NRI TAXATION – TAXABILITY OF FOREIGN INCOME IN INDIA
Moving to a foreign country often proves to be a challenge and coming to terms with a new taxation system is one of the many significant factors contributing to this challenge. If you thought tax laws were meant only for persons belonging to a particular country, you thought wrong. An NRI is no exception.
An NRI (often called expatriate) is an individual temporarily or permanently residing, as an immigrant, in a country, that is not the one of their citizenship, usually for work reasons.
Who is an NRI for Indian Income Tax?
To make this simpler, there are three classifications of residency for non-citizens or expatriates – Non-Resident (NR), Resident not Ordinarily Resident (RNOR), and Resident and Ordinarily Resident (ROR).
Ask yourself the following questions to determine which classification you belong to, with answers supported by your passport.
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Were you in India for 182 days or more in the last financial year?
If Yes, go to question 3. If No, go to question 2. -
Out of the last four financial years, did you live in India for 365 days?
If Yes, go to question 3. If No, you are a Non-Resident (NR). -
Did you live outside of India for 9 out of 10 years preceding this year?
If Yes, you are a Resident not Ordinarily Resident (RNOR). If No, go to question 4. -
Did you live inside of India for 730 days or more during the seven previous years?
If Yes, you are a Resident and Ordinarily Resident (ROR). If No, you are a Resident not Ordinarily Resident (RNOR).
NRIs Are Liable to Pay Tax
NRI tax (also known as emigration tax) is a tax on individuals who cease to be tax resident in a country. As the individual (expatriate) is a resident of a foreign country, his foreign salary income is exempt in India. However, any income which is earned by providing service in India or arises by any asset situated in India shall be taxable in India. This income may also be subjected to TDS (Tax Deducted at Source) in India.
Let us take an example, to understand better.
Cathy is a foreign national working for an International School in Hyderabad, India since one year. She is a resident of UK and receives 1000 pounds per month for her work. Will she be taxed in India for the payment she receives for teaching in India?
Yes, Cathy’s income from the school will be converted to rupees, and she is liable to pay tax on the 12,000 pounds she receives. Since she is an NRI as per the Income Tax Act, she is liable to pay tax on income earned in India.
A TDS of Rs 4,00,000 will also be deducted from her income by the school. She can adjust the tax amount of Rs 4,00,000 which has been deducted at source from her final tax liability.
It is advisable to understand the Indian tax laws and practices before you leave your home country to come work in India. Keep yourself updated on the tax, immigration, social security and other allied rules that are relevant for the expatriate population.