A new tax provision is creating significant challenges for Non-Resident Indians (NRIs) in West Asian countries. According to reports from Mint, if Indian-source taxable income from property sales, equity gains, dividend or interest crosses ₹15 lakh in any financial year, deemed residency kicks in and every treaty benefit disappears. This rule, introduced via the Finance Act 2020 under Section 6 (1A), targets Indian citizens not resident in India and not liable to pay tax in any other country by reason of domicile or residence. As reported by Mint, an Oman-based NRI who had lived there for over two decades and filed tax returns claiming NRI status was recently reclassified as a deemed resident, losing all non-resident benefits including the 5-20% flat tax on interest and dividend income.
The financial consequences of deemed residency are substantial for affected NRIs. According to Mint reports, the Oman-based NRI lost access to the 10% dividend tax rate available under the India-Oman DTAA and is now taxed as a resident on all Indian income at slab rates that can reach 30%. The threshold of ₹15 lakh is easily breached through routine activities, with a single property sale generating capital gains above this amount or a moderately sized dividend-paying portfolio in Indian equities sufficient to trigger deemed residency. As reported by Mint, the NRI lost benefits including reduced withholding rates, treaty-capped taxation and concessional treatment, despite never setting foot in India during the relevant years.
The impact varies significantly across different West Asian jurisdictions where Indians reside. According to Harshal Bhuta, partner at P. R. Bhuta & Co, as reported by Mint, NRIs based in the UAE have a structural advantage due to the India-UAE DTAA, which recognizes an individual as a UAE tax resident if they spend 183 days there in a calendar year. This creates dual residency that triggers tie-breaker tests, with most long-term UAE residents breaking this tie decisively in the UAE's favour, effectively neutralizing India's deemed residency claim. However, Oman, Bahrain and other tax-free countries may leave NRIs at the mercy of Indian domestic law, since these countries only tax companies and not individuals, making NRIs ineligible for DTAA qualification and treaty benefits.
Tax experts are advising proactive measures for affected NRIs. According to Mint reports, Bhawna Kakkar, chartered accountant and founder of Kakkar & Company, recommends that NRIs audit their Indian income immediately, restructure investments and consider proactively filing updated returns before the department comes knocking. The rule particularly affects NRIs with meaningful Indian investments, as routine activities like property sales or dividend portfolios can push them past the ₹15 lakh threshold. The provision represents a significant shift from the previous watertight benefits under Double Taxation Avoidance Agreements that NRIs had relied upon for decades.
