Determining Tax Liability for Foreign Nationals Working in India
By Tracie Sloop Frost
In general, foreign nationals working in India are liable for Indian income tax. They may also be liable for capital gains tax on disposal of capital assets in India. Whether an individual is liable to pay Indian income tax is dependent on the foreign national’s physical presence in India, regardless of citizenship or the purpose of the stay.
India has three levels of residency for tax purposes:
1 – Non-resident
2 – Resident but not ordinarily resident (RNOR)
3 – Resident and ordinary resident (ROR)
Non-residents for income tax purposes are taxed only on India-sourced income. In order to qualify as a non-resident, the individual must have spent less than 182 days in India during the tax year. Additionally, the individual cannot have been present in India for more than 365 days during the last four years preceding the relevant tax year.
Residents pay income tax based on whether they meet the qualification for RNOR or ROR. The distinction between RNOR and ROR is an important one because RORs are taxed in India on their worldwide income, while RNORs are taxed only on their India-sourced income.
In general, if an individual spends 182 days or more during the tax year in India, that person will be considered an Indian resident for tax purposes. Additionally, a foreign national who has been present in India for at least 60 days but less than 182 days in the relevant tax year, and has been present in India the last four tax years preceding the relevant tax year for an aggregate of 365 days or more, will be considered a resident for Indian tax purposes during the relevant tax year. Since the Indian tax year runs from April 1 to March 31, a foreign national who comes to India on or before September 3o will be a resident for that tax year, since that individual will be in India for 182 days during the tax year.
Resident but not Ordinarily Resident
A person who qualifies as a resident for any tax year is treated as a RNOR if the following two conditions are met:
1 – the individual has been a non-resident in India for nine of the past 10 tax years; and,
2 – the individual has during the 7 tax years preceding the relevant tax year been in India for a total of 729 days or less.
An individual who has RNOR status is taxed only on India-sourced income.
Resident and Ordinary Resident
Any resident who fails to meet both conditions for RNOR is considered a resident and ordinary resident for the relevant tax year and is taxed on world-wide income.
Foreign nationals should use careful tax planning to avoid becoming a ROR in India in order to avoid paying taxes on worldwide income.
Source of Income
Taxable compensation includes salary, wages, allowances (such as reimbursement for personal expenses like housing, transportation, and education payments), and other cash compensation for services rendered in India, regardless of whether salary is received in India or whether the employer is outside India. Taxable compensation also includes income tax paid by the employer on behalf of the employee and certain perquisites such as a car and driver provided by the employer.
Income that is received or accrued in India may also be subject to income tax. Additionally, income that arises outside India is subject to income tax for individuals who are ROR in India.
Foreign nationals are permitted to maintain foreign currency accounts outside India and receive their entire salary outside India as long as full taxes are paid on any salary accrued in India. Foreign nationals may also open bank accounts in India, and funds can be moved into those accounts from sources outside India. However, individuals must use care when making transactions involving non-employment income and their Indian bank accounts. If non-employment income is earned on investments outside India and is subsequently transferred to an Indian bank account, it will not be taxable in India. If the non-employment income is directly remitted to an Indian account, it is likely to become taxable in India.
Other types of non-employment income taxable in India include long and short-term capital gains earned on the disposal of capital assets situated in India, royalties payable by an Indian concern, and payments of interest on Indian infrastructure debt funds.
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