I work with a public sector bank. I am resigning soon and moving to Canada as a permanent resident. The bipartite settlement is overdue since November 2017. Once I move to Canada and if the salary revision happens on a later date, I will be entitled for revised salary till my last working day. How will I treat this income for tax purpose?
Taxability of income in India depends on residential status in India, source of income and place of receipt of income. As the revised salary (arrears of salary) will be received for past services rendered in India for an Indian employer, it will be taxable in India as per the Indian income-tax law and also as per the Double Taxation Avoidance Agreement (DTAA) between India and Canada.
You may claim relief under Section 89 of the Income-tax Act, for arrears to be calculated as follows:
Calculate tax on total income (including salary arrears) as per the tax rates for the current financial year (FY) (A); calculate tax on normal income (excluding salary arrears) as per the tax rates for the current FY (B); then calculate the difference between A and B = (C). Now, calculate tax on total income (including salary arrears) as per the tax rates for the previous FYs to which the arrears pertain (D); and calculate tax on normal income (excluding salary arrears) as per the tax rates for the previous FYs to which the arrears pertain (E). Now calculate the difference between D and E = (F). The tax relief is C – F. Further, in case of double taxation of salary arrears in Canada, you may explore benefit under DTAA between India and Canada.
My friend was in India in FY19 up to 15 November and took permanent residence in Australia. She received salary in India up to November and from December onwards, she received salary in Australia. If she wants to avail treaty benefit, what should she do? Is it compulsory to avail tax residency certificate from Australia to avail treaty benefits even if she is a resident in India?
Assuming that the individual qualifies as resident and ordinarily resident (ROR) in India for FY19, her global income will be taxable in India and she will be required to report all her assets outside India in the tax return. So, her salary income earned and received in Australia will also be taxable in India. Since the said salary income will be taxable in Australia also, the following alternative positions may be explored:
Claim tax exemption in India under Article 15(1) of the DTAA if (i) she qualifies as resident of Australia under the Australian domestic tax laws from the start of employment in Australia; (ii) she qualifies as resident of Australia under DTAA from the start of employment in Australia; this will be determined by application of a tie-breaker test laid down in Article 4(2) of DTAA; and (iii) TRC will be required from Australian tax authorities. The split residency position (i.e in the present case, resident of India till date of shift to Australia and resident of Australia thereafter) is not clearly spelt out in the tax law and can be challenged by the tax authorities.
Include salary from Australia employment in taxable income in India but claim foreign tax credit (set-off) of the Australia tax in India. This will require determination of Australia tax liability until 31 March 2019 to claim appropriate credits in India. Determination of residential status under DTAA and calculation of foreign tax credit depends on multiple factors, so you must seek professional advice.
Sonu Iyer is tax partner and people advisory services leader, EY India. Queries and views at firstname.lastname@example.org