Residential status is different under income tax, exchange control laws

The onus for re-designation of the accounts is on the account holder


Pradeep Gaur/Mint
Pradeep Gaur/Mint

My wife and I have recently become permanent residents in the US. Both of us are above 70. Can we transfer our bank deposits under non-resident ordinary (NRO) account as required under law, during our next visit to India? Can we transfer our deposits from the NRO to non-resident external (NRE) account after 1-2 years? We know that tax would be deducted at 30.90% from the interest income from NRO deposits. Are the rates of taxes same as for resident Indians?

—Subramanian.V

Under the exchange control law, when a person leaves India for another country for the purpose of employment or for carrying on business or for any other purpose indicating his intention to stay outside India for an uncertain period, his existing accounts should be designated NRO accounts.

The onus for re-designation of the accounts is on the account holder. There is no prescribed time limit for the same under the exchange control law. You may transfer the deposits from NRO to NRE account within the overall limit of $1 million per financial year (FY). There is no time limit to transfer the deposits under the exchange control law. You may like to transfer the deposits soon, as the interest from NRE accounts is exempt from tax in India. Tax would be deducted by the bank on interest income from your NRO account at 30.90%, if you qualify as a non-resident in India, and at 10% if you qualify as resident in India under the income-tax law. Determination of residential status is different under income-tax law and the exchange control law. While tax deduction will be at 30.90% or at 10%, your interest income will be taxable at slab rates as follows:

l up to Rs2.5 lakh: 0%

l Rs2.5lakh to Rs5 lakh: 10%

l above Rs5 lakh but up to

Rs10 lakh: 20%

l above Rs10 lakh: 30%

The minimum exemption limit is Rs3 lakh for resident senior citizens aged 60 years or more but less than 80 years of age, at any time during the FY. The exemption limit is Rs5 lakh for resident very senior citizens aged 80 years or more at any time during the FY.

A surcharge of 15% will be applicable on income above Rs1 crore, and education cess and secondary higher education cess of 2% and 1% on such tax and surcharge.

I work for an Indian technology company. I was on an assignment in Singapore from 1 January to 10 July 2016. As Singapore has a January-December FY, I was a tax resident there and paid income tax. As I came to India on 11 July 2016 and will stay until 31 March 2017, I will be a tax resident in India and will have to file income tax, which will consider my income in Singapore. Can I claim an exemption under the Double Taxation Avoidance Agreement (DTAA) on the income in Singapore or do I claim credit on the amount of tax I paid in Singapore? As I am becoming tax resident in both countries, do I end up paying tax twice on the same income?

—Anshuva Sanyal

Your period of assignment in Singapore overlaps two FYs in India, FY16 and FY17.

Given the facts, you will qualify as resident and ordinarily resident (ROR) in India for FY16 and FY17.

For both FY16 and FY17, salary income from Singapore will be taxed both in India and in Singapore as you qualify as ROR of India. To avoid double taxation, either of the following benefit may be claimed under the DTAA between India and Singapore:

l exemption from tax in India on salary income earned in Singapore under Article 15(1) of the DTAA; or

l claim credit for taxes paid in Singapore against taxes payable in India on doubly taxed income under Article 25(1) of the DTAA.

The above benefit under the DTAA depends on residential status under the DTAA. If the individual qualifies as resident in both the countries, residential status under the DTAA depends on tests like where is the permanent home available, centre of vital interest (political and economic interests) and habitual abode.

If a person is a resident of Singapore under the DTAA, the individual may claim exemption from tax in India on salary income earned in Singapore. Tax residency certificate from Singapore tax authorities will also be required. If you qualify as a resident of India under the DTAA, you may claim credit for taxes paid in Singapore against taxes payable in India on the doubly taxed income. Most likely, you will qualify as resident of India under the DTAA. In such a case, you may claim credit for taxes paid in Singapore against taxes payable in India on the doubly taxed income as per the provisions of the DTAA.

Sonu Iyer is tax partner & people advisory services leader.

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