Any foreign citizen who is employed or is working in India is culpable to pay income tax as per Indian taxation rules. All income acquired by an expatriate within India is taxable by law, regardless of the individual’s status of residence, citizenship or intention of stay. This income may be deducted at source, although the individual would be entitled to a refund after filing tax returns in India if he or she earns less than the minimum exempted amount.
Foreign nationals could also be liable to pay tax on capital gains should they sell any capital assets within India.
Taxation Based on Residency:
There are three distinct categories of individuals whose income is taxable in India based on their residency status:
Non-resident Indians are Indian citizens who have moved to a country outside of India on a temporary basis for a period of 6 months or more for the purpose of education, employment, service, residence etc. As per Indian taxation laws, only income earned by non-resident Indians in India is taxable. For any individual to hold non-resident status he or she must fulfill the following conditions:
- The individual concerned should not have resided in India for more than 182 days during the duration of a taxation year.
- The individual concerned should have resided in India for less than 365 days over the duration of the 4 years immediately prior to the taxation year in question.
Resident But Not Ordinarily Resident (RNOR):
RNOR’s are usually those foreign nationals who are liable to pay tax solely on the total income they earn within India. RNOR’s are liable to pay tax in India if they fulfil the following criteria:
- If the individual in question resides in India for an equivalent of 182 days or beyond over the duration of the taxation year in India, then this individual will be deemed to be a resident of India for the purpose of taxation, and the total of his or her income earned within India will be taxable by law.
- If the individual in question has been residing in India for a minimum of 60 days, but not more than 182 days, and has been residing in the country over the duration of the previous 4 years prior to the taxation year for a total equivalent to 365 days or beyond, then he or she will be deemed to be an Indian resident for the purpose of taxation, and the total of his or her income earned within India will be taxable by law.
For an individual to be considered an RNOR, the following conditions are required to be met:
- The individual must not have been residing within India for at least 9 out of the previous 10 years of taxation
- The individual has resided within India for a duration totalling 729 days or below during the 7 years prior to the taxation year
Resident and Ordinary Resident:
Resident and Ordinary Residents are those individuals who do not meet the criteria specified with regards to an RNOR. These individuals are liable to pay tax on the income he or she earns from all over the world for the taxation year.
Types of Taxable Income For Foreign Nationals:
Foreign nationals residing in India who are liable to pay tax, must do so on the following types of income:
- Employment Income - This category includes the following:
- Cash compensations
All these forms of income are taxable along with compensation such as perks like a company car along with a driver or the individual’s employer paying tax on his or her behalf.
- Non-Employment Income - This category includes the following:
- Any income gained through investments made abroad but sent directly to a bank account within India
- Any capital gains, whether long term or short term, acquired due to the sale of assets based in India
- Royalties received from an Indian entity
- Interest payments on infrastructure debt funds in India
Factors that Determine Taxability of Foreign Nationals in India:
Foreign nationals in India are taxed based on their status of residence. This can be outlined as follows:
- Individuals who qualify as a resident of India for the purpose of taxation are liable to pay tax on the sum of their income earned throughout the world. This income could also include any remuneration paid to them in their own country.
- Individuals who qualify as Non Resident Indians or who qualify as Resident but not ordinarily resident (RNOR) are liable to pay tax only on the income they acquire within India. According to the Indian Income Tax Act, rules and regulations in respect to the status of residence of an individual state that the individual will be granted RNOR status over the 2 years post his or her arrival in India. All tax that the individual pays will only be paid on the income he or she earns while in the county.
Double Tax Avoidance Agreement (DTAA):
Foreign nationals in India can also avail of benefits via the Double Tax Avoidance Agreement (DTAA). This agreement is made between two countries and allows a foreign national to avoid paying on any income he or she earns in either country. Foreign nationals whose income could be taxed both in India as well as another nation could look to the DTAA as a way out of being doubly liable to pay tax on the income he or she has earned.
Documents Required by Foreign Nationals when Filing Income Tax Returns in India:
Foreign nationals or expatriates are required to submit the following forms when filing their income tax returns in India:
- Form 16: This form will be provided by the employer of the concerned individual, and contains all information regarding the individual’s income as well as any deductions made from the individual’s income throughout the tax year
- TDS Certificate: The TDS Certificate is also called Form 16A. This form is provided by financial organisations and contain details regarding the tax that has been deducted at source on any other income earned by the individual.
- Bank Statements: Foreign nationals are required to provide bank statements showing all transactions made over the course of the taxation year. These transactions may consist of any investments, income accrued, expenditure etc
- Details of Property: Any property or asset sold within India will attract capital gain tax on the income received from the sale. Details regarding the sale of any property or asset in India will be required to be presented while filing Income Tax Returns.
- Investment Proofs: Individuals who have made any investments, which do not feature in their Form 16, are required to provide proof of the same.