Taxability in India depends on your residential status for each relevant tax year. The scope for taxation gets determined based on whether you are a resident or a non-resident (“NR”). An NR is liable to tax on both India sourced income and/ or income received in India. Reporting of foreign income/ assets is not required. Having said this, there are still a lot of things that you should take care of while offering income or filing the return of income.
This year, the Budget has proposed changes in the residency rules, which may impact non-residents. Citizens of India or a Persons of Indian origin who are settled outside India, used to enjoy non-resident status, when their stay in India did not exceed 181 days during the relevant financial year. The Budget has proposed reducing this threshold to 119 days. In other words, where the stay of such individuals is 120 days or more during the relevant financial year and 365 days or more during the past four financial years, they will become resident of India. Further, for residents to be not ordinarily residents (NOR), the relevant conditions are also proposed to be changed. Residents will be considered NORs, where they are non-residents in seven out of the past 10 financial years. Otherwise, they will become ordinarily residents (ROR).
The tax consequence of tax residency is that NRs and NORs are taxable in India on their India-sourced income or income they receive in India, while RORs are taxable in India on their global income.
This year, the Budget has also introduced the concept of Deemed resident. Citizens of India may qualify as residents of India if they are not liable to tax in any other country or territory by reason of domicile, residence or any other similar criteria. This may have the consequence of making NRs as deemed residents of India. Further clarifications are awaited as the Government clarified that it only intends to tax individuals on their India-sourced income. Where one is a resident of an overseas jurisdiction and not paying any taxes in that country needs to await updates on this aspect.
-Technically, you are required to file a return of income where your income exceeds the taxable threshold of Rs 250,000. However, if you only have “investment income” and/ or long-term capital gains from the foreign exchange assets in India as prescribed for NRIs and all the taxes due on the same have already been withheld at source, you have an option not to file the return of income.
-Even if your case falls under above beneficial provision, you may still be required to file a return. For example, you are supposed to file a return of a deceased individual where you are the legal heir or need to carry forward any loss (other than house property loss) or you need to claim refund of excess taxes deducted.
-If you have not filed your tax return as yet, you may still do so by March 31, 2020 only. In case you miss this timeline, you will not be able to file the return
While the Government has already notified ITR 1 and ITR4 for the FY 2019-20, ITR 2 and other forms are yet to be notified. You must ensure that accurate details are provided in these forms in accordance with the instructions applicable to these forms. The Government had expanded the disclosure requirements for NRIs last year and a few of such requirements are listed below:
-As a citizen of India/ person of Indian (“POI”) origin, you need to put in the number of stay days in India during the current and past four years.
-Details of your overseas residency, jurisdiction of residence and tax payer identification number to be disclosed. If you do not have a TIN, mention your passport number instead of TIN and the name of the country in which the passport is issued should be mentioned as the ‘jurisdiction of residence’.
-If you are a director in any company (including foreign company), details of such companies also need to be given in the return form.
-In case you hold unlisted shares, comprehensive details such as opening balance, shares bought and sold during the year and the closing balance are required to be reported in the return form. Important point is to cover reporting of only those shares which are unlisted anywhere i.e. unlisted in India and/ or unlisted outside India. Shares listed on any overseas stock exchange would also be construed as ‘listed’ only and will not form part of this reporting.
-If your total income exceeds Rs. 50 lacs, take care to make appropriate disclosure in Schedule assets and Liabilities (AL) for all the assets and corresponding liabilities you hold as on March 31 of the tax year. Such assets include immovable property, financial assets etc.
-There could be various incomes that are exempt in your hands (dividend/ NRE interest etc.). Although not taxable in your hands, the details of such income are to be duly reported under the relevant schedule in the return form along with the applicable section to each income.
It is important that you estimate your taxable income at the start of the year only to find out if you are required to pay advance tax under prescribed installments and avoid interest liability later on. If your tax liability is Rs10,000 or more for the year, you have the obligation to pay taxes in advance.
Lower withholding certificate
If you have sold any property located in India and made gains or have any property in India and get rental income, you will be liable to tax in India. The buyer of property or payer of rental income respectively is required to deduct applicable taxes before making payment to you. However, there could be a situation that your actual tax liability may be lower than the amount to be withheld by the payer of the income. You may explore obtaining a lower tax withholding certificate from the tax authorities and provide the same to the payer of income, who will then deduct taxes in accordance that certificate. This will save you from excess withholding and claiming refund later after filing the return. Thanks to the elevated use of technology by the tax authorities and you can now make an online application for lower withholding certificate.
Beneficial Treaty Rate
If as a NR of India, you are resident of a country with which India has a tax treaty, you may choose to pay tax at specified in the treaty on the interest and dividend income, in accordance with the tax treaty provisions. However, a tax residency certificate (TRC) from the tax jurisdiction where you claim to be resident needs to be procured from the resident country tax authorities substantiating your residential status there. Details of such TRC are required to be provided in the return form. Before you make such a choice, you should also check your actual tax liability under the Income tax Act, 1961.Considering the tax differential and also the cost and administrative hassles to obtain TRC, you may decide whether to avail this treaty benefit or not.
It is important that you carefully preserve records of you high value transactions, investments in India or overseas and their sources. This will help you in future where you become ordinarily resident of India and need to disclose your overseas assets in your India tax return. That will help to respond quickly, where any question is asked by the India tax authorities at a later stage during audit.(The writer is Partner and Leader Personal tax, PwC India. Views are personal)