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Residential status and foreign income tax treatment

TKKKKKK 
on 18 August 2014

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Hi friends,

If you are individual and have foreign income. You must become aware of tax treatment of foreign income.In this article, I have explained how to determine residential status for individual and tax applicable as per residential status.

Know your residential status:

Residential status of a person is a big factor for the determination of taxability of foreign income.Residential status can be determined by the number of days you are in India during previous year.

Resident:

An individual is resident in the previous year if he fulfills following conditions:

1. He has been in India for 182 days or more days during the previous year. OR

2. He has been in India for 60 days or more during the previous year and 365 days or more during the last 4 years preceding the previous year.

Exemption:

Only condition 1 will be applicable in following cases:

1. Person of Indian origion who resides outside India and come to India on a visit in previous year.

2. Indian citizen who go outside india during previous year for employment purpose or as a crew member.

3. When employee is transferred outside India. In all these cases, a person shall be considered resident if he has been in India for 182 days or more.

Non Resident:

If an individual does not fulfill above conditions, he is non resident for taxation purpose.

For resident, Indian and foreign income is taxable. That’s why you have to plan your visit to India or outside India accordingly. If you are included in above three category, stay in India for 181 days or less so that your foreign income will not become taxable.

Example:

Mr. Robot has in India for 51 days during the financial year 2013-14. He went to U.S. on May 21, 2013. He never went outside india before.

Residential status: Resident.

Though he has been in India for less than 60 days during previous year, he has been in India for more than 365 days during 4 last years (from 2009-10 to 2012-13) from previous year.

In above case, if Mr. Robot has visited India for first time and he has been in India for 51 days, his residential status will be Non resident.

Resident and ordinary resident: An individual is resident and ordinary resident if he fulfills above conditions and he also fulfills below mentioned conditions:

1. He has been resident in India for at least 1 year out of 10 preceding previous years and

2. He has been in India for 730 days or more during 7 preceding previous years.

Resident but not ordinary resident:

If an individual does not fulfill additional conditions mentioned above, he is resident but not ordinary resident.

Income treatment in various cases

Income ordinary resident Resident but not ordinary resident Non resident
Accrued and received in India (indian Income) Taxable Taxable Taxable
Accrued in India (indian income) Taxable Taxable Taxable
Received in India (indian income) Taxable Taxable Taxable
Income is neighter accrued nor received in India (foreign income) Taxable Taxable only if business is controlled wholly or partly in India or profession is set up in India Non taxable

Now if your foreign income is taxable, you have to calculate tax on that income and pay to government.

If there is any DTAA exists between India and country you visited, you can get exemption as per DTAA agreement or pay tax as per agreement.

If there is no DTAA, you can still claim exemption u/s 91.

You can take benefit of section 91 if you are resident and you have paid tax in foreign for income received during previous year.

Steps for claiming section 91 benefit:

1. Calculate gross income including foreign income.

2. Reduce it with deduction under chapter VI-A.

3. Calculate income tax payable

4. Find average rate of income tax. Average rate=Total tax/total income

5. Calculate average foreign tax rate

6. Claim rebate from tax payable in India at the rate of  step 4 or step 5 whichever is lower.

Example:

Pranay is resident individual.Pranay has earned Rs. 2000000 from outside India during financial year 2013-14. His Indian income is Rs. 300000. Pranay is 32 year old. There is not DTAA between India and foreign country. Pranay has paid 20% tax in foreign country. His investment in LIC is Rs. 100000.

Calculation of tax payable by Pranay in India.

Step Particulars Amount
  Indian income 3,00,000
  Foreign income 20,00,000
1 Gross total income 23,00,000
2 Deduction under chapter VI-A 1,00,000
  Total income 22,00,000
3 Tax payable as per indian law 5,04,700
4 Average rate of income 22.94%
5 foreign tax rate 20%
6 Rebate/s 91 u at 20% 4,00,000
  Tax payable after rebate 1,04,700

I hope this article will help you to determine tax on foreign income. Your views and comments are welcomed.

Thanks for reading

CA Tarannum Khatri


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