Taxation of NRIs and PIOs
Taxation of NRIs and PIOs
This article talks about different NRI statuses, NRI taxation and RNOR. Find out how taxable income is calculated based on your status and who is an RNOR.
Are you a Resident or a Non Resident Indian?
What constitutes taxable income in India for a Non Resident?
You landed yourself a plush job outside the country, you are living the dream. Your favourite aunt can’t stop addressing you as the NRI at every party. Suddenly your prospects are booming on the matrimonial sites due to your new found status. However, the Income Tax Act had a plan of its own and has laid out certain conditions to define your residential status. Your tax-ability in India will be defined by this status.
Before we understand who is a Non Resident Indian, lets first look at who is a Resident Indian – A person would be a RESIDENT of India for income tax purposes if-
He/She is in India for 182 days or more during the financial year.
If he/she is in India for at least 365 days during the 4 years preceding that year AND at least 60 days in that year.
So therefore – if you do no satisfy the condition laid out above– you will be considered a NON RESIDENT INDIAN.In case you are an Indian Citizen and you leave India for employment outside of India or as a member of the crew on an Indian ship, in other words if you take up a job outside India the 60 days minimum period will be increased to 182 days.
In case of a citizen of India and a member of the crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage shall be computed as follows:
- The numbers of days of stay in India for such person shall not include the days – from the start date of the Continuous Discharge Certificate and ending on the end date of this document, as signed off on the Discharge certificate.
- Continuous Discharge Certificate must be as per the Merchant Shipping (Continuous Discharge Certificate-cum-seafarer’s Identity Document) Rules, 2001 made under the merchant shipping act, 1958
- This Continuous Discharge Certificate must be for a voyage, which originates from any port in India and has its destination at any port outside India OR which originates from any port outside India and has its destination at any port in India. [Notification No. 70/2015/ F.No.142 /12/2015-TPL].
The above rule is applicable from 1 April 2015. The rule is applicable for finding out residential status of Indian citizens as crew on Indian ships starting from the financial year 2015-16.
Such crew is considered as Non Resident Indian (NRI) for income tax purposes, when they have spent less than 182 days in India. While calculating this stay of 182 days, the entire period mentioned in the Continuous Discharge Document shall be excluded even though the ship may have been on Indian
coastal waters in its journey. Earlier, the number of days outside India were only calculated from the date the Indian ship left Indian coastal waters.
In Case of Sailing on Foreign ships: Indian crew serving on foreign ships for 182 days or more are treated as non-resident in India, irrespective of where the ship trades (including Indian waters).
In case of sailing on Indian ships : A seafarer serving on Indian ships outside India for a period of 182 days or more in a year is considered to be a non-resident. However, the time spent by a ship in Indian territorial waters is considered as period of service in India, according to tax rules framed in 1990. The number of days outside India of Indian crew working on such Indian ships gets counted only from the date when the Indian ship crosses the coastal boundaries of India.
This increase in days is also applicable to you if you are an India citizen or a PIO and you live outside India and you come on a visit to India. The intention behind relaxing the minimum number of days to 182 is to protect your taxability (so you don’t get taxed as a Resident Indian) in case you decide to visit India for an extended stay to visit family or meet other obligations and end up staying more than 2 months. If this sounds confusing, you can look at the ClearTax NRI tax filing assistance for more help.
Besides Resident & Non Resident Indian there is a third category – That of a Resident But Not Ordinarily Resident- after having spent many years abroad if you have recently moved back to India, you may fall in the category of Resident but not Ordinarily Resident (RNOR).
Who is a RNOR?
You will be considered Resident but Not Ordinarily Resident in a year – if you satisfy one of the two conditions for a Resident (mentioned above) AND-
If you have been an NRI in 9 out of 10 financial years preceding the year.
You have during the 7 financial years preceding the year been in India for a period of 729 days or less.
What is your taxable income for the purpose of Indian Tax Laws: If you are a NON RESIDENT INDIAN, simply put –
- Any income that is ‘earned’ in India is taxable for you in India.
- Your Income outside of India is not taxable in India.
In case of Salary of a non-resident seafarer for services outside India on a foreign ship will not be included in the total taxable income of the seafarer, even though such salary is credited in the NRE account of the seafarer with an Indian bank.For instance seafarer rendered services in Europe and spent less than 182 days in India.The company credited his salary in NRE account with Indian Bank.This income will not be included in the total taxable income of the seafarer.
What is your taxable income for the purpose of Indian Tax Laws:
If you are a RESIDENT BUT NOT ORDINARILY RESIDENT (RNOR)
Interestingly, in case you have just returned back to India – you are allowed to keep your RNOR status for up to 3 financial years post your return back to India. That could benefit you in a big way – since your taxation will be very much in line with that of an NRI and therefore income that you may earn outside of India (while you may have returned back) will continue to be not taxed in India. Therefore like an NRI –
- Any income that is ‘earned’ in India is taxable for you in India
- Your income outside of India is not taxable in India
And you can continue this status for a period of 3 years. However, once you have attained the status of a Resident, all of your income within and outside India will be taxable in India, barring any concessions that may be available under the Double Taxation Avoidance Agreement between India and the country from where your overseas income has arisen.
