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Indians from time immemorial have been a very enterprising and adventures tribe. They find job opportunities suiting their skill sets in far off lands.
India’s major foreign exchange earnings are income remittances from abroad. In this column, we look at what happens when you are posted abroad by your company and how your salary would be taxed.
You are posted abroad, but you do not acquire NRI status.
Under section 6 (1), an individual is said to be resident in India in any previous year, if he satisfies any one of the following conditions:
(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year.
If the individual satisfies any one of the conditions mentioned above, he is a resident, otherwise the individual is a non-resident Indian (NRI).
Example: Kush, an Indian citizen, leaves India on 22.11.2012 for the first time, to work as an officer of a company in the United States. During the previous year 2012-13, Kush was in India for 236 days (i.e. 30 + 31+ 30 + 31 + 31 + 30 +31 + 22 days). He satisfies the minimum criteria of 182 days. Kush is a resident for the assessment year 2013-14.
There are two instance of taxation: One in India and one in the foreign country, in this case the US.
Tax in India: For resident Indians, all your income, whether local or global will be liable to be taxed in India. Tax will be deducted as source (TDS) on his Indian income.
Tax in foreign country: According to the US tax code, any person who is a resident of the US must pay taxes in the US. There are two tests to determine your residency in US:
Green card test: If at any time during the calendar year, you were a lawful permanent resident (Green Card holder) of the US, you must file income tax returns by the end of a financial year.
The substantial presence test: To meet the substantial presence test, you must have been physically present in the US on at least 31 days during the current year, and 183 days during the three-year period that includes the current year and the 2 years immediately before.
A non-resident person, that is, a person who is not a citizen or resident of the US but has a US source income on which tax has not been fully withheld at source, must file taxes in the US. As per above example, Kush is resident in the US as well for the respective calendar year and must file his taxes in the US.
Now, Kush must pay taxes in both the countries. To provide relief to him, provisions of DTAA (Double Taxation Avoidance Agreements) will be helpful. As per DTAA, if the income is subject to tax in both the countries, then credit could be claimed for tax paid in the other country, subject to the prescribed conditions.
You are posted abroad and acquire NRI status.
In case an individual is a non-resident, then only income received/deemed to be received or accrued/deemed to be accrued in India is taxable in India. Thus, broadly speaking, his/her overseas income would not be taxable in India, provided it is first received outside India.
If in above example, Kush is posted abroad on 21.04.2012, then he is non-resident in India for previous year 2012-13 and resident in the US for calendar year 2012.
According to US tax laws, a person who is resident of USA will have to pay tax in USA on his global income. Therefore, Kush will have to pay tax in the US on his Indian income.
(The writer is an assistant professor of taxation at Kirori Mal College, Delhi University.)