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Emigrating? Here’s a ready explainer on income tax implications

Compliance with various tax laws including provisions on residential status and global income will help those migrating overseas to avoid long-drawn inquiries and litigation with the Indian authorities

October 22, 2021 / 02:10 PM IST
Representational image. The EB-5 visa is one way for eligible candidates to get permanent residence in the US by making an investment. Of late, there have been a few changes in the more popular Regional Centre Program for EB-5.

Representational image. The EB-5 visa is one way for eligible candidates to get permanent residence in the US by making an investment. Of late, there have been a few changes in the more popular Regional Centre Program for EB-5.

In the recent past, we have seen more Indians migrating abroad. This increased migration is due to factors including personal, healthcare, education and economic considerations.

Emigration and starting life afresh is not an easy decision. The difficulty is compounded by the plethora of income tax laws, both in India and the destination country. Broadly, the key tax issues consist of change in residential status, taxability of global income, tax collection at source, outward remittances, and disclosure requirements in tax return forms, among others.

The first issue that prospective immigrants should be aware of is the definition of resident. A resident is an individual whose stay in India is either 182 days or more during a financial year (FY) or 60 days or more during an FY along with 365 days or more in the four FYs immediately preceding the relevant FY.

Further, an individual could be ‘ordinarily resident’ in India or ‘not ordinarily resident’ in India, depending on the fulfillment of additional conditions.

There are certain exceptions when the 60-day threshold is substituted by 182/120 days, such as when an Indian citizen leaves India in a FY for the purpose of employment abroad or an Indian citizen/Person of Indian Origin (PIO) from outside India comes on a visit to India.

In the year of migration, the residential status of the individual in India might undergo a change, depending on the date of departure, the number of days present in India in such a year, and the purpose of leaving.

If someone leaves India for employment abroad on November 1, 2021, his stay in India is likely to have been for more than 181 days in the year of departure and hence he/she would likely qualify as a resident (assuming the total stay in the preceding seven FYs was 730 days or more).

In case the departure date was May 1, 2021, the stay in India was likely to be less than 182 days in the year of departure and hence the likely residential status would be that of a non-resident.

There is also a possibility that an individual could qualify as a resident of both India as well as the foreign country in the year of departure, thereby leading to potential double- taxation of income.

In such a scenario, one can take recourse to the Double Taxation Avoidance Agreement (DTAA), if any, entered by India with the destination country to mitigate double taxation on the basis of the facts and circumstances of the case and subject to prescribed conditions. Prominent nations with which India has signed DTAAs include the US, the UK, Canada, Germany, Japan, Australia, Singapore and Switzerland.

What happens when you visit India after settling abroad?

The law allows you to stay 182 days before you are classified as a resident during the year of ‘visit’ to India. This extended threshold of 182 days is available only to Indian citizens and PIOs.

However, if you are a citizen or PIO whose annual income (other than income from foreign sources) exceeds Rs 15 lakh, then the threshold stands reduced to 120 days. This change was brought about by the Finance Act, 2020, to curb the potential misuse of provisions.

During the Covid-19 pandemic, the definition of ‘visit’ assumed more importance for NRIs who travelled to India for a limited period but could not return to their overseas country due to suspension of international flights.

So, does a visit of over 182 days (or 120 days if income exceeds Rs 15 lakh) make one liable to pay income tax in India?

This is a gray area. The term ‘visit’ has not been defined under the Income-tax Act and is subject to interpretation. Based on legislative history, the interpretation of the term ‘visit’ for an Indian citizen/PIO who is based outside India alludes to visiting India to oversee personal investments/meet relatives/medical reasons/casual visits/leave.

Another area one should pay attention to is the tax implication of sending money abroad.

Before emigration, resident high net worth individuals could use the liberalised remittance scheme (LRS) route for outward investments of up to $250,000 per FY in securities and property, as per the Foreign Exchange Management Act, 1999. Sending money overseas under LRS beyond the prescribed limit would require prior approval from the Reserve Bank of India through an authorised dealer. Any contravention of the Act’s provisions could invite various implications (penalties and prosecution).

Also, with effect from October 1, 2020, an authorised dealer is required to collect tax at source at the rate of 5 percent on any amount or aggregate of amounts remitted outside India, other than for the purpose of purchasing an overseas tour programme package, under the LRS route if it exceeds Rs 7 lakh in any financial year. Credit for the tax collected at source will be available at the time of filing income-tax returns. Thus, it may result in a cashflow constraint at the time of remittance.

Apart from this, the government recently mandated several disclosures so that there is no under/non-reporting of income and assets. This requirement must be borne in mind, especially by taxpayers who have emigrated and possess assets or accounts overseas.

Some of the amendments in this regard include enactment of the black money law, mandatory disclosure of foreign income and assets in tax return forms and execution of Foreign Account Tax Compliance Act agreement with the US government to ensure seamless exchange of information across nations.

It is pertinent that emigrants are adequately aware of the aforesaid aspects and be tax-compliant. This will assist them in avoiding exposures under Indian tax law as any slip-up may lead to long-drawn inquiries and litigation with the Indian tax authorities as well.

Parizad Sirwalla is partner and head, global mobility services - tax, KPMG in India
Parizad Sirwalla
first published: Oct 22, 2021 02:10 pm

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