I know that a resident Indian’s global income is taxable in India. This income may have been earned or received outside, but it shall be taxed in India. In case this income is taxable in another country, you can take the benefit of DTAA (Double Tax Avoidance Agreement). I have become a resident of India after being a non-resident Indian (NRI) and RNOR (resident but not ordinarily resident). I receive an annuity from my superannuation account in Australia every year. This is the same as the Provident Fund account in India, but is not the same as “age pension" that Australia provides. In Australia, this income is tax-free as I have already paid tax while contributing during my younger days. According to items 19 and 20 of DTAA between Australia and India, annuities and pensions are only taxed in the original state. Am I right to assume that the amount that I receive will not be taxed in India?
—Name withheld on request
Under the India income tax law, if you qualify as “resident and ordinarily resident" in India, your worldwide income is taxed in India. Accordingly, annuity from Australian Superannuation Account is taxable in India.
Under Article 18 of DTAA between India and Australia, pensions and annuities paid to a resident of one of the contracting states is taxable only in that state. In other words, pension paid to a resident of Australia under DTAA will be taxable only in Australia or vice-versa. The term “annuity" has been defined to mean a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.
In your case, annuity income earned in Australia may be claimed as exempt from tax in India under Article 18 of India-Australia DTAA, if:
a) You qualify as a resident of Australia; b) You qualify as resident of Australia under India-Australia DTAA (despite being resident of India as per the domestic tax law of India); c) You obtain a tax residency certificate from Australia tax authorities for the relevant financial year; and d) Annuity income is covered within the ambit of the definition of annuity as per Article 18 of the India-Australia DTAA. Thus, it is important to analyze your residential status under the India-Australia DTAA. For instance, the benefit of Article 18 cannot be availed if you are a resident of India as per India-Australia DTAA. In such case, the annuity will be taxable in India.
If you are a resident of both India and Australia, as per the domestic tax laws of the respective countries, then a “tie breaker test" needs to be applied to determine your residency for the purposes of applying India-Australia DTAA in your case. Note that determination of residential status under India-Australia DTAA by applying the tie breaker test is a fact sensitive exercise depending upon factors such as availability of permanent home, personal and economic interests, habitual abode and citizenship. You may wish to seek professional advice to determine your residential status.
Sonu Iyer is tax partner and people advisory services leader, EY India. Queries at email@example.com