For Indians who have relocated to the UAE, the absence of personal income tax in that country does not eliminate their tax obligations for income generated in India.
While the India–UAE double tax avoidance agreement (DTAA) provides relief in certain cases, several categories of income — particularly capital gains from certain assets — remain taxable in India.
Determination of Indian tax residency
An individual is treated as a tax resident of India if:
He / she is present in India for 182 days or more during the relevant financial year; or,
is present in India for 60 days or more during the year, and 365 days or more in the four immediately preceding financial years.
For Indian citizens or persons of Indian origin (PIO) visiting India, if the Indian income exceeds Rs 15 lakh, the threshold of 182 days reduces to 120. Further, Indian citizens not liable to pay tax in any other country may be deemed residents even if they don’t stay in India.
In such cases, individuals are generally classified as Resident but Not Ordinarily Resident (RNOR), which essentially means that India will tax only income that is earned or received in India, or arises from a business or profession controlled from India.
Also read: Planning to move to the UAE? Know the tax implications for your investments in India
India–UAE tax treaty benefits
Where the individual qualifies as a resident under the laws of both India and the UAE, the DTAA applies tie-breaker rules based on the location of a permanent home, centre of vital interests, habitual abode, and nationality.
A valid Tax Residency Certificate (TRC) from the UAE is mandatory to claim treaty benefits in India.
Capital gains on financial instruments
Equity shares:
· Gains exceeding Rs 1 lakh on listed equity shares held for 12 months or more are treated as long-term capital gains (LTCG) and taxed at 12.5 percent in India.
· Gains on listed equity shares sold within 12 months are treated as short-term capital gains (STCG) and taxed at 20 percent.
· No treaty benefit is available on such gains under the India-UAE DTAA.
Capital gains tax treatment for unlisted shares is similar to listed equity, except that unlisted shares require a 24-month holding period to qualify as long-term.
No tax on mutual fund capital gains
Mutual fund units are not treated as shares of an Indian company, and hence, capital gains arising from their redemption are eligible for exemption under the India–UAE DTAA. If the individual qualifies as a tax resident of the UAE and furnishes a valid TRC to the Indian authorities, such gains are not taxable in India.
Also read: Navigating double taxation: How NRIs can minimise tax implications on their incomes
Dividend income taxed @10 percent
Such income is taxed at 20 percent per Indian laws. However, thanks to the DTAA, NRIs in the UAE are taxed @10 percent for the same provided a valid TRC is submitted and the recipient is the beneficiary of the dividend.
Realty rules
Capital gains on the sale of property situated in India are fully taxable in India, regardless of tax residency under the DTAA.
- For LTCG (property held for over 24 months), a tax rate of 12.5 percent is applicable.
- For STCG (property held for 24 months or less), tax is charged at the individual’s applicable slab rate.
The above rates are also subject to applicable surcharge and cess.
Ankur Pahuja is the Co-founder and Leader - Americas at Legacy Growth
Rupali Ashar is a partner at Legacy Growth
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