" NRI Tax Plaining "

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"NRI Tax Plaining "

I know that my NRI (non-resident Indian) friends are looking forward to ‘The Money Quest’ to provide them proper guidance regarding their Indian finances particularly tax planning and investment planning. Although there is plethora of online information available on the subject of taxation, investments and foreign exchange management—as you must be quite aware—most of it is either outdated or incorrect.

So, starting with this post, Fisher promises to write at least one post every month to help NRIs (non-resident Indians) to plan and manage their investments, insurance and tax in India. Let’s start with tax planning for NRIs.

NRIs – Tax Planning

As a NRI, you already know that settling abroad doesn’t absolve you from tax liability under the Indian Income Tax Act. However, while it is not possible to completely escape the tax net, there are ways to minimize your tax liability under Indian tax laws.

While planning for your taxes as a non-resident Indian (NRI), you’re concerned with following basic questions:

1.Who is a non-resident Indian (NRI)? How to determine the NRI Status under various Indian Laws?

2. When is an NRI liable for tax in India?

3. When the tax is deducted at source (TDS) from the Indian income of an NRI? Or, what are the withholding tax provisions under Indian tax laws? Is it possible for NRIs to avoid TDS from their Indian Income?

4. If there’s no taxable income in India or if it is below exemption limit, do NRIs still require a PAN (Permanent Account Number) card?

5. What is the procedure for applying PAN card in India?

6. Is there any special tax concessions available to NRIs under the IT Act?

7. What are Tax Treaties or DTAAs? How do NRIs avoid double taxation of Income?

8. If Indian income of an NRI is taxable, is it mandatory to file tax returns in India?

9. How do NRIs file IT returns in India?

10. How to plan residential status of NRIs to minimize tax liability in India

Replies (2)

Guest

It’s very important that returning non-resident Indians (NRIs) know the tax implications in advance before their arrival in India so as to better plan their tax affairs.

In continuation of part 1:NRI tax planning residential status, this post will explain how to maintain your NRI status even after coming back to India and how to minimize your tax liability even after losing your NRI tag for a particular financial year (FY) under Indian Income Tax Act, 1961.

Residential Status: Year of your final return to India

To maintain your NRI status (under tax laws) in the year of your final return to India, you’ve to ensure that

i). Your stay in India during the financial year (FY) of your return is less than 60 days, or,

ii). If your stay in India during the FY of your return is exceeding 60 days but is less than 182 days, then further your total stay during last 4 FYs doesn’t exceed 364 days.

Once your stay in India during the FY of your return exceeds 181 days, you lose the status of non-resident.

So if you’re a returning NRI, ensure that you return to India on or after 1st Feb (Feb 2nd in case of a leap year) of a FY so as no to lose your non-resident status. However, if your aggregate stay in India during 4 preceding financial years doesn’t exceed 364 days, then you may return to India anytime after September 30th of the relevant year without losing your non-resident status under IT Act.

For example, if you’re planning to return back to India during current financial year (i.e., 2009-10), the day of your arrival in India should depend upon your total stay in India during last 4 financial years (i.e., FY 2005-06 to FY 2008-09). If it exceeds 364 days, you should arrive only in the month of February or March 2010 and if it doesn’t exceed 364 days, then you can arrive here anytime from October 2009 onwards.

Another Escape route after becoming resident in India

However, even if you lose your NRI status under the IT Act during a particular FY, there’s nothing to worry about. In such cases, Indian IT Act provides you another escape route to avoid paying tax on your foreign income.

[Note: The following discussion is not relevant for those returning NRIs who won’t have any foreign income after their arrival in India.]

If you’re not a ‘non-resident’ (NR), means that you’re a resident in India for tax purposes. Now, resident tax payers are further divided into two sub-categories: ‘resident and ordinarily resident’ (ROR) and ‘resident but not ordinarily resident’ (NROR).

Guest

According to the Income Tax Act, 1961, once an individual becomes a resident in India during a particular financial year due to his/her crossing the threshold limit of physical stay (as discussed in the previous post: NRI tax planning residential status, he further needs to determine whether he would qualify as resident and ordinary resident (ROR) or resident but not ordinary resident (RNOR) based on his residential status of past 10 years.

How to determine whether you’re ‘ordinary resident’ or ‘not-ordinary resident’?

To acquire the status of ‘resident but not ordinary resident’ for a particular FY under Income Tax Act, 1961, you’ve to make sure that you satisfy either or both of the following two conditions as laid down in section 6(6)(a):

a). You’ve been ‘non-resident’ in India in 9 out of 10 FYs immediately preceding the relevant FY.

b). Your total period of your stay in India during the 7FYs immediately preceding the relevant FY is less than 730 days.

In other words, if you qualify as a resident in India for at least 2 out of 10 FY preceding the relevant FY AND you’ve been in India for at least 730 days during 7 years preceding the relevant FY, then you become a ‘resident and ordinarily resident’ (ROR) in India and there is no escape from paying taxes on your foreign income.

Usually, an NRI coming back to India after a decade long overseas stint will qualify as ROR only in the third year. In other words, a returning Indian who has been a Non Resident in India for 9 years or more (during past 10 years preceding the relevant FY), then for 2 successive years he shall be a resident but not ordinary resident (RNOR).

But what’s the significance of this distinction between ‘ordinary residents’ and ‘not-ordinary residents’?

While in the hands of ‘ordinary residents’ in India, the entire world income is taxable, the foreign income of ‘non-ordinary residents’ is taxable only if it is

i). Business income and business is controlled from India, or

ii). Professional income from a profession set up in India.

Rest all kinds of foreign income is exempt in the hands of ‘not-ordinary residents’ in India similar to exemption provided to non-residents. Put another way, impact of being ‘resident but not ordinarily resident’ in India for tax purposes means that all your passive foreign income (income earned on overseas assets)such as interest, dividend, rent etc. would not be taxable in India (except business or professional income as specified above).