Indians who are on deputation overseas or have settled overseas — whether by way of acquiring a permanent residency such as a green card in the US, or acquiring citizenship of a foreign country — need to be aware of their tax obligations in India.
A recent move seeking details from non-residents of foreign bank accounts in income tax (I-T) returns caused anxiety about whether India was taking steps to tax global income. The Central Board of Direct Taxes (CBDT) subsequently clarified that providing such details was optional and it was to facilitate refunds in those cases where individuals did not have a bank account in India.
Here is a primer explaining the tax incidence for Indians overseas:
What determines tax residential status and why is it important?
An Indian residing abroad is popularly referred to as a non-resident Indian (NRI). Under India’s tax laws, the reference is to the term ‘tax resident’ or ‘non-resident’. The country of origin does not determine the taxability. For instance, a UK citizen who is working in Mumbai in the subsidiary of a UK parent company could be a tax resident of India. An Indian who has migrated to Australia on March 20 may in common parlance be an NRI, but for tax purposes for the financial year 2016-17, he is likely to be tax resident of India.
The number of days stay in India, as provided for in the Income Tax (I-T) Act, determines the tax residential status of an individual in India. This status, in turn, determines which income can be taxed in India and what cannot be taxed. Thus, it is important to know which category you fall into.
An individual is considered to be a tax resident of India (also referred to as Indian tax resident) for a financial year (say FY 2016-17) if (i) he has been in India for 182 days or more during that FY, or (ii) he has been in India for 60 days or more during that particular FY and has lived in India for at least 365 days or more during the four years immediately preceding.
Indian citizens taking up employment abroad or crew members of an Indian ship who have left India during a FY or persons of Indian origin (PIOs) visiting India need to note that the period of 60 days mentioned in the above clause is replaced by 182 days. (In the non-tax realm, the PIO scheme has been merged with Overseas Citizen of India scheme and it provides for visa-related relaxations.)
Thus, if an Indian citizen has left for overseas deputation during FY 2016-17, he will be considered as a tax resident of India for the year ended March 31, 2017, if he has been in India for 182 days or more during 2016-17. Only, tax residents of India (ROR) are subject to tax on their global income, which would include interest income on overseas bank accounts.
Apart from resident and non-resident, is there any other definition in the I-T Act which determines tax in India?
Yes, the I-T Act also defines a ‘Resident but not ordinarily resident’ (RNOR). An RNOR qualifies as a tax resident of India during a particular FY, but satisfies the following criteria: (i) He has been a non-resident of India in nine out of 10 immediately preceding financial years; or (ii) has during the last seven years immediately preceding that particular FY been in India for a period of 729 days or less.
To illustrate: A PIO visits India during 2016-17 and stays for more than 182 days. This would make him a tax resident of India. However, during the last seven years immediately preceding FY2016-17, he has been in India for 729 days or less, he will be regarded as an RNOR.
What is the tax incidence in India of a tax resident (ROR), RNOR and non-resident?
As mentioned earlier, an ROR is subject to tax on his global income in India. RNOR and non-residents are generally subject to tax in India only in respect of India source income (that is, income received, accruing or arising in India or deemed to be received, accrued or arisen in India).
Salary received in India or for services provided in India, rental income from a house property in India, capital gains on sale of assets in India — be it shares or house property, income from fixed deposits or savings bank account in India are instances of income which would be taxed in the hands of not just tax residents of India, but also RNORs and non-residents.
NRIs should also note an additional point. They are allowed to hold NRE and FCNR accounts (where foreign earnings are deposited) with banks in India. However, under the I-T Act, interest against such deposits is tax-free. However, interest earned on an NRO account (where Indian source income is deposited) will be taxable in India.
What is the role of tax treaties?
If an individual is a tax resident of one country but has a source of income from another country, complexities can arise. Tax treaties ensure that the same income is not taxed twice. Broadly, tax treaties provide that the country from which the income is generated has the right to tax it.
Double taxation is avoided in two ways — either the country of non-tax residence exempts the income earned in the foreign country, or the country of tax residence grants a foreign tax credit for the taxes paid in the other country. India has entered into tax treaties with a hundred-odd countries, including US, UK, Canada, Australia and Germany, which are popular destinations for the Indian diaspora.
For instance, if an expat is a US tax resident, he will pay tax on his global income in the US (this would include tax on India source income). However, for taxes paid in India — say tax withheld at source against fixed deposits in a bank in India — he will get a foreign tax credit (a tax credit for the taxes paid or withheld in India against the US taxes payable by him). This will lower the US tax outgo.