NRIs who receive all their salary abroad will not be taxed in India
I have been working in the UAE since 5 February 2014. Recently my company terminated our contracts and provided end of service benefits. My last date of working is 31 May 2017. The company is giving the following—April and May salary and house rent allowance (HRA); 3 months’ basic retention bonus; 2 months’ basic leave encashment; gratuity: 3.25 times the basic salary; and additional cash for termination in the form of 4 months’ salary as well as HRA. What will be my tax liability?
—Abdul Vasim Shaik
Taxability in India depends on the following factors:
(a) Source of income
(b) Residential status
Typically, source of income lies where the services are performed, or where the asset, from which the income arises, is located. Residential status in India is determined based on your physical presence in India in the current financial year (FY) (1 April to 31 March) and preceding 10 FYs. If the individual satisfies any of the basic conditions mentioned below, he would qualify as a resident, otherwise he would qualify as a non-resident (NR):
The basic conditions are:
a) Stay in India during the FY is 182 days or more; or
b) Stay in India during relevant FY is 60 days or more and 365 days or more in the four immediately preceding FYs.
A resident would qualify as a Resident and Ordinarily Resident (ROR) if both the below mentioned conditions are satisfied; otherwise he would qualify as a Resident but Not Ordinarily Resident (RNOR):
Additional conditions are:
a) Resident in India in two of 10 FYs preceding the relevant FY; and
b) Stay in the 7 years preceding the relevant FY aggregates 729 days or more.
An individual qualifying as ROR is taxable on his global income and is required to report his global assets and income in his India tax return. However, a person whose status is RNOR and non-resident is taxable in India only on income received in India or deemed to be received in India, and income accruing or arising in India or deemed to accrue or arise in India.
If you qualify as a non-resident in India and receive all salary outside India, it will not be taxable in India. If you qualify as ROR in India, the salary earned or received in the UAE will become taxable in India. Also, you will be required to report details of all your assets outside India in your Indian tax return. But you may claim the following tax exemptions as per India income-tax laws.
a) HRA: House rent allowance received is exempt from tax subject to least of the following:
i. 40% of salary, or
ii. Actual HRA received, or
iii. Excess of actual rent paid by the employee over 10% of salary.
b) Leave encashment: If this is received at the time of termination of employment it is exempt from tax subject to the least of the following:
i. Rs3 lakh (the maximum amount as specified by the government),
ii. Leave encashment actually received,
iii. 10 months’ salary (basic average salary of last 10 months),
iv. Period of earned leave standing to the credit in the employee’s account at the time of retirement multiplied by average monthly salary.
c) Gratuity: If this is received at the time of termination of employment, it is exempt from tax subject to the least of the following:
i. Half month’s salary for each completed year of service,
ii. Rs10 lakh,
iii. Actual gratuity received
Salary for the purpose of gratuity and leave encashment means average salary for 10 months immediately preceding the month of termination of employment. Salary will include basic salary, dearness allowance (if considered for computing all the retirement benefits) and commission based on fixed percentage of turnover achieved by the employee.
Sonu Iyer is tax partner and people advisory services leader, EY India.
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