Taxation of foreign income in India

NRI Taxation

The taxes to be levied on foreign income accrued by a Nonresident have always been a hot topic for discussion. As many people have confusion regarding the residential status that is to be determined for NRI Tax Return filing in India.

At the outset, it may be noted that in case a Non Resident becomes Resident in India during any previous year, his income accrued or arising or earned outside India will also become taxable in India. Further, in the case of Residents, their income earned anywhere whether in India or abroad is always taxable in India.

With new inclusions and deductions through the Finance Act, 2020, the residential status of NRI, has been a bit clarified. Here are the changes that have been made in this regard in the Finance Act:

  1. Till the end of the Financial Year 2019-20, the Non-Resident Indians (NRIs) including the Indian citizens and Persons of Indian Origin (PIO) have included only those people who have been to India for less than 182 days in total in a particular fiscal year which has now been reduced to 120 days for the purpose of NRI Tax Return.
  1. An amendment in Section 6 of the Income Tax Act prescribes that the period of 120 days will be applicable to only those visiting individuals whose total income accrued in India in a financial year is more than Rs. 15 Lakh.
  1. As the case was earlier, the individuals whose total taxable income in India is up to Rs. 15 Lakhs in a particular financial year will continue as NRI status if their stay period in India is less than 182 days.
  1. In case the income taxable in India exceeds the mark of Rs. 15 Lakhs, then the provision of the stay of more than 120 days will be applicable. Therefore, the visiting Indians must keep a proper check on their taxable income in India as well as their staying duration.

Following Points to be noted relating to NRI Taxation in India 

As per the Income Tax Act, 1961 and Income Tax Rules, if a person is a resident of India, then they are liable to pay taxes on income earned by them anywhere in the world. However, in case a person is a resident of two countries, then the tie-breaker rule is applied to determine the taxability. For purpose of computing Tax in India, the following points must be kept in mind:

  1. The income earned abroad must be converted into Indian currency from foreign currency. This can be done through the Telegraphic Transfer Buying Rate (TTBR) of the State Bank of India. The rate of the last day of the month before the income due month is to be applied while converting the currency.
  1. The income after converting must be included under the relevant head such as income from salary is to be included in the “Salaries” head etc.
  1. The individual is required to treat this accrued income as any other income they have earned in India.
  1. The Income Tax Act and rules provide a minimum exemption of Rs. 2,50,000 in total on the overall income earned by the person. The remaining income is to be taxed as per the slab rates applicable in India.
  1. In the case where the Tax Deducted at Source (TDS) has been applied on the income, the individual is allowed to take credits on it. The person is required to refer to the relevant Double Tax Avoidance Agreement (DTAA) of the country where the income is earned.
  1. It is to be noted that India has DTAA with several countries across the world. This has benefited the taxpayers majorly and has protected them from paying double taxes, one in India and the other in the country where the income is earned. Since TDS is applied that is it is taxable in the country of residence, the taxpayer is not burdened.
  1. If the taxpayer has taken the benefits of the DTAA, then they receive a Tax Residency Certificate (TRC). This certificate is really helpful in identifying and certifying the residential status of the person for taxes and also helps in applying the accurate DTAA.
  1. The taxpayer is required to refer to the correct DTAA while applying for TDS credits in the Income Tax Return. There are two ways through which a person can claim tax relief under the DTAA. These methods are as follows-
    1. Exemption Method: In this method, the income earned by the taxpayer is taxable in one country and is exempted from taxes in another.
    2. Tax Credit Method: In this method, the income earned is liable for taxes in both countries but the taxpayer can claim tax relief in the country of their residence.
  1. If in case there is no Double Tax Avoidance Agreement between two countries, then the taxpayer is still liable to get a tax credit on the taxes paid in a foreign country.
  1. The Indian government and the tax department have made the latest changes in the Income Tax Return forms for NRIs. Several disclosures have been added to these forms for earned incomes on which DTAA has been claimed.
  1. NRI can remit income out of India subject to payment of applicable taxes in India as well as submission/uploading of Form 15CA and form 15CB on the tax department portal.