Foreign income transferred to NRO account may not be taxable
A ‘Non Resident’ is not liable to tax in India for the income earned and received outside India
I am visiting India for my sister’s wedding. As I want to fund this ceremony, I am transferring a substantial amount to my NRO account. Will it be taxable? Do I need to carry any documents to avoid tax? I have income from rents in India and file taxes every year.
An individual qualifying as ‘Non Resident’ is taxable only on income which accrues or arises in India or is deemed to accrue or arise in India and income which is received or is deemed to be received in India. A ‘Non Resident’ is not liable to tax in India for the income earned and received outside India. Subsequent transfer of such income to NRO Bank account in India is not taxable in India.
Under the Income-tax law, an Indian citizen who, being outside India, comes on a ‘visit’ to India will qualify as Non Resident if the physical presence is less than 182 days in India. The term ‘visit’ is not defined in the Income-tax law.
Residential status is a self-determination process for each financial year basis physical presence in India. In case the income-tax return is picked up for audit and the residential status is challenged by the Income-tax Officer, the physical presence in India will need to be evidenced by the arrival/departure stamps in the passport. As an NRI, you may transfer your money to NRO account and there is no documentation required to substantiate residential status other than passport.
I became an NRI last year. While while working overseas, I also had a business there and earned income from it. As per law, I am an NRI on the basis of job and am resident outside India for more than 182 days. But would my business income also be treated as an NRI income for the purpose of Indian income tax rules? I was paying tax on this while I was a resident Indian.
Taxability in India depends on the following factors:
(a) Source of income;
(b) Residential status as per income-tax law
Typically, source of income lies where the services are performed, or where the asset, from which the income arises, is located. Residential status under the Income-tax law is determined based on the physical presence in India in the current financial year (FY) (1st April to 31st March) and preceding 10 FYs.
Depending upon physical presence in India, an individual could be:
(a) Resident and Ordinarily Resident (ROR)
(b) Resident but Not Ordinarily Resident (RNOR)
(c) Non Resident
A Non Resident and a RNOR is taxable on the following:
(a) Income which accrues or arises in India or is deemed to accrue or arise in India; and
(b) Income which is received or is deemed to be received in India.
An ROR is taxable on the above stated incomes and on income which accrues or arises outside India (i.e. worldwide income).
Under the Income-tax law, an Indian citizen can attain Non Resident status in India, if the individual is physically present in India for less than 182 days and has left India for the purpose of employment outside India.
As an NRI, only your India sourced income will be taxable in India. Salary income received outside India for services rendered outside India will not be taxable in India.
India sourced income includes any income which accrues or arises from any ‘business connection’ in India or from any asset or source of income in India or through the transfer of a capital asset situated in India.
The term ‘business connection’ is not exhaustively defined in the income-tax law. Under the income-tax law, it includes any business activity carried on through a person who, acting on behalf of the Non Resident –
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the Non Resident, unless his activities are limited to the purchase of goods or merchandise for the Non Resident;
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the Non Resident; or
(c) habitually secures orders in India, mainly or wholly for the Non Resident.
The meaning of the term ‘business connection’ has been the subject matter of extensive litigation. Based on the judicial interpretation of this term, following aspects are necessary to constitute a ‘business connection’ in India:
(a) there must be a business activity carried on outside India;
(b) there must be some business activity carried on within India;
(c) there must be relation between the two business activities which should contribute to the earning of income by the Non Resident;
(d) there must be an element of continuity between the business of the Non Resident and the activity carried on in India.
If the business is owned, set up, controlled and managed from outside India, then income from such overseas business income arising to you, as a Non Resident, will not be taxable in India.
Sonu Iyer is tax partner and people advisory services leader, EY India.
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