In an increasingly globalized world, it is only common for individuals to work and earn in a country other than their own. This situation opens up questions around tax liabilities, especially concerning income earned abroad. In India, the tax treatment of salary or allowances received by non-residents for services rendered outside the country is a crucial issue. This article explores the nuances of how India’s tax laws apply to salary or allowances earned abroad by Non Resident Indians.
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Understanding Tax Residency in India
To grasp the taxation rules applicable to non-residents, it is important first to understand the concept of tax residency as per Indian law.
According to the Income Tax Act, 1961, an individual’s tax liability in India depends on their residential status, which is classified into three :
1. Resident
A resident is an individual who’s been living in India :
• Since birth
•For 182 days in the preceding financial year in India
• For 365 days straight for the last four years
•For 60 days in the specific financial year
2. Non Resident
An individual who does not satisfy the latter two conditions as mentioned above will be treated as Non-Resident in that previous year.
3. Resident but Not Ordinarily Resident (RNOR)
An RNOR is an NRI who :
• Has been a Non-Resident Indian ( NRI ) for at least nine out of the ten fiscal years before the current year.
• Has spent 729 days or fewer in India over the previous seven fiscal years.
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What determines the Taxability of Income?
The taxability of income in India depends on its source. According to Section 9 of the Income Tax Act, the income is taxable if:
•The income is received or deemed to be received in India.
•The income is accruing or arising or deemed to accrue or arise in India.
•The income is received or accruing outside India, but only if the taxpayer is a resident.
For non-residents, only income that is received or deemed to be received in India or that accrues or arises in India is taxable. Thus, salary or allowances received for services rendered outside India typically do not fall under the ambit of taxable income for non-residents.
Simply put, if the salary/allowance of an NRI or RNOR is foreign – sourced, then it won’t be taxed in India even if it is remitted to an Indian account.
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In a recent ruling, The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that a non-resident’s salary or allowance for services rendered abroad is not taxable in India.
Read More: Non-Resident’s Salary/Allowance for Services Rendered Abroad not Taxable in India: ITAT [Read Order]
How Double Taxation Avoidance Agreements (DTAAs) Help
India has entered into Double Taxation Avoidance Agreements ( DTAAs ) with more than 94 countries to mitigate the issue of NRIs having to pay taxes multiple times. These agreements provide relief on the taxation of income earned abroad. Non-residents can benefit from these treaties to avoid being taxed in both jurisdictions.
Understanding the interplay between Section 9 of the ITA and DTAA is crucial for NRIs to ensure that they comply with the tax laws while optimizing their tax liability.
Sections concerning DTAA
To employ the DTAA usefully, Sections 90, 90A, and 91 of the Income Tax Act have been designed. They provide tax relief clauses to counter the possibility of an unfair double taxation.
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The reliefs offered under DTAA can be classed into two:
•Section 90-Bilateral Relief
It is implemented when a DTAA is in existence between the two countries. The countries who have entered into the mutual agreement are supposed to allow relief either through a foreign tax credit or by the exemption method.
Section 90A- DTAA signed between Associations
Under this section even if there’s no bilateral agreement between two countries, if there is a DTAA signed between two institutional bodies/ associations of the two countries, relief can be claimed.
•Section 91- Unilateral Relief
In absence of a DTAA between the home and resident countries, the home country is responsible for offering tax relief and preventing double taxation. That is, since the individual is paying taxes in two different countries, the lowest payable tax rate of the two can be claimed as relief.
What not to miss while claiming DTAA
While claiming DTAA benefits , one should be mindful of the following:
•Tax Residency Certificate (TRC):
Obtaining a TRC from the country of residence can help in claiming benefits under the DTAA.
•Form 10F
Form 10F is a declaration that must be provided by a non-resident who is not a company or a foreign company in order to claim the benefit under an agreement that the Indian government has with the government of another nation or designated outside territory.
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•Income Disclosure
Although the income might not be taxable in India, proper disclosure in the tax return is advisable to maintain transparency and compliance.
How to apply DTAA benefits while filing Income Tax Returns
• Residency Status
Before claiming DTAA benefits, determine your residency status as given by section 9 of the Income Tax Act. As previously mentioned, You can be a resident, non-resident, or resident but not ordinarily resident ( RNOR ).
•Identifying the Applicable DTAA
The DTAA fixes a specific rate at which tax has to be deducted on income paid to residents of that country. This means that when NRIs earn an income in India, the tax deducted at source ( TDS ) applicable would be in accordance with the rates set in the agreement with that country.
Find out if India has a DTAA with the country where your salary was earned. You can find the list of countries with which India has a DTAA on the Income Tax Department’s website.
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•DTAA Method
DTAAs can offer relief either through the Exemption Method or through the Tax Credit Method.
Exemption Method: The income is taxed only in one country.
Tax Credit Method: The income is taxed in both countries, but the country of residence provides credit for the tax paid in the source country.
Check the specific DTAA pertaining to your situation to understand which method applies.
•Details of Salary and Tax Deducted
Next, gather details of your salary earned abroad and the tax deducted in the foreign country. You will need the Form 16/16A ( for tax deducted in India ) and the equivalent document from the foreign country.
•Conversion of Income to INR
You should convert the foreign income to Indian Rupees ( INR ) using the exchange rate prescribed by the Income Tax Department for the financial year.
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•Computing the Total Income
Include the foreign salary income in your total income while filing your ITR.
•Calculation of DTAA Relief
If the Tax Credit Method applies, compute the relief by considering the lower of the tax payable in India on the foreign income and the tax paid in the foreign country on that income.
If the Exemption Method applies, exclude the foreign income from your taxable income in India.
Filing in ITR
While filing ITR, the following should be taken into concern:
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Conclusion
The Indian tax system provides clear guidelines that exempt non-residents’ salaries and allowances for services rendered abroad from being taxed in India. As globalization continues to drive cross-border employment, it is quintessential to design laws that will prevent the possibility of double taxation of salaried individuals. Since expatriate individuals contribute to the Indian economy significantly, it is only fair to not burden them with double taxes and the provisions designed towards mitigating this concern are commendable.
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