Tax benefit can be claimed under DTAA to avoid double taxation on income earned outside of India

Residential status is dynamic and is required to be determined for each financial year


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I am moving to Sydney in December this year for a project. Till then, I will be getting my India salary and after my move, I will get both my India salary and the wages in Australia. How will I be taxed for financial year (FY) 2016-17?

—Neeraj Kulshreshtha

Taxability in India depends on the following factors:

►* Source of income

►* 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 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 last 10 FYs.

For FY17, you will most likely qualify as a resident and ordinarily resident (ROR) in India as:

(a)Your stay in India during FY17 would be 182 days or more; and

(b)Your stay in India during the preceding seven FYs would be 730 days or more; and

(c)You would have qualified as a resident in India for at least two FYs out of the 10 FYs preceding FY17.

Thus, salary income earned in India and Australia will be taxable in India during the FY17. To avoid double taxation of salary earned in Australia, benefit may be claimed under the Double Taxation Avoidance Agreement (DTAA) between India and Australia. Typically, benefits available under the DTAA in your case would include claiming credit of tax paid in Australia against tax payable in India on the doubly taxed income.

I am a non-resident Indian (NRI). Can I buy a commercial property in India with my brother? What will we be taxed? I plan to move back to India and let out this property.

—Chetan Varma

Non-resident Indian, or NRI, is a term that is referred to in the Indian exchange control law. Under the exchange control law, an NRI is a person resident outside India, who is a citizen of India.

Persons resident outside India include those who have gone out of India for the purpose of employment or for business, or for any other purpose in such circumstances as would indicate their intention to stay outside India for an uncertain period.

Under the exchange control law, an NRI is permitted to acquire immovable property in India, other than: agricultural land, plantation property and farm house.

Any income from letting out this property will be taxable in India, even in case you are settled outside India and qualify as a non-resident under the income-tax laws in India.

Please note that determination of residential status is different under income-tax laws and exchange control laws. It is determined on the basis of physical presence of an individual in India during the relevant FY and last 10 years. Further, residential status is required to be determined for each financial year.

As the property will be jointly held by you, rental income from this property would be taxed under the head ‘income from house property’ in the hands of both the co-owners in the proportion of investment made.

A deduction of municipal tax paid during the financial year and standard deduction of 30% is available against rent received. Interest payable for a loan availed for purchase of the property is also available as a deduction against the rental income.

I have been investing in equities through my non-resident external account in India and want to sell some of the shares. How will I be taxed?

—Sunetra Reddy

Capital gains arising from sale of shares of an Indian company are taxable in India. The taxability will depend on the nature of asset, holding period and residential status of seller. In your situation, since you are holding an non-resident external (NRE) account in India, we understand you qualify as a Non Resident of India under the Income-tax law of India.

Determination of residential status is different under Income-tax law and exchange control law. It is determined on the basis of physical presence of an individual in India during the relevant FY and last 10 years. Further, residential status is required to be determined for each FY.

Capital gain on sale of equity shares listed on a recognised stock exchange in India will be classified as long term if held for more than 12 months. Long term capital gains from sale of listed equity shares are exempt from tax provided Securities Transaction Tax (STT) has been paid. Short term capital gain earned by a Non-Resident, on sale of listed equity shares (where STT has been paid) is taxable at 15%, plus applicable surcharge and education cess, without giving the benefit of maximum exemption limit (currently Rs2.5 lakh for FY17).

Capital gain on sale of unlisted shares will be classified as long term if held for more than 24 months. Long- term capital gain from sale of unlisted shares earned by a non-resident are taxed at 10% plus applicable surcharge and education cess, without giving the benefit of indexation.

Tax exemption can be availed if the LTCG is re-invested in specified bonds or a residential house in India, subject to satisfaction of other prescribed conditions.

Short-term capital gains on sale of unlisted equity shares are taxable at slab rates, plus applicable surcharge and education cess.

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

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