Many people who go aboard for work find income tax planning very complicated. This article will enlighten you about the tax rules for NRIs and compliances attached to it.
Indian laws have been made much simpler in case of NRIs but the issues remain because of different varieties of conditions that exist with different people. First step in tax planning is to ensure that people are not taxed twice just because they worked in two or more countries in a year and by different rules, they are expected to pay taxes on all their income. Let's look at the most common situations that people encounter in this context.
Indian citizen going to USA for work
The rules on Indian citizens going to a foreign country are very clear. If you have stayed in India for more than 182 days in a financial year, you are treated as resident Indian and are subjected to Indian tax laws. If you did not stay in India for more than 182 days, the tax authorities will check if you had stayed in India for 60 days in the current financial year and at 365 days in the last 4 years. If yes, you are subjected to Indian tax laws.
Hence, if you satisfy any of these conditions, you have to pay tax on Indian income. At the same time, you have to pay tax in India on global income. However, if your foreign income is given as allowance, you don't have to pay taxes in India on this allowance. If the foreign income is given as income, the taxes will be paid in India. As far as paying taxes to foreign country is concerned, it depends on the tax laws of the foreign country and the DTAA (Double Tax Avoidance Agreement). If the taxes are already paid in the foreign country, taxpayer can show this in India and avoid being taxed twice on the same income.
If you do not satisfy any of the conditions, you are considered non-resident for the financial year and there is no liability on your income earned in a foreign country. Your tax liability in India is only on the Indian income. The foreign country may require the person to pay taxes on global income. However, if the taxes are paid in India already, the taxpayer can show this in the foreign country and avoid paying taxes twice on the same income. The taxpayer doesn't have to declare his or her foreign income to Indian authorities.
NRI/PIO (Person of Indian origin having foreign citizenship) coming to India for work
Since the last couple of years, a new trend is observed among non-resident Indians and PIOs (Person of Indian origins). Many of them come to India to take up jobs and work here for longer terms. When the NRIs earn their salaries in India, they are taxed as per the Indian laws. The taxes will be paid to the Indian Government. However, the NRI will have to file two taxes; one in India, where taxes have to be paid and the other in USA, where no taxes are paid but the global income has to be mentioned in filing.
A note on DTAA (Double Taxation Avoidance Agreement)
Because of issues faced by people who move around various countries for work and assignments, there were voices on tax reform to be implemented among the countries. Owing to this, DTAA was created among nations. DTAA essentially helps people avoid paying taxes in two countries on the same income.
For example, it will be unfair to the taxpayers if he or she has to pay taxes on Indian income in India and USA both. Similarly, it would be wrong to pay to the Indian Government if taxes have already been paid in the foreign country on the global income.
There could be a situation, when according to prevailing laws of the countries; a person may be termed as resident for multiple countries at the same time. In such cases, the tax payers will be liable to pay taxes in all the countries on the global income. Thankfully, it doesn't have to be that way. Taxpayers can pay taxes in the country where they have earned the global income and can show to the other nations the same to avoid being taxed multiple times on the same income.
Example of DTAA
Let's take one example. Indranil is a software project manager. He has worked in India for more than 182 days in a financial year (say FY2011). Indranil goes to USA and works there for 45 days. At the same time, Indranil has worked in USA for more than 183 days in last 3 years including the current year (in this case calendar year 2011).
In such a case, Indranil is termed resident in both the countries. Indian law will demand that Indranil pay taxes to India on his Indian income as well as global (or US) income. At the same time, US law demands that he will have to pay taxes on US income as well as global (or Indian) income. It will be bad on the part of India and US to tax Indranil twice. Hence there is DTAA, by which Indranil has to file tax returns on both the countries and show the proof that the taxes have already been paid in either of these countries. For example, if Indranil has already paid taxes to US Government on US income, he can show this to Indian authorities while filing returns. Similarly, if Indranil has paid taxes to Indian Government on Indian income, he can show this to US authorities while filing the returns.
Though there are multiple ways to plan your taxes and save, avoidance of paying taxes multiple times on the same income is the first and most important step to obtain clarity on your taxes.