Many taxpayers may think that citizenship alone determines where and how they are taxed but that is not entirely true. Under Indian income tax laws, a person’s residential status often plays a bigger role in deciding tax liability than their nationality or passport status.
As a result, non-resident Indians (NRIs) and foreign citizens staying in India for long periods may be subjected to taxation depending on the number of days spent in the country and the nature of their income. Understanding this distinction is important because residential status determines whether only Indian income is taxable or whether income earned outside India may also be subject to Indian tax.
When does a foreign citizen or NRI become a resident taxpayer in India?
The Indian income tax law is based solely on residential status, which is calculated by counting the number of days spent in the country. Under Section 6(1) of the Income Tax Act, a foreign citizen becomes a “Resident” if they meet either of these conditions:
- They stay in India for 182 days or more during the financial year (1 April to 31 March)
- They stay in India for 60 days or more in the current financial year and have spent 365 days or more in India across the preceding four financial years.
For or persons of Indian origin visiting India, if their total income other than foreign-sourced income exceeds ₹15 lakh, they will be considered a resident if they have been in India for at least 120 days in the relevant financial year and more than 365 days in four preceding financial years, said Pranav Sai S, tax expert at ClearTax.
When does income not earned in India become taxable?
According to Sai S, Global income becomes taxable in India only when an individual transitions into a Resident and Ordinarily Resident (ROR) status. Indian tax law divides individuals into three categories:
- Resident and Ordinarily Resident (ROR): Global income is fully taxable in India.
- Resident but Not Ordinarily Resident (RNOR): Global income is not taxable, unless it is derived from a business controlled or profession set up in India.
- Non-Resident (NR): Global income is completely exempt from Indian tax.
If a foreign citizen qualifies as a “Resident” under Section 6(1), they must then determine whether they fall under the ROR category. If they do, the person will owe tax on their global income if they satisfy both of these conditions:
- They have been residents of India in at least 2 out of the 10 preceding financial years.
- They have been in India for a total of 730 days or more during the 7 preceding financial years.
“However, if the foreign citizen is just visiting India for one long trip (such as staying 200 days this year but never visited before), they fall under the RNOR category and their salary, rental income in their respective country, or global stocks will not be taxed in India,” the tax expert noted.
How are NRIs taxed on income earned in India?
Income earned in India, such as , salary for services rendered in India, or capital gains from Indian shares, is taxable for every person irrespective of their residential status, Sai S said. However, the rules differ as mentioned below:
- Slab rates and deductions: Non-residents are taxed at the same progressive tax slab rates as residents. Also, they cannot avail the benefit of tax rebate under Section 87A.
- Restrictions: Non-residents cannot invest in certain tax-saving instruments like PPF, SSY, NSC and also cannot claim 80TTA deduction.
- TDS (Tax Deducted at Source): For residents, TDS on rent or property sales is nominal (1% to 10%). For non-residents, TDS is high. If an NRI sells a house in India, the buyer must deduct TDS at the highest capital gains rate (plus surcharge and cess) on the entire sale price, not just the profit. However, they can claim a refund by filing an income tax return (ITR).
How DTAAs protect people from being taxed twice on such income?
Double Taxation Avoidance Agreements () ensure that a person does not suffer tax on the same income in two countries. For example, if a person earns rental income in India and at the same time he is a tax resident in Canada, then both countries can claim the right to tax this income.
“DTAA helps in determining the country that is entitled to the primary right to tax, and what relief is to be given,” said Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.
He added that the methods of relief is given through a tax credit and an exemption. “A tax credit means tax paid in one country is deducted from the tax that needs to be paid in another country. An exemption means certain incomes are not liable to pay tax again,” Maurya said.