According to the provisions of Income Tax Act, 1961; all the foreigners or individuals who belong to a different country but staying and working in India or individuals who belong to India but working in any other part of the world, have to pay income tax, as the Income Tax Act, 1961 provides for taxability depending upon the residential status of a person. Here in this article, we are going to discuss all the details related to tax by foreigners and NRIs.
This tax is levied regardless of the individual’s status of citizenship, or intention of staying in India. However, the extent of taxability may vary depending upon the residential status of the person.
There could be some tax deduction at source on income earned in India, though the person will be entitled to take credit of such amount while filing the income tax return. However, if Income tax payable is less than tax deducted at source, then balance amount can be claimed as refund
1. Tax By Foreigners- How is a foreign national’s or expatriate’s income taxed after becoming a resident of India?
In India, the taxability of income of a foreign national solely depends on the person’s residential status. The following can be the different scenarios of taxability based on residential status:
- Resident and Ordinary Resident: For a person who is a resident and ordinary resident in India as per Income Tax Act, 1961 then the total income earned by such person anywhere in the globe, including India, is taxable in India. This includes even if the income is earned in the country of citizenship and taxed there.
- Non-Resident (NR) and Resident But Not Ordinary Resident (RNOR): In case the expatriate is a Non-Resident (NR) or Resident but Not Ordinarily Resident (RNOR) as per Income Tax Act, only the income earned, i.e, Income accrued or deemed to be accrued in India or Income received or deemed to be received in India, is taxable in his hands in India.
So the first thing is you need to find out your residential status to ensure what tax is levied on your income.
As per the Income Tax Act, residential status rules, the first 2 years of a foreign national’s arrival to India will put the person into RNOR (Resident but Not Ordinarily Resident) status and he/she will pay tax for only the income earned in India.
However, there are certain other criteria given under Income Tax Act to determine whether a person is NRI (Non-Resident), RNOR (Resident but not Ordinary Resident), or ROR (Resident and Ordinary Resident).
2. How to check Residential Status?
To determine residential status, Income Tax Act, 1961 defined 2 stages wherein first we need to determine whether a person is resident or not and if a person is found resident then it is further determined whether he is an ordinary resident (ROR) or not (RNOR).
Let’s have a look at criteria given by the Income Tax Act, 1961 to determine residential status:
The first step is to determine whether a person is a resident or not for the relevant previous year or not. As per Section 6 of the Income Tax Act, if he satisfied either of the following condition:
- The concerned individual has been in India for more than 182 days during the relevant previous year; or
- The concerned person has stayed in India for 365 days or more for 4 years immediately preceding the relevant previous year and has stayed in India for 60 or days during the relevant year.
Let’s understand the same with an example. Mr A has the following different scenarios of stays in India for F.Y. 2019-20:
|Stay in India During F.Y. 2019-20||Stay in India During F.Y. 2015-16 to F.Y. 2018-19||Residential status|
|200 days||600 days||Resident. Criteria A satisfies. So, we are not required to check Criteria B.|
|200 days||30 days||Also regarded as Resident. Criteria A satisfies. So, we are not required to check Criteria B.|
|150 days||600 days||Resident. Criteria A doesn’t satisfy. Criteria B satisfied|
|40 days||600 days||Non-Resident. No criteria satisfied.|
Amendments by Finance Act, 2020
However, with an objective to stringent provisions related to residential status, the Finance Act, 2020 has proposed to change the period of 182 days to 120 days. Therefore, concerned individuals must have stayed in India for more than 120 days during the relevant financial year to qualify as a resident.
2.1.1 Resident and Ordinary Resident (ROR)
Once it is determined that a person is a resident for a financial year then it is determined that whether such person Ordinary Resident (ROR) or Not Ordinary Resident (RNOR).
To get the status of ROR, an expatriate must have to meet the following 2 conditions simultaneously:
- Such a person is Resident In India during 2 or more Financial years out of 10 financial years immediately preceding relevant Financial year; and
- Such persons have resided in India for a total duration of 730 days or more during 7 financial years prior to the relevant Financial Year.
2.2.2 Resident but not Ordinary Resident (RNOR)
If a person fails to satisfy the above-mentioned conditions then he will be considered RNOR.
