A job abroad could be reason to celebrate. But you need to look beyond the offer letter and job profile. Income tax could lower your foreign pay substantially. But the impact could be mitigated by planning your travel to and from India. Keep track of your travel dates. The Income Tax (I-T) Act, 1961, helps.
Plan your journey to India in such a way that you become a non-resident Indian (NRI) in the year you left the country. If your total stay in India is less than 182 days a year, you are an NRI. Or you pay tax on your foreign salary. In the year of return, the threshold for residency is 60 days and a look-back period of 365 days in the immediately preceding four tax years.
Residential status
Your residential status is determined on the basis of physical presence in India during a tax year - between April 1 and March 31. Depending on your India stay in a tax year, you may be classified an ordinary resident or not ordinary resident (or non-resident).
To qualify as an NRI, you must have stayed in India for less than 365 days during the four years preceding the tax year, in which you must have stayed 182 days or less.
For residents it is to be determined whether you are an ordinary resident or not. A person is said to be not an ordinary resident if he has been an NRI in nine of the 10 preceding years or he has been in India for 729 days or less in the seven preceding years.
Taxation varies, based on your residential status in a tax year. Here's how:
n Ordinary resident: To be taxed on world-wide income
n Not-ordinary resident: To be taxed on income sourced from India or received/deemed to be received in India, or from income derived from a business controlled or set up in India
n Non-resident: To be taxed only on income sourced from India or received/ deemed to be received in India.
There is also a benefit under a Double Taxation Avoidance Agreement (DTAA). If your income is taxable in two countries, tax could be avoided in one country by showing the tax credit of the other country.
Non-residents returning to India
Here, the time of return is crucial because you need to consider some tax issues. The taxability of foreign income (rental income, capital gains, bank interest, dividends) depends on the residential status.
An NRI returning to India would be a resident but not ordinarily resident for two years for tax purposes and would be taxable only on India income. Thereafter, you would become a resident and ordinarily resident and your world-wide income is taxable in India. You will, however, be entitled to benefits, if any, under the DTAA.
A recent Authority for Advance Rulings (AAR) analysed the tax issues faced by returning NRIs. It held that to determine the residential status of an NRI returning to India, see whether the employee had come on a visit to India as an NRI or with the intention to permanently settle in India.
During the tax year 2010-11, an employee was in India for 119 days. As she was employed in India earlier, the number of days she was in India during the earlier four years was 625 days. Accordingly, since the employee was not only on a visit to India, particularly as she did not leave India thereafter, for any employment, it was held she was a resident and the income by way of encashment of stock options received by the employee outside India was taxable in India.
What to do with your assets located outside India?
An NRI returning to India can continue holding foreign earnings, securities or any immovable property if it was acquired when he/she were a resident outside India. However, try to sell the foreign property while still a non-resident.
As a non-resident, if you sell any foreign assets and receive the sale proceeds outside India, you do not have to pay any taxes in India. If you need to buy a house in India out of the sale proceeds, receive the sale proceeds in a foreign bank account and thereafter remit it back to India for no Indian tax liability. Separately, under wealth tax law, wealth tax is payable at the rate of one per cent for wealth in excess of Rs 30 lakh. However, assets located outside India owned by a non-resident shall not come under the wealth tax bracket.
The writer is executive director at Nangia & Co.
Plan your journey to India in such a way that you become a non-resident Indian (NRI) in the year you left the country. If your total stay in India is less than 182 days a year, you are an NRI. Or you pay tax on your foreign salary. In the year of return, the threshold for residency is 60 days and a look-back period of 365 days in the immediately preceding four tax years.
Residential status
Your residential status is determined on the basis of physical presence in India during a tax year - between April 1 and March 31. Depending on your India stay in a tax year, you may be classified an ordinary resident or not ordinary resident (or non-resident).
To qualify as an NRI, you must have stayed in India for less than 365 days during the four years preceding the tax year, in which you must have stayed 182 days or less.
For residents it is to be determined whether you are an ordinary resident or not. A person is said to be not an ordinary resident if he has been an NRI in nine of the 10 preceding years or he has been in India for 729 days or less in the seven preceding years.
Taxation varies, based on your residential status in a tax year. Here's how:
n Ordinary resident: To be taxed on world-wide income
n Not-ordinary resident: To be taxed on income sourced from India or received/deemed to be received in India, or from income derived from a business controlled or set up in India
n Non-resident: To be taxed only on income sourced from India or received/ deemed to be received in India.
There is also a benefit under a Double Taxation Avoidance Agreement (DTAA). If your income is taxable in two countries, tax could be avoided in one country by showing the tax credit of the other country.
Non-residents returning to India
Here, the time of return is crucial because you need to consider some tax issues. The taxability of foreign income (rental income, capital gains, bank interest, dividends) depends on the residential status.
An NRI returning to India would be a resident but not ordinarily resident for two years for tax purposes and would be taxable only on India income. Thereafter, you would become a resident and ordinarily resident and your world-wide income is taxable in India. You will, however, be entitled to benefits, if any, under the DTAA.
A recent Authority for Advance Rulings (AAR) analysed the tax issues faced by returning NRIs. It held that to determine the residential status of an NRI returning to India, see whether the employee had come on a visit to India as an NRI or with the intention to permanently settle in India.
During the tax year 2010-11, an employee was in India for 119 days. As she was employed in India earlier, the number of days she was in India during the earlier four years was 625 days. Accordingly, since the employee was not only on a visit to India, particularly as she did not leave India thereafter, for any employment, it was held she was a resident and the income by way of encashment of stock options received by the employee outside India was taxable in India.
What to do with your assets located outside India?
An NRI returning to India can continue holding foreign earnings, securities or any immovable property if it was acquired when he/she were a resident outside India. However, try to sell the foreign property while still a non-resident.
As a non-resident, if you sell any foreign assets and receive the sale proceeds outside India, you do not have to pay any taxes in India. If you need to buy a house in India out of the sale proceeds, receive the sale proceeds in a foreign bank account and thereafter remit it back to India for no Indian tax liability. Separately, under wealth tax law, wealth tax is payable at the rate of one per cent for wealth in excess of Rs 30 lakh. However, assets located outside India owned by a non-resident shall not come under the wealth tax bracket.
The writer is executive director at Nangia & Co.