NRIs should check their tax residency certificates for smoother compliance

Understanding tax residency rules and maintaining proper documentation is imperative to ensure smooth tax compliance

The Income-Tax Appellate Tribunal (ITAT), Delhi bench, recently ruled in favour of Devi Dayal, who had been deputed by his employers to work on a project in Austria. The ITAT ruled that salary and allowances earned abroad by a ‘non-resident’ for services rendered overseas are not taxable in India.  The employer disbursed both the salary and compensatory allowance overseas, with the allowance accessible through a credit card valid only in Austria.

“Since he had failed to furnish a Tax Residency Certificate (TRC) from Austria, the tax authorities deemed the allowances taxable in India. However, the ITAT ruled in the taxpayer’s favour, stating that since the services were rendered outside India, the salary was not taxable in India,” says Varun Chablani, an international tax lawyer.  

Many taxpayers find the tax residency rules perplexing. “Under Indian tax laws, tax incidence arises based on residential status, which in turn depends on the number of days spent in India,” says Vivek Jalan, partner, Tax Connect Advisory.

Who is a resident?

A person is a tax resident of India if he is physically present in the country for 182 days in a financial year or if he spends 60 days during the relevant period and 365 days in the four immediately preceding financial years.

“Once an individual qualifies as a resident, the next step is to determine if he is a Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR),” says Megha Jain, tax expert, Cleartax.

A person qualifies as an ROR if he has been a resident of India for at least two out of the 10 past years, and has stayed in India for at least 730 days in the seven immediately preceding years. If either of the above conditions is not met, the person’s residential status will be that of an RNOR.

“RNORs and NRIs are taxed alike, with their foreign income being exempt from Indian taxes unless it is derived from a business controlled from India or a profession set up in India,” says Ankit Jain, partner, Ved Jain & Associates.

Definition of NRI for tax purposes

If you don’t qualify as a resident or as an RNOR, your status is that of a non-resident. “Non-residents are liable for taxes in India only on income received, accrued, or deemed to be received or accrued in India,” says Rishab J, advocate, Shivadass & Shivadass Law Chambers.

Residents are taxed in India on their global income, while NRIs are taxed only on their income that accrues or arises in India. Says S R Patnaik, partner (head-taxation), Cyril Amarchand Mangaldas: “An NRI’s salary is taxable in India if the services are rendered or performed in India since it is considered income earned in India. If salary is paid for services rendered outside India, it is assumed to have been earned outside India.”

While considering residency for individuals who have spent more than 60 days outside India, most of the tax disputes arise over the nature of work being undertaken. 

“While the tax authorities allege that the person has been outside India not for ‘employment’ but as an investor or promoter, the individual claims that he is, in fact, an employee,” says Kishore Kunal, an advocate.  

A recent judgement states that “employment” lacks a technical definition, implying that employment abroad includes self-employment or starting a business or profession overseas.

Resident on temporary foreign assignment

Many multinationals in India send employees overseas, making them liable for taxes in that country. “Before filing an income tax return (ITR) in India, residents must submit Form 67. They can then claim Foreign Tax Credit (FTC)  for taxes paid abroad,” says Rishab.

Avoiding double taxation

To shield NRIs from double taxation, India has signed a Double Tax Avoidance Agreement (DTAA) with over 80 countries. “DTAA offers protection to those living abroad and having an income in India. DTAA may cover all types of income or only a few specific ones. Both the rules and the tax rates differ from one country to another,” says Rajarshi Dasgupta, executive director, Aquilaw.

Non-residents eligible for DTAA can claim its advantages only with a Tax Residency Certificate (TRC) from the tax authority of the country in which they reside.

“Non-residents are required to furnish some additional information in Form 10F electronically,” says Suresh Surana, founder, RSM India. Form 10F is a declaration that non-residents need to file in India to provide necessary details to the Indian Income-Tax (I-T) authorities, ensuring that they are eligible for DTAA benefits.

Tax savings for NRIs

NRIs are entitled to certain exemptions and deductions under the old tax regime, but not under the new one. “By investing in specified instruments like NRE (Non-Resident External) accounts, and select mutual funds, NRIs can avail of tax benefits. They can also explore deductions under Section 80C and other sections of the I-T Act,” says Jain.

Finally, experts say NRIs’ salaries should be structured in such a way that double taxation is avoided. “If double taxation is unavoidable, then maintain proper records to ensure NRIs get tax credit in India,” says Patnaik.