Tax implications of NRI income
Larissa Fernand
Confused about the amount of tax levied on the money you earn? Read on to see where you fit in.
Situation: An individual going abroad on a contract.
Question: Will he need an Income Tax Clearance Certificate when leaving?
Answer: According to Section 230(1) of the Income Tax Act 1961, you have to apply for an Income Tax Clearance Certificate. The application can be made in form number 31 to the competent authority. If you are being assessed by an Assessing Officer anywhere in India, the application has to be accompanied by an authorisation in form number 32 to be obtained by you from the Assessing Officer.
Situation: An individual going abroad on employment and currently a resident of India in possession of a PAN.
Question: Should he intimate the income tax authorities about his moving out of India?
Answer: Generally, the visa issuing authority would insist on producing a Tax Clearance Certificate from an individual leaving India for a long period. Other than this, there is no specific requirement under the Indian Income Tax Act to inform the tax department.
Situation: An individual going abroad on an assignment and currently a resident of India.
Question: Is the income paid by the company abroad taxable?
Answer: The income paid by the company abroad is not taxable once the status of NRI is achieved. Till the time you are a resident under the Income Tax Act, 1961, you are liable to pay tax.
Situation: An NRI earning money abroad.
Question: Is his income taxed?
Answer: No. The NRI status confers tax exemption on all income earned and received outside India. If the salary is received by virtue of a contract of employment with an entity based abroad, it is deemed to have been earned outside India and, hence, is not taxable. However, if the salary is received from an employer who is based in India, the salary is still taxable.
Situation: An NRI earning an income in India.
Question: Does he have to file returns and pay tax on such income?
Answer: The NRI status confers exemption on all income earned and received outside India. But an NRI is liable to pay tax in respect of any income earned in India and will have to furnish the return of income. Section 9 (1) (ii) of the Income Tax Act, 1961 specifies that income is chargeable to tax under the head "Salaries" if it is earned in India.
Situation: An NRI having in India investments, which earn him dividends and interest.
Question: Does he have to file returns and pay tax on such income?
Answer: If your income in India is above the non-taxable limit, you have to file the return in India. However, under Section 115G of the IT Act 1961, an NRI need not file a return if his income consists of 'investment income' or income by way of long-term gains or both and the tax has been deducted from such income.
Situation: NRI wanting to sell his stock options abroad.
Question: Would it be subject to tax in India?
Answer: Taxability of the income by way of capital gains would depend upon the residential status. If he sells the ESOP after he assumes the status of resident, he would be taxable on the amount of capital gains. If the sale takes place while still under the NRI status, he is exempt from tax as the income is deemed to accrue and arise outside India.
Situation: NRI wanting to sell his investments in an ADR or GDR of an Indian company.
Question: Would it be subject to tax in India?
Answer: Income earned outside India is exempt from tax as long as the NRI status is maintained. So returns on a foreign security is deemed to be earned outside India and hence not taxable.
Situation: NRI wanting to invest in Indian companies in the Indian stock market.
Question: Would his returns be subject to tax in India?
Answer: Yes. Since the income will be arising in India, the return will be taxable in India.
The following chart indicates tax incidence on income in different situations:
| Where tax incidence occurs in the case of |
| |
Resident and ordinarily resident |
Resident but not ordinarily resident |
Non-resident |
| Any income received in India |
Yes |
Yes |
Yes |
| Any income deemed to be received in India |
Yes |
Yes |
Yes |
| Any income accruing or arising in India |
Yes |
Yes |
Yes |
| Any income deemed to be accruing or arising in India |
Yes |
Yes |
Yes |
| Income received and accrued outside India from a business controlled in or a profession set up in India |
Yes |
Yes |
No |
| Income received and accrued outside India from a business controlled or a profession set up outside India |
Yes |
No |
No |
Situation: An NRI bringing his savings from abroad to India.
Question: Is any of it to be taxed?
Answer: All income earned and received abroad will not attract any tax when it is remitted into India, even when brought back at a later date.
Situation: An NRI earning in South Africa.
Question: Since the two countries do not have a Double Taxation Agreement, will the income earned in South Africa be taxed in India?
Answer: No. The NRI status still holds. So all income earned and received outside India is exempt from tax.
Situation: A citizen and passport holder of another country but born and brought up in India.
Question: Would he have to pay tax in India or in the country where he is a citizen?
Answer: Income accruing or arising in India to any person, irrespective of his citizenship, is taxable as per the provisions of Section 5 of the Income Tax Act, 1961. Hence, taking up a job in India and earning from it will make even a foreign citizen assessable to tax in respect of such income.
The requirement of filing of return in the country, other than India, of which the individual is a citizen, would need to be examined in the light of that country's tax laws.
Situation: An NRI working abroad as a consultant for a foreign company.
Question: When giving consultation to Indian companies, he gets paid in rupees. Is this amount taxed?
Answer: According to Section 5(2)(a) of the Income Tax Act, an NRI is chargeable to tax on income received or deemed to be received in India. Thus, the consulting fee received in India is chargeable to tax.
Situation: An Indian gone abroad on a short stint and given a living allowance by the employer abroad.
Question: If he brings back the money he saves abroad, is it taxable in India?
Answer: A resident Indian is chargeable to tax on all income earned by him. So the allowance received is taxable. However, he is eligible for a deduction under Section 80RRA, of up to 75 per cent of the amount remitted by you into India within six months from the end of the financial year. This deduction is available only if you are a technician as defined under explanation © to sub-section (2) of Section 80 RRA and, further, the terms & conditions of your service outside India are approved in this behalf by the Central government or the appropriate authority. The balance 25 per cent is taxable at the marginal rate of tax.
Situation: An NRI given a living allowance by the employer abroad.
