Residential status of a taxpayer as per the Income-Tax Act can be different from his citizenship. Total income of a taxpayer can't be computed unless his residential status is determined as per the I-T provisions.
Rahul Sharma, a software engineer, was very excited to get his first job with an Indian IT company. His excitement got the better of him as he got an opportunity to work for an offshore client in the United Kingdom for 18 months. It was like a dream come true until he saw an income-tax notice in his mailbox. The Income-Tax Department issued a show-cause notice for not filing the return and asked him to explain the reason for the same. If any of the facts from this fictional example sound analogous, you should know the 10 important tax provisions to avoid any disruption in your routine and your dreams.
Income-tax liability of a taxpayer is calculated on the basis of his total income and what is to be included in total income is greatly influenced by his residential status in India. Remember residential status of a taxpayer as per the Income-Tax Act can be different from his citizenship. Total income of a taxpayer cannot be computed unless his residential status is determined as per provisions of this section.
1. Determine your Residential Status?
An individual is treated as resident in India in a financial year if his stay in India during that year is for 182 days or more. If this condition is not fulfilled, then the second test is to be applied. If his stays in India is for 60 days or more in that year and 365 days or more in the last 4 years, then he is treated as resident in India. If the result of any of the above tests is positive, he is deemed as a resident in India during the previous year.
The second test of stay for 60 days or more during the year shall not be applicable in case of an Indian citizen, who leaves India during the year for the purposes of employment and he shall be deemed as resident in India only if his stay in India during the previous year is for 182 days or more.
If an individual could be considered a resident of two countries because of their respective domestic tax laws, recourse shall be made to the tie-breaker rules under the Double Taxation Avoidance Agreement (DTAAs). Comprehensive Treaties India has entered into with the foreign countries provide for tie-breaker rules to ensure that the tax residency of an individual is established only in one country.
2. Know which income is taxable in India?
Global income of a resident person is taxable in India, while only income earned or received in India is taxable in the hands of a non-resident person.
A resident person is taxable in India on his global income, notwithstanding the country, these incomes have been earned from, i.e., interest on FDs, salary from India co., salary from a foreign company, etc. If the residential status of a taxpayer is ‘non-resident’, then he shall be liable to pay tax on interest income he earns from Indian banks, salary received from an Indian company for services rendered in India, etc.
If services are rendered to a foreign client and the taxpayer is a non-resident, then the salary paid by the Indian company for the period during which such services are rendered for the foreign client shall not be taxable in India. The salary for the period during which he worked for the Indian clients shall be taxable in India.
3. Tax on per-diem or foreign allowance?
When Indian companies send their employees overseas on deputation, they are provided with ‘per diem’ or ‘foreign’ allowances to enable them to cover the cost of their local travelling, food, communication and living costs in relation to their overseas assignments. Such per diems may be granted to the employees in the form of pre-loaded travel cards or by way of reimbursement of expenses actually incurred by them.
These allowances shall be exempt from tax only to the extent these are incurred by the employee during this stay. The amount saved by him out of per-diem allowance shall be taxable in India if he is a resident in India. The living allowance paid to an employee for his service outside India will not be taxable in India if he is non-resident in India.
It is advisable that the employee retains proof of all expenses incurred by him using the per-diem allowance. The tax officer may require an employee to prove the quantum of expenditure claimed to be incurred by him from the per-diem allowance.
4. Conversion of foreign earnings into INR
Income earned in foreign currency is first converted into the Indian rupees before calculation of income-tax thereon. The salary income or any taxable allowance earned in foreign currency shall be converted into Indian rupees according to the TT buying rate of such currency as on the last day of the month immediately preceding the month in which the salary is due or is paid, whichever is earlier.
Example, a salary of $5,000 for the month of June 2018 shall be converted into Indian rupees and for such conversion, TT buying rate as of May 31, 2018, shall be used.
5. Filing of Income-tax Return
Filing of income-tax return is mandatory if total income, before claiming any deductions under Sections 80C to 80U or exemption under section 10(38), exceeds the maximum exemption limit, which is Rs 2,50,000 if the age of an employee is below 60 years. It shall be Rs 3,00,000 and Rs 5,00,000 if the age of resident taxpayer is above 60 years and 80 years, respectively, at any time during the financial year.
For an individual taxpayer, the I-T Dept. has notified 4 ITR forms and the applicability of each ITR form shall depend on the nature of income and status of the taxpayer. If an employee is non-resident in India and he has no business income, then he can use only ITR 2 to file a return of income. A resident person can use ITR-1 to report only salary income, income from one house property and other income (interest and dividend), provided the aggregate of such income doesn’t exceed Rs 50 lakh and if it exceeds, use ITR-2.
