Non resident income in India can be classified into two categories. And one would be better off learning about the rules that decide how much tax is to be recovered from non resident.
With India rapidly progressing towards a globalized era with stronger economic ties being forged with other developing /developed markets, there are a plethora of employee movements across the globe. Such, employees, being sent to work in 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 referred to as NRIs) are citizens of India or Persons of Indian origin who qualify as Non-Residents in India for the relevant tax year. As per Indian tax laws, a 'Non-Resident' is defined as an individual who was present in India for less than 60 days during the relevant tax year, and in case of Indian citizens who leave India (during the year) for the purpose of employment outside India, such limit to break 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, he would be regarded as Non-Resident if his total stay is less than 182 days in the relevant 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 incomes which accrue/arise from an employment exercised in India, there are certain reliefs available under the domestic tax laws (commonly known as the 90 day rule) and the DTAA (commonly known as the 182 day rule) which allow exemption of such employment income earned in India for individuals qualifying as Residents of their home country, subject to 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 (rent, interest etc) is not taxable in India.
For NR employees leaving India to work outside India: The compensation income received by non-resident Indians in a bank account overseas is not subject to tax in India. However, 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'. However, in such a case, an exemption may again be claimed under the Dependent Personal Services (DPS) clause of the DTAA entered between India and the relevant host country, if the individual qualifies as a resident in the host country.
Apart from the above, foreign tax credits may also be claimed by NRIs overseas in respect of incomes taxed both in the home as well as host jurisdictions, in accordance with the rules prescribed under the domestic tax laws and DTAA. It is pertinent to note that in case an NRI intends to avail any of the tax benefits provided under a DTAA, a Tax Residency Certificate needs to be applied for and obtained in respect of each of the tax year(s) for which such benefit is claimed. Such certificate is required to be issued by the country where the individual breaks residency.
An important point to note is that, Indian sourced income in the form of interest on deposits, rental income on property in India etc. shall however continue to be taxed in India (as per domestic tax laws) and the exemptions available under the domestic tax laws (except any specifically not applicable to NRIs) such as Section 80C with respect to certain investments, payment of 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 investment income or income by way of long-term capital gains or both, does not necessarily need to file an income tax return in India. Also, 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 NRIs can opt for special tax rates (instead of progressive slab rates applicable in India) for specific investment incomes or capital gains from foreign exchange assets. Further, the interest earned by an NRI on his NRE bank account etc is tax free subject to certain conditions.
Hence, keeping the above in mind, work/business assignments to different countries may be planned and structured better by NRIs (as well as their employers) from a tax perspective.
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