Taxation for Foreign Nationals in India

Over the past few years, India’s rapidly growing infrastructure, industry, and services sectors have opened up its economy to greater foreign investments and multinational corporations.

This development has led to numerous employment opportunities for foreign nationals working in skilled and specialized roles in the country. However, foreign nationals moving or planning to work in India often find it challenging to understand their tax obligations in the country.

In this Q&A session, we speak with International Business Advisory Manager Krishan Aggarwal to discuss some of the commonly asked questions that we receive from our subscribers related to taxation for expats in India.

Who is a foreign national in India? Are foreign nationals liable to pay taxes in India? 

• Any individual who is not a citizen of India is considered a foreign national;
• Taxation of Individuals (incl. foreign nationals) is based on source of income and the residential status (irrespective of citizenship);
• Residential status is determined based on number of days of stay in India during previous financial years (financial year April 1 to March 31), regardless of the purpose of stay.

What is the concept of residential status for determining tax liability under the Indian Income Tax Act, 1961?

Income tax for expats in India is determined based on their residency status. Individuals can be divided into following categories based on their residency: 

Resident - An individual is said to be a resident in the tax year if he/she is:

• physically present in India for a period of 182 days or more in the tax year (182-day rule), or
• physically present in India for a period of 60 days or more during the relevant tax year and 365 days (or more) in aggregate in four preceding tax years (60-day rule)

If none of the above two conditions are met, the individual is said to be a Non-Resident (NR) in that tax year.

Resident and Ordinarily Resident (ROR) - If a taxpayer qualifies as a resident, the next step is to determine if she or he is a ROR or Resident but not ordinarily resident (RNOR). These individuals are taxed on their worldwide income. An individual would be ROR if both of the following conditions are met:

• Has been a resident of India in at least 2 out of 10 years immediately previous years; and
• Has stayed in India for 730 days or more in 7 immediately preceding year

Resident but Not Ordinarily Resident (RNOR) - If the individual qualifies as a resident only and does not satisfy the above conditions, she or he will be known as a resident but not ordinarily resident (RNOR). These individuals are taxed on their income sourced or received from India, or from an income derived from a business set up or controlled in India. Further, with effect from FY 2020-21, the Finance Act, 2020 has inserted the following two more situations wherein a resident person is deemed to be ‘Not Ordinarily Resident’ in India:

• An Indian Citizen (passport holder) or a person of Indian origin whose total income exceeds INR 15,00,000 (other than income from foreign sources) during the previous year and who has been in India for a period of 120 days or more but less than 182 days;
• Deemed Resident: Effective 01 April 2020, a concept of deemed residency has been introduced. An Indian citizen having India-sourced taxable income exceeding INR 15,00,000 during the relevant tax year will be deemed to be a resident of India if one is not liable to tax in any other country by reason of domicile or residence or any other criteria of similar nature. Further, such an individual will qualify as RNOR in India for the relevant tax year.

Non-resident - If none of the conditions specified for residency are met, then the individual will qualify as a non-resident.

Which categories of income are taxable in India?

All income received or accrued in India is subject to taxation. Below are the types of incomes that are taxable in India:

• Employment income: Salaried income relating to services rendered in India is considered to accrue or arise in India regardless of where it is received or the residential status.

• Business income tax rules for expats: All individuals who are self-employed or involved in business controlled or setup in India are subject to tax in India.

• Expat investment income: Investment income earned by the foreign nationals are taxed in the following manner (all must be declared via expatriate tax returns):
  • Dividends earned from Indian companies is taxable in the hands of the individual shareholders
  • Dividends received from foreign companies are subject to taxation in the hands of shareholders at the normal tax rates

• Expat Directors' Fees: Directors' fee is taxed at the usual progressive rates. Tax is required to be withheld at source from directors' fees paid to residents.

• Expat rental income: Rental income received by an individual from leasing of the house property is taxable at the value determined in accordance with specific provisions subject to deductions.

What is the concept of Double Taxation and how can it be avoided?

Expatriates often worry about “double taxation”, which means paying taxes in two different countries on the same income.

The Double Tax Avoidance Agreement (DTAA) is a tax treaty signed between two or more countries to help taxpayers avoid paying double taxes on the same income. A DTAA becomes applicable in cases where an individual is a resident of one nation but earns income in another.

 Taxpayer can take the help of Double Tax Avoidance Agreement (DTAA) for incomes that can be taxable in both the countries that is India and the other country and avoid paying tax in one of the countries. He or she will then only be liable to pay tax for that income in one country.

India’s Double Taxation Avoidance agreement is with over 88 countries, however, 85 are in force presently.

What do we need to keep in mind while filing taxes?

Filing of taxes may be challenging for foreign nationals due to the presence of multiple tax regimes and a different tax system from their home country. It is advisable for individuals to not wait for the last minute in order to file their returns, as it might turn out to be a lengthy process depending upon the particulars of a case (sources of income, exemptions types and proofs, correctness of data, among others), and hurrying may lead to unnecessary mistakes leading to possible penalties.

Few points to keep in mind while filing an income tax return:

1. Proper calculation and declaration of taxable income is important to avoid any discrepancy
2. Correct Income Tax Return form needs to be filled with accurate information
3. Timely preparation and filing of all the mandatory documents is vital

Foreign Nationals in India should be aware of the basic provisions affecting their taxation and should plan in advance to reduce their tax burden.

If you are looking for assistance in your India taxation matters, please do not hesitate to contact us.