An Indian, who is on deputation overseas or has settled abroad, needs to know all the tax rules in India. A recent move wanting details of foreign banks accounts from non-resident Indians (NRIs) in IT returns caused anxiety about whether the government was planning to tax global income.
The Central Board of Direct Taxes (CBDT) clarified that giving such details was voluntary and it was to facilitate refunds in those cases where individuals did not have a bank account in India.
Tax Residential Status
As per the Indian tax laws, the reference is to the term ‘tax resident’ or ‘non-resident’. The country of origin does not determine the taxability.
The duration of stay in India, as provided for in the IT Act, determines your residential tax status in the country. This status determines which income can be taxed in India and what cannot be taxed. Thus, it is essential to know which category you fall into.
Let’s look at an example to understand this theory better.
An NRI recently asked a question, “I’ve been working from London in the UK for a year now and as I’ve lived outside India for 220 days, I qualify as an NRI. My salary is transferred to my Indian bank account by my employer. Being an NRI, will the salary received from my employer’s overseas bank account be taxable in India?”
Firstly, you must fulfil certain conditions to define your residential status, which are as follows:
- You stayed in India for more than 182 days in the relevant financial year (FY), or
- You have resided in India for 60 days or more in the same year, and
- You have lived in India for 365 days or more in the four years before the relevant year.
Additional conditions that you must fulfil:
- You are a resident in India in two of the 10 FYs immediately preceding the relevant FY.
- You are in India in the seven years immediately preceding the relevant FY for 729 days or more.
If you meet any of the specified basic conditions and both the additional conditions, you will be viewed as a tax resident in India. If you meet any of the basic conditions, but don’t meet the additional conditions, you will be considered to be a resident but not ordinarily resident (RNOR) in India. In case you don’t meet any of the basic conditions, you will be an NRI.
In any case, condition (2) does not make a difference to Indian natives who have left India to work abroad. Consequently, if you do not meet condition (1), you will be an NRI for tax purposes.
The tax laws in India states that salary earned in India shall be taxable in India. Whether the wage was directly credited in an Indian bank account by you for services provided overseas has been a matter of repeated litigation. In such cases, the lookout has been that such income is not taxable in India since the services have not been rendered in India and funds have been merely sent to a bank account in India.
It is highly recommended that you receive the compensation locally where you are employed and then remit the amount as required. Or else, you may have to report it in tax returns in both countries and face double taxation.
Are Gifts Received From Relatives Taxable?
Abhishek Rathi recently asked, “I am US citizen. My mother passed away recently and I want to buy a flat for my sister. What are the tax implications for me and my sister? Can he receive the flat as a gift? Will it be wiser to buy the flat in my father’s name?”
You can buy a flat as a present for your sister and it won’t be taxable in her hands. Gifts to relatives are excluded from taxation. Your sister is added in the list of determined relatives, according to the Income Tax Act.
But, if you earn from this asset, it will be clubbed with the pay you receive from India and will be taxable. Since you are probably going to be a tax resident in the US, you should conform to local laws that may apply to such a buy.
If you are a tax resident of one country but have a source of income from a different country, complications can arise. Tax treaties make sure that the same income is not taxed twice. Broadly, tax treaties provide that the country from which the revenue is generated has the right to tax it. You can take credit for such taxes paid while tax filing in your country of tax residence.
India has entered into tax treaties with hundred-odd countries such as UK, US, Australia, Canada, and Germany, which are popular destinations for Indian migration for the purpose of dealing with double taxation of income.