The NRI Series – Understanding NRI Status & Taxation

The NRI Series – Understanding NRI Status & Taxation

From today we are commencing a series of Articles related to Non Resident Indians’ (NRIs) implications under Indian Income Tax Laws.  The articles will endeavour to educate our NRI readers on applicability of Indian Income tax laws on their incomes and in each article we will take up different income aspects and how they should are dealt with.  We trust this will be helpful.

Our first article in this series is about understanding your NRI status under the Income tax Act of India which primarily determines taxability of your incomes.

Hence, the first step is to understand the status of an NRI in order to decide whether the income of the NRI is subject to tax in India or not.

This article talks about different NRI statuses, NRI taxation and Resident but not Ordinary Resident (RNOR) status.

Are you a Resident or a Non Resident Indian?  What constitutes taxable income in India for a Non Resident?

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:

1.)  He/She is in India for 182 days or more during the previous financial year

OR

2.)  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 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.

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

1.)  If you have been an NRI in 9 out of 10 financial years preceding the year

OR

2.)  You have during the 7 financial years preceding the year been in India for a period of 729 days or less.

Please note here that this is how the Income Tax Act considers your status and applies purely to your taxability in India. This may not essentially apply with other rules & laws that exist in India

NRI Taxation

Firstly, before you decide to invest money in India you must get yourself a PAN (Permanent Account Number) issued by the Government of India.

What is included in your taxable income for the purpose of Indian Tax Laws:

If you are a NON RESIDENT INDIAN, simply put –

1.)  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 included in 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 –

1.)  Any income that is ‘earned’ in India is taxable for you in India.

2.)  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?

1.)  Any income received in India or the law deems it to be received in India by you or on your behalf

2.)  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:-

1.    Income from a business connection in India

2.    Income from any property, asset or source of income in India

3.    Capital gain on the transfer of a capital asset situated in India

4.    Income from salary if the services are rendered in India

5.    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

6.    Dividend paid by an Indian company even though this may have been paid outside India

7.    Interest, royalty or technical fees received from the Central or the State Government or from specified persons in certain circumstances

We trust this article was useful to you in understanding how an NRI status is the determining factor for taxability of his/her income under the Indian Income tax laws.  In the forthcoming article of this series we will come up with commonly taxed NRI incomes.

Should you have any queries, ki ndly feel free to write to us at info@gjmco.in

Thanks & Best regards,

Knowledge Base Team

GJM & Co.

Chartered Accountants

www.gjmco.in