TAXABILITY of an individual in India is based on the source of income as well as residential status. Residential status is determined on the basis of one’s physical presence in India during the financial year gone by. Depending on the length of your stay in the country, you may be classified as an ordinary resident or a not-ordinary resident or a non-resident.
Going abroad for work
If you were deputed abroad for employment, determining taxability and filing of income tax return can be tricky. It will depend on the number of days you were outside the country, structure of payments made in India and abroad and whether the foreign payer deducted tax at source. The residency rule is much more liberal for Indian citizens leaving India for taking up employment outside the country. The 60-day period is increased to 182 days in case of citizens of India who leave India for purposes of employment outside India.
Double taxation arises when an individual is taxed twice on the same source of income in more than one country. India has a Double Tax Avoidance Agreement (Treaty) with more than 80 countries and an individual has the option to choose the provisions of the treaty or domestic tax laws of India, whichever are more beneficial to him. If under the treaty provisions, a person’s residency shifts to a foreign location, he may not be liable to tax in India in respect of emoluments drawn for the period of services rendered abroad.
If a person’s residency under the treaty provisions continues in India, he will be taxable in India on his global income. India may, however, consider the taxes paid abroad and provide credit of the same, while computing taxes payable in India.
NRIs returning to India
The decision to return permanently to India will require careful financial planning and tax preparation. The impact could be mitigated by planning your travel to and from India. So it would be worthwhile to plan your journey to and from India in such a way that you become an NRI in the year you left the country and remain an NRI in the year of your return to India, to ensure lower tax liability in India.
A returning Indian who has been an NRI would continue to enjoy the tax exemption for two years upon acquiring the status of not ordinarily resident.
Assets located abroad
An NRI returning to India can continue holding foreign earnings, securities or any immovable property if it was acquired when he was a resident outside India. However, it is advisable to square-off these assets while you are an NRI, since such capital gains would be taxable in the country where the assets are located. The income accruing from the assets will be taxable in India once the NRI qualifies as a resident in India. All foreign bank accounts and assets are mandatorily required to be disclosed in the income tax return.
The writer is partner, Nangia & Co