Taxation of Indian expatriates in and outside India

By Romit Dwivedi

With the globalization of society, a growing number of Indians are opting to live and work overseas. Global mobility presents many opportunities both personally and professionally, but it also entails complicated tax requirements. To maintain compliance with Indian tax rules and to maximize financial outcomes, Indian expatriates must grasp the nuances of the tax ramifications.

Determining Residential Status

An Indian expatriate’s tax duty is based on their residential status in India, which is based on how many days they spend there in a given fiscal year.

Resident: A person is deemed to be a resident of India if they have spent at least 182 days there during the fiscal year or 60 days in India during the fiscal year and 365 days during the four years prior.

Non-Resident Indian (NRI): A person is regarded as an NRI if they do not meet the requirements for residency.

NRIs are only taxed on money earned or accumulated in India, residents are taxed on their entire worldwide income.

International Income Taxation

Global income, which includes money generated both domestically and outside, is taxable in India for Resident Indian. This can include income from assets overseas, rental income from properties outside of India, and wages from jobs outside of India.

NRIs, on the other hand, are only subject to taxes on income that is earned or accumulated within India. This comprises earnings from sources like:

Salary: Regardless of where the payment is made, salary income that is received for services provided in India is taxable in India.

Rental Income: Income earned from real estate located in India is subject to taxation in India.

Investment Income: Interest received on other investments and deposits made into Non-Resident Ordinary (NRO) accounts in India is subject to taxation.

Capital Gains: Transfers of capital assets—like real estate or shares—that are situated in India are subject to taxation in that country.

Avoidance of Double Taxation Agreements (DTAA)

India has Double Taxation Avoidance Agreements (DTAAs) with a number of nations to reduce the possibility of double taxation, in which a person may be subject to taxes in both India and their country of residence. These agreements protect against double taxation of income and offer relief in two main ways:

Exemption Method: Under this method, income earned in the foreign country is exempt from taxation in India.

Tax Credit Method: Here, the tax paid in the foreign country can be claimed as a credit against the tax liability in India.

For instance, – Double Taxation Avoidance Agreement (DTAA): India and the UAE have a DTAA in place, which prevents double taxation of income. This agreement ensures that income earned in the UAE is not subject to additional taxation in India, provided certain conditions are met.

Information on Foreign Assets and Income

When filing their tax returns in India, non-resident Indians (NRIs) must reveal their international assets and income. This comprises:

Foreign Bank Accounts: It is necessary to report any bank accounts kept outside of India.

Financial Interests: Foreign securities investments or ownership of foreign businesses need to be disclosed.

Immovable Property: Any real estate held outside of India that an NRI owns must be disclosed.

According to Indian tax regulations, there are serious penalties for failing to declare overseas assets and income.

NRIs Are Eligible for Deductions and Exemptions

NRIs can reduce their tax burden by taking advantage of a number of deductions and exemptions offered by Indian tax laws:

Section 80C: NRIs may deduct expenses for investments made in certain financial instruments, including as Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), and life insurance premiums, up to ₹1.5 lakh.

Section 80D: NRIs are eligible to deduct health insurance policy premiums.

Interest on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) Accounts: Interest earned on these types of accounts is free from Indian taxation.

These deductions and exemptions can drastically lower taxable income, giving non-resident Indians (NRIs) financial assistance.

Income Tax Return Filing

If the total income of a non-resident foreigner is above the current basic exemption ceiling of Rs2.5 lakh, they are required to file income tax returns in India. NRIs may be required to file returns in order to receive a refund for any taxes deducted at source (TDS), even if their income is below this threshold.

The tax authorities may extend the deadline for filing tax returns, which is normally July 31 of the assessment year. To avoid fines, NRIs must keep themselves updated on the dates.

Repercussions for Failure to Comply

Significant fines may be incurred for breaking Indian tax regulations. This involves not disclosing overseas assets, filing tax returns incorrectly, or failing to record income. In extreme situations, the penalties may include prosecution in addition to fines. NRIs must so make sure that their tax returns are filed on time and accurately.

Final Thoughts

To ensure compliance and maximize financial planning, Indian expatriates must be aware of the tax ramifications. The complex rules of tax legislation necessitate careful consideration, particularly about international income, residency status, and foreign assets. For assistance navigating these complexities and making well-informed decisions, NRIs should consult with a tax specialist with experience in foreign taxation.

(Author is Romit Dwivedi, Senior Wealth Manager, Dubai – catering to NRI’s and Global High Net Worth individuals in one of the Leading Bank in the region.)

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