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Photo: Mint

NRIs working from India need to keep tax implications in mind

  • Your residential status can affect the amount of tax you need to pay in India on salary and investments
  • You may also have to figure out if your foreign employer credits your salary in a foreign or Indian bank account

For many non-resident Indians (NRIs), the advent of work from home (WFH) due to covid-19 has opened the opportunity of working from India. In some cases individuals are stuck in India due to difficulty in getting flights and visas, particularly to the US where visa processing has slowed down due to political uncertainty.

The lower cost of living in India can result in higher real wages for NRIs who are paid in foreign currencies. However, working from India may have tax implications for NRIs. Here are some of the things they should keep in mind.

Residential Status

Your status: If you spend 182 days or more in India in a financial year (FY), you are treated as resident and ordinarily resident for tax purposes. In case you spend more than 60 days in India in an FY and more than 365 days in the previous four FYs, you will be considered as resident in India. The 60 days rule becomes 182 days for persons who have gone abroad on employment or NRIs who are visiting India. However, from FY21 additional rules apply if you have Indian income of 15 lakh or more. In such cases, the relaxation from 60 days to 182 days gets restricted to 120 days. You must check other conditions to decipher your exact residential status. Consult a chartered accountant, if need be. Remember that the residential status may be different for each financial year.

If you are resident in India, your worldwide income becomes liable for tax in India and you are also required to report your foreign assets in Schedule FA of your income tax return (ITR) form. This may lead to a higher tax burden compared to developed countries, said chartered accountants. “Practically many developed countries have top tax rates similar to the 42.7% in India. But their slabs start at higher levels of income and they have higher exemption limits due to higher average income," said Gautam Nayak, a Mumbai-based chartered accountant.

Company’s status: Working from India can also create litigation for your company, especially if you work at a senior level.

“For employees of a foreign company working out of India, the foreign company itself may be deemed to have a permanent establishment in India and can become liable for tax for that part of its profits that are attributed to the employee. This situation can give rise to substantial litigation for the company or employer," said Prakash Hedge, a chartered accountant based in Bengaluru. “The threshold for this permanent establishment concept varies according to the tax treaty in question. It can vary from 182 days to as little as a single day," Hedge added.

salary receipt

Tax deduction at source: Most countries have provisions similar to TDS in India and this is likely to be deducted by your foreign employer even if you are an Indian resident in a particular FY.

“The foreign employer is likely to deduct TDS from your salary as per the laws of that country. You can claim it as credit while filing your ITR in India, depending on the Double Tax Avoidance Agreement (DTAA) in question. Getting a Tax Residency Certificate (TRC) from India may be required by some countries to prevent TDS but this is a manual process in India involving a physical application to the assessing officer," said Nayak. A TRC proves your residence in India for a given FY.

Forex complication: Most employers credit the foreign bank accounts of employees, which means such employees have to bear the costs of forex transfers to their Indian accounts. In case the salary is credited to the Indian account, it can become taxable in India regardless of residential status. “Receiving your salary in your Indian account may lead to it getting taxed in India even if you are non-resident, although there are complex rules and judicial decisions at play here. A prudent precautionary measure can be to receive the salary in the overseas account and then transfer it to India," said Hegde.

Investment income

A lot of individuals also have investment income such as dividends from shares, capital gains and even returns on pension funds. “Note that deductions and exemptions under the foreign country’s law will not apply in India. So for example your 401k returns will be taxable," said Nayak. The 401 (k) is a popular retirement account in the US that comes with certain tax benefits.

“However, up to two years since your return to India, you can claim resident but not ordinarily resident (RNOR) status depending on your time in India in the preceding 10 years. This will exempt your foreign income from tax in India, except salary since you will be working from India," said Nayak. NRIs who have been in India for less than 729 days in the preceding seven FYs will be able to retain RNOR status if they have not been a resident in India for two out of the preceding 10 FYs.

Note that investment income derived in India such as dividends from Indian companies or rent will be taxable in India.

Other rules

NRIs who are permanently relocating to India will have to convert their bank accounts to residential status. For instance, non-resident ordinary (NRO) and non-resident external (NRE) accounts will have to be converted to resident. Foreign Currency Non Resident Account (FCNR) can be converted to Resident Foreign Currency (RFC) Account.

Those who are temporarily in India due to covid-19, however, may not have to convert their accounts. “Residency under FEMA (Foreign Exchange Management Act) is different from residency under the Income-tax Act. If you are here on a temporary visit and have not spent more than 182 days in the previous FY in India (as opposed to the current year), then, generally, you are non-resident under FEMA," said Hegde.

If you are an NRI and working from India, consult an expert to ensure you file taxes correctly.

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