Let’s understand the same with an example. Mr. A has qualified as Resident for FY 2019-20. Now following are the different scenarios to check his status as ROR and RNOR:
|No of years during which Mr. A was resident during F.Y. 2009- 2010 to F..Y. 2018 -2019||Stay in India During F.Y. 2012-13 to F.Y. 2018-19||Status|
|1 Year||720 Days||RNOR.|
|1 year||740 days||Same|
|3 years||720 Days||Same|
|3 years||740 days||ROR|
Amendments by Finance Act, 2020
Finance Act, 2020 has proposed to replace the period of 2 years to 4 years. Therefore, to qualify as ROR, you have to qualify as a resident for 4 or more out of 10 immediately preceding financial years.
2.2 NR (Non-Resident)
If a person fails to satisfy either of the condition given for residential status then he shall be considered as Non-Resident for the purpose of Income Tax Ac, 1961.
You can refer to the table below to understand better and determine your residential status,
|A.||1. Your total stay in the country is 182 days (120 days from F.Y, 2020-21 onwards) or more during the relevant financial year. Or,2. stay is 60 days or more in India in the relevant financial year and total stay is 365 days or more during the last 4 financial years.||Yes||Same||Same||No|
|B.||Your cumulative stay in India is 730 days or more during 7 financial years||Yes||Yes||No||NA|
|C.||You were an Indian resident for at least 2 (4 years or more from F.Y. 2020-21 onwards) of the last 10 financial years||Yes||No||Yes||NA|
If you satisfy all the conditions i.e. condition A, B, and C then you qualify as a ROR.
If you satisfy condition A and any of conditions B and C then you qualify as an RNOR.
But if you do not satisfy condition A then you qualify as NR. Therefore, the condition B and C does not apply in this case.
3. What are the factors in determining the Tax liability of a Foreign National in India?
As we’ve already mentioned, the tax liability of a foreign individual depends only on the residential status which can be outlined as follows-
- Resident and Ordinary Resident: Expatriates who have qualified to be a resident of India, need to pay tax on the total income earned throughout the globe. This income may also include the amount of remuneration which is paid to them in their own country.
- Non-Resident (NR) or Resident but Not Ordinary Resident (RNOR): Foreign individuals who qualify to have the status of an NRI or RNOR, are liable to pay tax on the income which is accrued or deemed to be accrued in India or received or deemed to be received in India Only.
4. What type of incomes of Foreign Nationals are taxable in India?
Foreign nationals residing in India are liable to pay tax for the following types of incomes-
- Employment Income
- Cash compensations
- Non-Employment Income
- Income generated through the investments made abroad but sent directly to a bank account in India
- Royalties received from an Indian individual
- Capital gained through the selling of Indian based assets
- Interest payments on the infrastructure bill funds in India
5. DTAA (DOUBLE TAXATION AVOIDANCE AGREEMENT)
In the case of residents, income earned in India or outside India is liable to Income Tax in India and in case of non-resident, income earned in India is taxable.
However, there are certain cases where an expatriate may get assigned to pay tax two times [in India and another country] for the same Income.
To avoid such instances, the Government of countries enters into an agreement with the Government of other countries. To avoid double taxation of Income and these agreements are known as facilities of the Double Tax Avoidance Agreement (DTAA).
6. How to be beneficial under DTAA?
DTAA or Double Tax Avoidance Agreement is a particular agreement that two countries have made to help the foreign individuals in avoiding taxation of his/her total income in both the countries.
By availing the benefits of DTAA, one can easily avoid paying tax two times on such income which is taxable in India and another country as well.
DTAA set out different conditions which help in determining the tax amount by foreigners.
7. Documents required by Foreign Nationals to file ITR in India
Certain documents that you are mandatory to have or required to be provided by a foreign national while filing Income Tax Returns (ITR) in India. These are-
- Form 16- Form 16 is a certificate issued under the Income Tax Act, 1961 which shows Tax deducted by the payer on salary. For the purpose of claiming credit for such TDS, the person needs to furnish a copy of his Form 16. Please note that Form 16 is applicable as per the Income Tax laws of India. Such credit of TDS will get reflected in 26AS of the assessee also.
- Form 16A: Similarly to Form 16, Form 16A represents TDS deducted on Incomes other than Salary and this certificate consists of information related to the amount of tax which has been deducted at source and also other details of deductor.
- Bank Statements- Expatriates have to provide bank statements mandatorily, that contains the detail of transactions made with the purpose of income accrued, investments, and expenditure owing to a taxation year.
- Investment Proofs- If an expatriate has certain investments that don’t show up in Form 16 then he requires to provide the proof separately for the same.
- Details of Property- If any property or asset of a foreign individual is sold in India, the capital gain tax will be levied on the income that came from the sale. The details of selling the property or asset must be presented at the time of filing Income tax Returns.