Sunday, September 5, 2010

Income Tax for NRIs

As per the existing Income Tax laws, an NRI is liable to pay tax on global income if he is in India in that year for a period or periods amounting to 182 days.

Furthermore, in case an NRI resides in India for a period of 365 days or more over a period of four years prior to the assessment year, he is also liable to pay tax on his global income.However, the period of 60 days is extended to 182 days for an Indian citizen leaving India for employment. Similarly, the period of 60 days is extended to 182 days for an Indian citizen or person of Indian origin who, being outside India comes on visit to India. As a result, non-resident Indian citizens or persons of Indian origin (PIOs) are able to maintain non-resident status as long as their stay in India is less than 182 days during any financial year.

This may change once the direct tax code comes into effect. Under the latest direct tax code, a NRI will have to pay income tax on their global income if they stay in India for more than 60 days in a year. The present dispensation for taxation of global income if an NRI resides in India for 365 days or more over a four-year period has been retained in the proposed direct tax code.

In addition, the proposed direct tax code also intends to remove the 'Resident Not Ordinarily Resident (RNOR)' category. In effect, only two categories will remain: Resident and Non Resident.

There would be liability on a resident belonging to a country where the tax rate is lower than India and there is a Double Taxation Avoidance Agreement (DTAA) between both the countries. The non-resident would be considered a resident if the threshold limit of stay has been exceeded for the purpose of imposing tax. At present, India has comprehensive DTAAs with about 74 countries, including the USA, Singapore, UK, Thailand, South Africa, Saudi Arabia, New Zealand and Australia.

In the case of a resident of a non-treaty country, which India has no DTAA with, the tax burden would be higher if he exceeds the threshold limit of stay in India, Kumar said, adding that he has to pay tax on all the global income in India as well as the country of residence as per the prevailing tax laws of that country.

This is not good news for NRIs and in our view makes life more difficult for anyone coming from abroad to start a new buisness or even stay at his or her home for an extended duration. There are ways to increase the government income tax kitty but this does not look right. Any person should pay income tax to that country where he or she has earned his income from. With the proposed direct tax code, any NRI staying in India for an extended vacation (60 days in a year) will have to pay income tax to Indian government even though he would not have earned anything in India for those 60 days.


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