Residential status in India is dynamic and has to be determined for each financial year

A resident may either qualify as a resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR)


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My husband has been working in Abu Dhabi since January 2016. He was in India for 15 days, from 15 May to 1 June and will continue to work there for at least a year now. He gets the salary in a bank in Abu Dhabi, which he withdraws through an ATM and sends back to India via money transfer. This money is directly credited to his savings account in a nationalised bank in India. I wanted to know if this salary is considered a taxable income. Also, if he wishes to create a bank account in Abu Dhabi and then send money directly to India through the same bank, will that also be called a taxable income? Does he need to create a non-resident external (NRE) or non-resident ordinary (NRO) account here for the transfer?

—Rasika Dhawan

Given the facts, let me begin by first explaining how taxability in India is governed. Taxability in India depends on the following factors:

l Source of income

l 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 is dynamic and is required to be determined for each financial year (FY) (1 April to 31 March).

Residential status is determined on the basis of physical presence of an individual in India during the relevant FY and the last 10 FYs.

Basic conditions: An individual may qualify as a resident of India, if he satisfies any one of the following basic conditions.

l Stay in India during the FY is 182 days or more, or

l Stay in India during the FY is 60 days or more and in the 4 years immediately preceding the FY is 365 days or more.

Further, in case of an Indian citizen, who is leaving India for the purposes of employment outside India; or who is based outside India during the entire financial year, and who comes to India only for visit purposes, the aforementioned second ‘basic condition’ is not applicable.

A resident may either qualify as a resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR).

If both the additional conditions mentioned below are met, then such a resident individual would qualify as ROR, otherwise the individual would qualify as RNOR.

Additional conditions:

l The individual qualifies as a resident of India in at least 2 FYs out of the 10 FYs preceding the relevant FY, and

l Stay in India during the 7 FYs preceding the relevant FY is 730 days or more.

An individual qualifying as ROR is taxable on his global income and is required to report his global assets in his India tax return.

However, a non-resident or RNOR is liable to pay tax only on the India-sourced income or any income directly received in India.

Assuming that your husband had stayed in India for at least 182 days in FY16 and has satisfied both the above-mentioned additional conditions, then your husband would qualify as ROR for FY16 and would thus be taxable in India on his global income, including salary income earned in Abu Dhabi.

In relation to FY17, as your husband (an Indian citizen) would be based outside India during the entire FY, and is expected to be physically present in India for not more than 181 days during the FY17, he would qualify as a non-resident of India.

Accordingly, your husband would be taxable only on income earned in India or that received by him directly in India.

Thus, salary received by your husband in Abu Dhabi, for services rendered by him in Abu Dhabi will not be taxable in India.

Also, remittance of funds by your husband from Abu Dhabi to his Indian bank account shall not be taxable in India, irrespective of whether such remittance is by way of money (cash) transfer or from the Abu Dhabi bank account of your husband to his Indian bank account.

It may be important to note that your husband may qualify as ROR in his year of repatriation to India, in case he satisfies either of the aforementioned ‘basic conditions’ and both the ‘additional conditions’.

In case he qualifies as ROR, then he would be taxable in India on his global income, including salary earned in Abu Dhabi.

As your husband has gone out of India for taking up employment outside India, he would qualify as a person resident outside India (PROI) under the Indian foreign exchange regulations.

Accordingly, he would be required to re-designate his resident Indian savings bank accounts to NRO bank account.

Also, he may open an NRE bank account, that allows for efficient conversion and transfer of Indian and foreign currency both within and outside India.

Also, interest earned from NRE account is exempt from tax, under the Indian tax law, subject to certain conditions.

Sonu Iyer is tax partner and people advisory services leader, EY India.

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