Across the globe, many individuals benefit from the principles of liberalism, allowing them to generate income from diverse sources worldwide. However, this global income-generating scenario prompts questions about how taxation is applied in different nations. In India, an individual's tax obligations hinge on their residential status and the origin of their income. Generally, resident Indians are subject to taxation on their global income, while non-residents face taxation solely on their Indian income. Exceptions and specific provisions apply to various types of income, including interest, royalties, and capital gains. Additionally, India has established double taxation avoidance agreements (DTAA) with numerous countries to prevent the same income from being taxed in both the source and residence countries. Through these agreements, resident Indians can seek credit for the tax paid on foreign income, offsetting it against their tax liability in India.
Residential Status and Tax Liability
The initial phase in grasping the tax ramifications of overseas earnings involves comprehending one's residential status. In India, individuals are categorized into three groups depending on residency: Resident and typically resident (ROR), Resident but not typically resident (RNOR), and Non-resident (NR). Precise classification holds significance as it delineates the scope of one's tax obligations.
How residential status is determined?
Resident and typically resident (ROR): A taxpayer attains the status of an Indian resident if they fulfill either of the following criteria: spending 182 days or more in India during a given year or residing in India for 365 days or more in the immediate preceding four years, coupled with a minimum of 60 days in the relevant financial year.
Resident but not typically resident (RNOR): An individual is classified as RNOR if they have not been an Indian resident for 9 out of the 10 preceding years or have not stayed in India for a period exceeding 729 days during the 7 preceding years.
Non-resident (NR): An individual failing to meet any of the aforementioned conditions will be designated as a non-resident Indian.
Tax Treatment of Foreign Income
The tax on foreign income in India varies based on residential status:
ROR (Resident and Ordinarily Resident):
As a ROR, you are taxable on your entire global income, including income earned abroad.
This income is combined with your Indian income and taxed according to the applicable income tax slabs in India.
There might be some relief for foreign taxes paid under Double Taxation Avoidance Agreements (DTAA) that India has with many countries.
RNOR (Resident but Not Ordinarily Resident):
The rules for RNOR are slightly complex. It depends on the number of years you've been resident in India in the past ten years.
Generally, RNORs' income from foreign sources is not taxable in India if it's not received in India.
However, income earned from an Indian business or profession is taxable even for RNORs.
NR (Non-Resident):
As a non-resident, you are generally only taxable on income earned or accrued in India.
There are some exceptions, though, like interest income, royalty, fees for technical services, and capital gains from certain assets in India.
Note: For all these categories, it's important to consider Double Taxation Avoidance Agreements (DTAA) that India has signed with many countries. These agreements help avoid paying tax on the same income twice.
Taxation of Foreign Income for Residents
Foreign Income Taxation for Residents:
Residents, whether ROR or RNOR, face taxation on foreign income at rates applicable to domestic earnings. Taxes must be paid on time to avoid trouble; if foreign income is received in India, it must be settled in the same fiscal year. For income not received in India, taxation occurs in the financial year when it is realized or accrued.
Distinguishing the Tax Treatment for ROR and RNOR:
While RORs are taxed on their global income, including earnings from foreign sources, RNORs face taxation solely on income received or accrued in India or from a business controlled or a profession set up in India. This nuanced differentiation aligns the tax liability with the individual's degree of connection to the Indian economy.
Taxation of Foreign Source Income for Non-Residents
Specified Income Categories for Non-Residents:
Non-residents encounter a distinct tax framework. Specific income categories, such as interest, royalties, fees for technical services, and capital gains, are subject to taxation in India. Section 195 of the Income Tax Act governs how non-residents are taxed on income from a foreign source.
Withholding Tax for Non-Residents:
Income paid to non-residents is subject to withholding tax by the payer. This mechanism ensures that the Indian government can collect taxes on certain types of income earned by non-residents within its jurisdiction.
Double Taxation Avoidance Agreements (DTAA)
In response to the dilemma of double taxation, wherein income faces taxation in both the source and residence countries, India has engaged in numerous Double Taxation Avoidance Agreements (DTAA). These agreements are significant in relieving taxpayers by allowing them to claim relief from the tax paid on foreign income against the tax payable in India.
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