Understanding tax residency rules and maintaining proper documentation is imperative to ensure smooth tax compliance
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In a recent decision, the Income Tax Appellate Tribunal (ITAT) provided relief to an individual earning overseas income. According to the ITAT, the salary income earned by a ‘non-resident’ for services rendered overseas cannot be taxed in India. An Indian company deputed a non-resident employee to work in Austria, and the company paid the employee’s salary and allowances (only usable through an Austrian credit card).
Varun Chablani, an international tax lawyer, says, “He did not furnish a Tax Residency Certificate (TRC) from Austria. The tax authorities considered that the allowances were taxable in India. On contention by the taxpayer, the Tax Tribunal held that since he rendered the services outside India, that salary is not taxable in India.” ITAT’s decision emphasises that income earned outside India should not be taxed.
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Tax residency rules are often confusing for many. “Under the Indian tax laws, the tax incidence arises based on residential status, which in turn depends on the number of days stayed in India”, says Vivek Jalan, partner, Tax Connect Advisory. Hence, it’s important to know the basics to avoid getting notices from the tax department.
Resident
A person is a tax resident of India if he is physically present in India for 182 days in a financial year or who spends 60 days during the relevant period and 365 days in the four immediately preceding financial years and also includes even a resident but not ordinarily resident (“RNOR”). Megha Jain, tax expert, Cleartax, says, “Once an individual qualifies as a resident, the next gradual step is to determine if he is an ordinary resident (ROR) or not ordinary resident (RNOR). “A person will qualify as an ROR If he has been a resident of India for at least two out of the 10 immediately previous years, and has stayed in India for at least 730 days in the seven immediately preceding years, if either of the above conditions is not met, a person’s residential status will be an RNOR.
Note, an RNOR is a resident who has not been in India for 730 days or more during the preceding seven years or who has been a non-resident in India in nine out of the ten previous years. “It also includes non-resident Indians having an income of more than Rs 15 lakh from India. RNORs are taxed similarly to NRIs, with their foreign income being exempt from Indian tax unless it is derived from a business controlled from India or a profession set up in India,” says Ankit Jain, partner, Ved Jain & Associates.
NRIs
If you do not fall under Resident or RNOR, you become a non-resident. “Only income received, accrued, or deemed to be received or accrued in India is taxable in the hands of such non-residents”, says Rishab J, advocate, Shivadass & Shivadass Law Chambers,
Residents are taxed in India on their global income, while NRIs are taxed only on their income that accrues or arises in India. S. R. Patnaik, partner (Head – Taxation), Cyril Amarchand Mangaldas, says, “For an NRI, salary is taxable in India if the services are rendered or performed in India since it is considered income earned in India, whereas if the salary is paid for services rendered outside India, it is assumed to have been earned outside India.”
Resident individual on a temporary foreign assignment
Many multinational companies in India follow the practice of deputing employees abroad, who are subject to tax according to the laws of that country. Rishab says, “However, at the time of filing his return of income in India, the resident can claim a foreign tax credit (FTC) on taxes discharged on the foreign income earned. It would be pertinent for the resident to file Form 67 to claim the FTC before filing a return of income.”
How can NRIs avoid double taxation?
India has signed the DTAA (Double Tax Avoidance Agreement) with more than 80 countries to prevent NRIs from paying double tax. Rajarshi Dasgupta, Executive Director, Aquilaw, says, “So if you live abroad and have a source of income in India, the DTAA will be your remedy. DTAAs can either cover all types of income or only some specific ones, as the tax rates and rules of each DTAA will differ from one country to another.”
Non-residents who are covered by DTAAs are only entitled to claim relief under such DTAAs if they obtain Tax Residency Certificates from the government (tax authorities) of the foreign country where they reside. Suresh Surana, founder, RSM India, says, “He is required to furnish some additional information in Form No. 10F electronically. As such, the non-resident individuals can obtain the Tax Residency Certificate (TRC) of the country where they are resident and can claim any tax treaty beneficial rates in the respective treaty with India.”
Tax Savings
NRIs are entitled to certain exemptions and deductions under the old taxation regime, but not under the new one. “Investments in specified instruments like NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts, as well as certain mutual funds, can offer tax benefits. Additionally, deductions under Section 80C and other sections of the Income Tax Act can be explored,” says Jain.
Things to keep in mind
It is important to structure the salaries payable to NRIs in a way that avoids taxation of the same income in both countries. “In case it is unavoidable, then appropriate documentary evidence should be maintained so that credit for taxes paid by such NRIs is available in India.” says Patnaik.
NRIs should stay informed about changes in tax laws, especially those related to foreign income and investments. Understanding tax residency rules and maintaining proper documentation are imperative to ensuring smooth tax compliance. Jain says, “Lastly, seeking professional advice and staying compliant with reporting requirements can help avoid legal complications.”
Essential points to know about DTAA
Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between countries to help taxpayers avoid paying double taxes on the same income
It becomes applicable where an individual is a resident of one nation but earns income in another
DTAA provisions can apply to income from services provided and salary received in India; interest earned on fixed deposits and savings bank accounts held in India; income from house property in India; and capital gains from the transfer of assets in India
If an NRI makes use of DTAA provisions, then tax is deducted at a lower rate on the incomes mentioned above
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