Question: If he brings back the money he saves abroad, is it taxable in India? If yes, what's the percentage?
Answer: Since the living allowance is received by virtue of a contract of employment with an entity based abroad, it is deemed to have been earned outside India and, hence, is not taxable.
Situation: An Indian deputed abroad by his Indian company. He attains the status of NRI because he was abroad for a particular number of days.
Question: Does he have to pay tax on the income earned by him abroad, which is paid by the Indian company?
Answer: Certain income is deemed to accrue or arise in India even though it may actually be received outside India. Since he is employed with an Indian company and has been deputed abroad, the payment made to him is deemed to accrue and arise in India. So he is liable to pay tax on this income. If he joins a local company abroad, then he is not liable to pay tax on that income.
Situation: An NRI given a living allowance by the Indian employer.
Question: If he brings back the money he saves abroad, is it taxable in India? If yes, what's the percentage?
Answer: If an employer who is based in India gives the living allowance, the allowance is still taxable. You are eligible for a deduction under Section 80RRA, of up to 75 per cent of the amount remitted by you into India within six months from the end of the financial year. This deduction is available only if you are a technician as defined under explanation © to sub-section (2) of Section 80 RRA and, further, the terms & conditions of your service outside India are approved in this behalf by the Central government or the appropriate authority. The balance 25 per cent is taxable at the marginal rate of tax.
Situation: An NRI falling under the category of 'technician'.
Question: How is a technician defined under the Income Tax Act?
Answer: According to explanation (c) of section 80RRA of the Income Tax Act, 1961, 'Technician' means a person having specialised knowledge and experience in:
- Constructional or manufacturing operation or mining or the generation or distribution of electricity or any other form of power, or
- Agriculture, animal husbandry or dairy farming, deep sea fishing or ship building, or
- Public administration or industrial or business management, or
- Accountancy, or
- Any field of natural or applied science (including medical science) or social science, or
- Any other field which the board may prescribe in this behalf. The board has prescribed the following fields under Rule 11C (profession of actuaries; banking; insurance; journalism).
Situation: An NRI not in possession of a PAN.
Question: Is it possible to buy assets in India without a PAN?
Answer: According to Rule 114B (a) of Indian Income Tax Rules 1962, a person has to quote his Permanent Account Number (PAN) in all documents for the sale or purchase of any immovable property valued at Rs 500,000 or more.
But as per Rule 114C of the IITR, an NRI need not apply for and obtain PAN for any transaction mentioned in clauses (a) to (h) of Rule 114B, (which includes sale or purchase of immovable property). Thus, you can buy assets in India without PAN.
Situation: An individual residing outside Indian since February 1999 to December 2000. Paying tax on his salary earned in India as well as tax abroad on the salary earned there.
Question: Would he have to pay tax on the foreign currency he brings to India?
Answer: For assessment year 1999-2000, you were outside India for less than 182 days and, hence, your status is resident. For that year, your salary earned abroad will also be taxable in India. However, if the country has a Double Taxation Avoidance Treaty (as in the case of India and US), you will be eligible for tax credit on the tax paid to the foreign government. Generally, Double Taxation Avoidance Treaties provide for credit to the tax payer on account of tax paid by an assessee in the foreign country.
For assessment year 2000-01, you will be outside India for over 182 days and hence your status is non-resident. So the income earned by you will not be charged to tax in India.
Situation: An Indian musician playing abroad on a concert tour, earns in foreign currency and pays tax in that respective country. On returning to India, the money is transferred to his bank account.
Question: Would he have to pay tax on the foreign currency he brings to India?
Answer: The question of whether the musician will be taxed in India or not will depend on his residential status. If he is an NRI according to the Indian Income Tax Act, then his income will not be taxed in India whereas if he is Ordinary Resident, his income in the US will be taxed in India. However, if the country has a Double Taxation Avoidance treaty with India, he will be eligible for tax credit on the amount of tax paid to the foreign government.
A Treaty of Double Taxation exists for granting of relief in respect of the income for which tax has been paid both under the Indian Income Tax Act, and the legislation in a foreign country. In a double taxation treaty, there are two countries: the resident country, [the place of ordinary residence] and the source country [the country where the doubly taxed income is generated]. As a result of such Double Taxation Avoidance Treaties, tax credit is given in the resident country in respect of the tax paid in the source country.
Situation: An Indian who goes abroad for a short stint and earns in foreign currency and even pays tax in that respective country. He has now returned.
Question: Would he be able to maintain an account abroad and in India?
Answer: If he is an NRI, he can maintain his bank account in the US or in India. If he is resident, then he can keep foreign currency account, provided he has earned foreign currency including any income earned on it through employment, business, or vocation outside India taken up or commenced while he was resident outside India and such stay was for a continuous period of not less than one year. Otherwise, he has to surrender the foreign currency within seven days on returning to India. However, he will be allowed to retain a maximum of $ 2,000 for numismatic purposes or for personal use.
Situation: An NRI returning to India permanently.
Question: Would he have to pay wealth tax on the money he brings into India?
Answer: According to Section 5(v) of the Wealth Tax Act: No wealth shall be payable in the case of an assessee, being a person of Indian origin or a citizen of India who was ordinarily residing in a foreign country and who, on leaving that country, has returned to India with the intention of permanently residing here.
The following are not chargeable to tax for seven successive assessment years (commencing from the assessment year next following the date on which such a person returned to India):
- money brought by him into India
- value of assets brought by him into India
- money standing to the credit of his NRE account in any bank on the date of his return
- value of assets acquired by him out of such money referred to in (1) and (3) within one year immediately preceding the date of his return and at any time thereafter
Non-fulfillment of any of the above conditions will render an NRI liable under Wealth Tax.
Tell us what you think of this information
|
