The income tax Assessing Officer argued that since the salary of NRI landed in an NRE account in India, it was taxable in India.
An NRI working abroad does not have to pay Indian income tax on their foreign salary just because they deposit it in an NRE account in India. (Image Bloomberg)
In a landmark decision, the Income Tax Appellate Tribunal (ITAT) Ahmedabad rejected the tax department’s attempt to tax an NRI employee’s salary received overseas and then deposited into an Indian Non-Resident External (NRE) bank account.
The appellant, an NRI, was employed by a foreign company in the Seychelles. He transferred the salary into his Non-Resident External (NRE) bank account in India, after receiving it in his foreign bank account in Seychelles.
Spotting this transfer, the income tax Assessing Officer argued that since the salary landed in an NRE account in India, it was taxable in India.
The Appeal
The appellant challenged the tax department before the ITAT, arguing that since he worked outside India, his salary accrued (was earned) outside India. Depositing it into an NRE account in India is just a matter of convenience, and it doesn’t mean the income was received in India. As an NRI, salary earned abroad should not be taxed in India.
His main argument was that the salary income in relation to service rendered outside India is not taxable in India since the appellant is a non-resident.
The tax department argued back that since the money actually entered an Indian bank account, it qualifies as income received in India and must be taxed. As per the Revenue, since the salary was credited to the assessee’s NRE account in India, it was to be treated as income received in India and hence taxable in India in the hands of the non-resident assessee.
Contentious Question
The contentious issue: If an NRI earns a salary abroad and transfers it to an NRE account in India, is that income received in India subject to tax?
ITAT Verdict
After listening to the arguments and previous such cases, the Income Tax Appellate Tribunal (ITAT) Ahmedabad ruled that in a situation in which the salary has accrued outside India, and, thereafter, by an arrangement, the salary is remitted to India and made available to the employee, it will not constitute receipt of salary in India by the assessee to trigger taxability.
ITAT held that the constructive receipt of salary took place at the place of rendering employment, and the deposit of the same in the NRE bank account in India was only an application of the salary received outside India.
In simple terms, the ITAT drew a clear line: the ‘salary amount’ was received in India, but the ‘salary income’ was received outside India.
The bottom line: An NRI working abroad does not have to pay Indian income tax on their foreign salary just because they deposit it in an NRE account in India. The money was earned and received outside India, and moving it to India later does not make it taxable here.
What Experts Say
Sanjay Kumar, Director, Nangia Global, says, “In the present case, the Income Tax Appellate Tribunal (Ahmedabad) categorically rejected the Revenue’s contention that salary credited to a NRE account in India would, by itself, render such income taxable in India.
The Tribunal emphasised that the determinative test is not the location of the bank account where the funds are ultimately credited, but the place where the income is first received in its character as income.
In doing so, it reaffirmed the settled legal principle that “receipt” for tax purposes refers to the initial point at which the taxpayer obtains control over the income, whether actually or constructively.”
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications, ITAT rulings or consult a Chartered Accountant before making any financial and tax-related decisions.
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