely on the treaty may be constrained.”
Higher US Tax Rates for RNOR Individuals on Dividends and Interest
According to US policy, an RNOR will be subject to US taxes of 30% on dividends on US stocks and mutual funds (compared to 15–25% under the treaty) and 30% on interest on FDs with US banks. Additionally, in the US, royalties from US platforms, applications, books, Spotify, and YouTube would be subject to a 30% tax instead of the current 15–20%.
Experts Say Courts Often Refer to OECD Principles for Clarity
The fear appears to be genuine. Priyanshi Chokshi, an advocate at the Bombay High Court, states that “the OECD Commentary is an important interpretive aid, especially when both countries to a tax treaty are OECD members or have endorsed the Commentary, even though it does not have binding legal force and is generally regarded as persuasive guidance only.” It is seen as good practice to rely on the Commentary for clarity and consistency because the US is a signatory to the OECD framework, India is a significant partner, and both countries have traditionally interpreted treaty clauses using OECD principles.
RNOR Status Creates Unique Tax Complications Under Indian and US Law
Even though it is not strictly required, courts and authorities frequently look to it to discern the common objective behind treaty language. Residents of two nations are covered by a tax treaty. RNOR is a peculiarity in Indian law wherein an individual who is not a complete resident of India is yet regarded as such by the United States. There’s a good chance that this oddity will be eliminated and that RNORS will pay more in taxes.