If you’re resident in India (other than not ordinarily resident) and you hold (as a beneficial owner or otherwise) any asset or financial interest in any entity located outside India or you have signing authority in any account located outside India (foreign bank account), then you have to file the income-tax return either in ITR 2 or ITR 3.
6. E-Filing of Return
The general rule is that electronic filing of return of income is mandatory for all taxpayers. However, a person can furnish the return of income in paper form in Form ITR 1 only if his age is above 80 years or if his total income is up to Rs 5,00,000 and no tax refund is due to him.
To file the income-tax return, the I-T Dept. has issued Excel and Java utilities, which can be downloaded from https://incometaxindiaefiling.gov.in. For ITR-1, an additional online return preparation and filing facility is available on this website. Returns prepared using the Excel or Java utilities will provide an output file in.XML format which has to be uploaded on this website. To file the return, you need to have a PAN and an account on the website of e-filing.
From this year even a delay of one day in the filing of ITR would cost you Rs 5,000. A late filing fee of Rs 5,000 shall be charged if the return is filed between August 1, 2018, and December 31, 2018. The fees shall be Rs 10,000 if the return is filed between January 1, 2019, and March 31, 2019. The late filing shall be Rs 1,000 for small taxpayers whose taxable income is up to Rs 5 lakh.
So, to avoid this burden, file ITR on or before July 31, 2018.
7. Tax Deductions
Income-tax allows various deductions which are linked to your investments in life insurance policies, medical insurance, house property, pension schemes, etc. These deductions are available under Section 24, Sections 80C to 80U. Tax deductions are allowed for the philanthropic activities, for looking after a family member suffering from specified disease or disability.
All these deductions are subject to certain threshold limits and conditions. Carefully read these conditions and accordingly plan your tax affairs. Some of the tax deductions are not available to the non-resident taxpayers.
8. Aadhaar No. mandatory for residents
It is mandatory for a resident taxpayer to link the PAN and Aadhaar number and to mention the Aadhaar No. (or Aadhaar enrolment ID) in the ITR. Make sure that your details are the same in the records of the Income-Tax Department and Aadhaar database. In case of any mismatch, you will not be able to link the two records. The mobile number should be registered in Aadhaar database as an OTP is sent on the registered mobile number to verify the linking process.
E-filing website doesn’t allow the filing of ITR if Aadhaar number is not mentioned in the ITR form if the status of a taxpayer is resident in India. However, recently, the Kerala and Gujarat High Courts in the cases of Prasanth Sugathan v. UOI  84 taxmann.com 73 and Bandish Saurabh Soparkar v. UOI  87 taxmann.com 48 respectively allowed taxpayers to file their returns manually without furnishing the Aadhaar number or enrollment ID of Aadhaar application form. The Courts held that taxpayers who do not have Aadhaar have to be allowed to file their returns before the department in hard copy for the relevant year as an interim measure. However, it would not be obligatory for the department to process such returns and the Dept. may demand the Aadhaar number from the taxpayers while processing such returns.
If your status is non-resident in India, it would not be mandatory for you to link the two records and utility would not show any error if the field of Aadhar No. is left blank in the ITR form.
9. Foreign Tax Credit
Every country has the right to tax the income earned by a foreign national using its resources. Similarly, every country has the right to tax the income earned by a person who is resident of that country. This confliction in the rights generally results in double taxation of the same income. Thus, to avoid the situation, India has entered into Double Taxation Avoidance Agreements with more than 90 countries. As per the relevant agreement, India shall allow the credit of foreign taxes paid by a person in another country. Thus, if your income is taxable in India, but you have paid taxes on such income in the foreign country, you can claim a credit of such taxes up to some extent.
The taxpayer is required to submit Form 67 to claim Foreign Tax Credit in India. It has to be filed on or before the due date of filing of the Income-tax Return.
10. Claim Refund of excess TDS
If you have rented out a property and have a fixed deposit with the bank, check your tax passbook (Form 26AS) after login into your e-filing account. If you find any entry in the tax passbook, it means some the payers (banks or tenants) have deducted some taxes at the time of payment and deposited the same with the Central Govt.
Even if your income is below the taxable limit, you are advised to file the tax return so as to claim a refund of taxes paid to the Govt. which you were otherwise not liable to pay. If the return is not filed, then your income-tax refund shall be forfeited and if you filed a belated return, the tax refund shall be reduced by the number of late filing fees.
(By Naveen Wadhwa, DGM, Taxmann.com)