What does the term “Earned” in India mean?
- Any income received in India or the law deems it to be received in India by you or on your behalf.
- Any income that accrues or arises in India or income that the law believes accrues or arises in India.
What does ‘Accrues in India’ mean?
This is laid out in Section 9 of the Income Tax Act (note that this applies to everyone while considering the income that accrues or arises to them irrespective of what their residential status is).
If your answer to any of these is a YES the law will consider these incomes to have accrued in India:-
- Income from a business connection in India.
- Income from any property, asset or source of income in India.
- Capital gain on the transfer of a capital asset situated in India.
- Income from salary if the services are rendered in India.
- Income from salary which is payable to you by the Government of India for services rendered outside of India when you are an Indian citizen.
- Dividend paid by an Indian company even though this may have been paid outside India.
- Interest, royalty or technical fees received from the Central or the State Government or from specified persons in certain circumstances.
Who is Foreign National?
Any person of Indian origin who has settled abroad and granted citizenship of foreign country, also known as NRIs’. A person is said to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India
Any person who is not a citizen of India, is a foreign national.
Foreign National of Indian Origin
Any person of Indian origin who has settled abroad and granted citizenship of foreign country, also known as NRIs’. A person is said to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.
Incomes Liable to Tax
The taxability of income of a person depends primarily upon his ‘residential status’ If a foreign citizen is resident in India, all incomes received, accrued or arisen to him in India or abroad shall be subject to tax in India. If a foreign citizen is not resident in India, only incomes that are received, accrued or arisen to him in India, shall be taxable.
Incomes Exempt from Tax-
- Remuneration of officials of embassies, high commission, etc. [Sec.10(6)(ii)]
- Remuneration received from a foreign enterprise for services rendered in India, provided his stay in India does not exceed 90 days during a previous year. [Sec.10(6)(vi)] (3)
- Remuneration of an employee on a foreign ship where his :t9′ stay in India does not exceed 90 days in a previous year. [Sec.10(6)(viii)
- Remuneration of employees of a Foreign Government, on training in certain establishments in India. [Sec. 10(6)(xi)]
- Income of a Consultant under a Technical Assistance Grant Agreement. [Sec.1 0(8A)]
Tax Liability of Foreign Nationals
Foreign nationals resident in India are liable to pay tax on the taxable income as in case of other resident assessees.
Foreign nationals who are non-residents are liable to pay tax as under:
- At special rates on income from dividends (not subjected to additional income-tax u/s 115-o), interest and capital gain from units of mutual funds/UTI, bonds, Global Depository Receipts and shares, royalty or fees for technical services. [Sec.115A and 115A]
- At special rate of 10% in respect of gross receipts 0 sportsman for his participation in India in a game or sports from advertisement or contribution of articles, and income sports association. [Sec.115 BBA]
- At normal rates on other incomes.
How is an expatriate’s income taxed when they become a Resident in India?
Taxability of income in India depends upon residential status. For a Resident entire income earned anywhere on the globe is taxable in India. This includes income that may have been earned in the country of citizenship and may also have been taxed there.
If the expatriate is a NRI or a Resident but not ordinarily resident (RNOR) only the income which is earned in India is taxable in India. Therefore, the first step is to find out the residential status. As per the residential status rules of the Indian Income Tax Act, for the first 2 years after your arrival in India you will enjoy RNOR status and will pay tax only on the income which is earned by you in India.
Source of Income of Foreign nationals
Salary- Taxable compensation includes salary, wages, allowances (such as reimbursement for personal expenses like housing, transportation, and education payments), and other cash compensation for services rendered in India, regardless of whether salary is received in India or whether the employer is outside India. Taxable compensation also includes income tax paid by the employer on behalf of the employee and certain perquisites such as a car and driver provided by the employer. Income that is received or accrued in India may also be subject to income tax. Additionally, income that arises outside India is subject to income tax for individuals who are ROR in India.
Non-employment Income- Foreign nationals are permitted to maintain foreign currency accounts outside India and receive their entire salary outside India as long as full taxes are paid on any salary accrued in India. Foreign nationals may also open bank accounts in India, and funds can be moved into those accounts from sources outside India. However, individuals must use care when making transactions involving non-employment income and their Indian bank accounts. If non-employment income is earned on investments outside India and is subsequently transferred to an Indian bank account, it will not be taxable in India. If the non-employment income is directly remitted to an Indian account, it is likely to become taxable in India.
Other types of non-employment income taxable in India include long and short-term capital gains earned on the disposal of capital assets situated in India, royalties payable by an Indian concern, and payments of interest on Indian infrastructure debt funds.
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