How NRI Income Is Taxed In India?
Posted on October 01 2020
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India is rapidly proceeding towards a globalized era with the stronger economic ties being forged with the other developing/developed markets, there are a surplus of employee movements across the globe. Such, employees, being sent to work in the other countries, straddle two tax jurisdictions and may have a host of reporting and other obligations in addition to adherence to the tax laws in two countries.
Non-Resident Indians commonly known to as NRIs are the citizens of India or Persons ofIndian origin who qualify as Non-Residents in India for the suitable tax year. As per the Indian tax laws, a Non-Resident is explained as an individual who was staying in India for less than 60 days during the suitable tax year and in case of the Indian citizens who leave India during the year for the purpose of employment outside India, such limit to break the Indian residency is replaced by 182 days. Additionally, when a citizen of India or a person of Indian origin who is outside India visits India in any year then he would be regarded as Non-Resident, if his total stay is less than 182 days in the suitable tax year.
In order to analyze the tax benefits available to NRIs under the Indian domestic tax laws and under the double tax avoidance agreements (DTAAs), let us break such individuals into 2 categories:
·For NR employees coming to work in India: Although India follows a source rule basis of taxation, i.e. to tax all the incomes which accumulate/arise from an employment exercised in India, there are certain reliefs available under the domestic tax laws which is commonly known as the 90 day rule and the DTAA which is commonly known as the 182 day rule which allow the exemption of such employment income earned in India for individuals qualifying as the Residents of their home country, liable to the satisfaction of certain other specified conditions such as physical presence in India, cross charge to an Indian entity, etc. Personal income received outside India for such individuals such as rent, interest etc which is not taxable in India.
·For NR employees leaving India to work outside India: The compensation income received by the non-resident Indians in a bank account overseas is not liable to tax in India. Therefore, the salary received in India is taxable under the Indian domestic tax laws along with being taxed in the source country as most countries follow the source rule of taxation i.e. on a receipt basis. Therefore, in such a case, an exemption may again be claimed under the Dependent Personal Services (DPS) clause of the DTAA which entered in between India and the suitable host country, if the individual qualifies as a resident in the host country.
Apart from the above, the foreign tax credits may also be claimed by the NRIs overseas in respect of the incomes taxed both in the home as well as host jurisdictions, in accordance with the rules prescribed under the domestic tax laws and the DTAA. It is applicable to note that in case an NRI intends to avail any of the tax benefits provided under a DTAA, a Tax Residency Certificate are required to be applied for and attained in respect of each of the tax year(s) for which such benefit can be claimed. Such certificate is required to be issued by the country where the individual breaks residency.
An important point to note is that, the Indian sourced income in the form of interest on the deposits, rental income on the property in India etc. shall however continue to be taxed in India as per the domestic tax laws and the exemptions available under the domestic tax laws except any especially not applicable to the NRIs such as Section 80C with respect to certain investments, payment of the principal on housing loan etc., may continued to be availed by them. Further, a non-resident individual, whose income during the tax year comprises only of the investment income or the income by way of long-term capital gains or both, does not necessarily require to file an income tax return in India. Likewise, a return is not required if the necessary tax has already been deducted at source from such income.
There are certain provisions under Indian tax laws wherein the NRIs can choose for the special tax rates instead of the progressive slab rates which are applicable in India for the specific investment incomes or the capital gains from the foreign exchange assets. Further, the interest earned by an NRI on his NRE bank account etc is tax free liable to certain conditions.
Therefore, keeping the above in mind, work/business assignments to different countries may be planned and structured better by the NRIs as well as their employers from a tax aspect.
Tax Assist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians.
With the help of Tax Assist and its team of income tax professionals, taxpayers can minimize their Income Tax liability, maximize their net income and create opportunities to save for current and future needs while maintaining proper accounting standards and income tax returns which are compliant with the Law.
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