COURTKUTCHEHRY SPECIAL ON FOUNDER EXIST, RELOCATION ABROAD & IT’s IMPACT ON TAXES
Residential Status Under Scrutiny: ITAT Ruling on Founder Exit Sparks Debate on NRI Tax Rules
Section 6 Residency Rules and DTAA Tiebreakers Explained
Implications for Founders, NRIs, and Global Tax Planning
By Our Legal Reporter
New Delhi: January 15, 2026:
The determination of residential status under Indian tax law has long been a complex issue, but recent rulings have placed it under unprecedented scrutiny. The case of Binny Bansal, co-founder of Flipkart, has become a landmark in this debate. After resigning from Flipkart in 2018 and relocating to Singapore in 2019, Bansal claimed non-resident status for the Assessment Year 2020–21, arguing that his stay in India was below the statutory threshold. However, the Income Tax Appellate Tribunal (ITAT), Bengaluru rejected his claim, ruling that he remained a resident and ordinarily resident of India, thereby liable to pay capital gains tax on share sales worth over ₹1,626 crore.
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This ruling has far-reaching implications for founders exiting startups, NRIs, and professionals relocating abroad, as it clarifies how India interprets residency rules under Section 6 of the Income Tax Act, 1961 and the India–Singapore DTAA.
The Rules Governing Residential Status
Section 6 of the Income Tax Act, 1961
- Basic Test: An individual is considered resident if they stay in India for 182 days or more in a financial year.
- Secondary Test: Even if below 182 days, an individual may be resident if they stay in India for 60 days or more in a year and 365 days or more in the preceding four years.
- Explanation 1: Provides relaxations for Indian citizens leaving for employment abroad, allowing them to qualify as non-residents with shorter stays.
DTAA Tiebreaker rules (India–Singapore DTAA, Article 4)
- Permanent Home Test: Where does the individual maintain a permanent home?
- Centre of Vital Interests: Where are family, business, and social ties strongest?
- Habitual Abode Test: Where does the individual spend more time?
- Nationality Test: If unresolved, nationality determines residency.
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In Bansal’s case, the tribunal held that his days of stay in India exceeded the 60-day threshold and that his ties to India remained strong, disqualifying him from claiming non-resident status.
Case Details: Binny Bansal vs. DCIT
- Timeline:
- Nov 2018: Resigned as Flipkart CEO after Walmart acquisition.
- Feb 2019: Relocated to Singapore for employment.
- FY 2019–20: Stayed in India for 141 days (claimed 103 days due to COVID-19 restrictions).
- Aug–Nov 2019: Sold shares in Flipkart Private Limited, earning capital gains exceeding ₹1,626 crore.
- Claim: Filed returns as a non-resident, seeking exemption under Article 13(5) of the India–Singapore DTAA.
- Tax Department’s Stand: Held him as resident and ordinarily resident, taxing his capital gains.
- ITAT Ruling: Confirmed the tax department’s view, rejecting his non-resident claim.
Implications of the Ruling
For Founders and Entrepreneurs
- Exit Planning: Founders selling shares after relocating abroad must carefully plan residency status.
- Global Tax Exposure: Even if incorporated abroad, gains may be taxed in India if residency rules apply.
- ESOP Holders: Employees with stock options face similar risks when relocating.
For NRIs
- Residency Tests: NRIs must track days of stay meticulously to avoid being classified as residents.
- Double Taxation Risks: DTAA benefits may be denied if residency is disputed.
- Family Relocation: Moving family abroad strengthens non-resident claims but is not decisive.
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For Tax Authorities
- Stricter Enforcement: The ruling empowers authorities to scrutinize NRI claims more aggressively.
- Revenue Protection: Ensures large capital gains are taxed domestically.
Comparative Cases
- ITAT Chennai (2025): Ruled in favour of a US-based NRI, recognizing non-resident status despite managerial role.
- Other Precedents: Courts have consistently emphasized substance over form, focusing on actual ties and presence rather than mere declarations.
Wider Economic and Legal Impact
- Investor Confidence: Founders may hesitate to exit or relocate due to tax uncertainty.
- Policy Debate: Calls for clearer rules to balance revenue protection with ease of doing business.
- Global Mobility: Professionals relocating abroad must factor in India’s strict residency tests.
Conclusion
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The Binny Bansal case has become a watershed moment in India’s tax jurisprudence. By rejecting his non-resident claim, the ITAT has signalled that residency rules will be interpreted strictly, with little room for subjective arguments. For founders, NRIs, and professionals, the message is clear: track your days, plan your exits, and understand DTAA provisions thoroughly.
As India seeks to attract global capital while protecting its tax base, this ruling underscore the need for clarity, consistency, and fairness in residency determinations.
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