Factor in residency status for all plans
In case of mobile employees, it is vital to plan their assignments after factoring residential status in India
Residency is mostly the trigger for taxation in every country, with every country having it’s own rules for taxation. Similarly, each sovereign nation has its set of rules for determining residency. For example, in Australia, an individual will be considered as a resident if he/she has always lived in Australia or has come to Australia to live or has been in Australia for more than half of the financial year. Similarly, a citizen of the US is considered as a tax resident of the US, even though he/she might not have stayed in USA during the tax year. However, certain countries like Belgium do not have minimum stay conditions for determining residency. In Belgium, a person who has his family, home or a place from where he manages his personal wealth or occupation in Belgium will be considered as a tax resident.
Residency in India is dependent on physical presence of an individual in India during a tax year (1st April to 31st March). It is the residency of an individual that defines the scope of taxable income in India.
Tax residency in India: As per the Income tax Act, 1961 (Act), an individual will be categorised either as a resident or a non-resident for the purposes of taxation. Further, a resident individual will be regarded as either a resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR). As per the Act, in order to qualify as a “resident” of India, a person should satisfy either staying in India during a tax year for 182 days or more; or staying during a tax year for 60 days or more and 365 days or more in four years immediately preceding the relevant tax year.
A “resident” will be further classified as RNOR if either of the following conditions are satisfied:
l Non-resident in India for nine years out of the 10 years preceding the tax year for which the residential status has to be determined
l Stay in India is for 729 days or less during the 7 years preceding the tax year for which the residential status has to be determined.
An individual will be classified as a ROR if both the above conditions are not met. However, there are exceptions to the above rule. A person leaving India for the purposes of employment outside India or a person of Indian origin coming on a visit to India could stay in India for upto 181 days without qualifying as a “resident”. It is important to note that for the purpose of determining residential status, stay in India even for part of a day will be considered as a full day. In the recently presented finance bill 2015, it has been proposed to provide different sets of rules for determining residency in case of Indian citizens leaving India as a crew member of foreign bound ships.
Scope of income taxable in India: The scope of taxable income varies as per the residential status of an individual. Irrespective of the residential status, income accrued or received in India is subject to tax in India. The words “received in India” would mean initial receipt of income in India. Hence, if income is first received outside India and subsequently remitted to India, it shall be treated as received outside India.
As per the provisions of the act, a ROR is subject to tax on global income. Further, an ROR is required to report his global assets and financial interest in the India tax return. On the other hand, NR and RNOR are subject to tax only on the income received or accrued in India. An RNOR is also taxable on foreign income only if it is from a business controlled from India or from a profession that is set up in India.
At times, an individual could qualify as a tax resident of two countries. In order to avoid double taxation or to claim relief from double taxation in such a case, an individual can determine his residency per article 4(2) of the relevant double taxation avoidance agreement (DTAA).
In case of mobile employees, it is critical to plan their assignments after factoring their likely residential status in India as it may have significant tax impact. It is therefore important to keep track of the stay days in India to determine the tax residency as it would have a bearing on the tax liability in India. Documentation plays a vital role in establishing the tax residency; thus, individuals should maintain copies of their passport in order to support their India tax residency position.
