In today’s globalized world, many individuals find themselves working or investing across borders, which often raises questions about tax implications. For those classified as non-residents in a particular country, understanding tax laws and procedures becomes crucial to ensure compliance and avoid potential penalties. In this blog, we’ll explore the concept of non-resident taxability, the procedures involved, and key considerations when filing Income Tax Returns (ITR), supplemented with practical examples.
1.. Residential Status for Different Entities
Individuals:
- Resident: An individual is a resident if they stay in India for 182 days or more in a financial year (April to March).
- Non-Resident: If the stay is less than 182 days, the individual is considered a non-resident.
Companies, HUF, AOP, BOI:
- Similar to individuals, these entities are categorized as resident or non-resident based on the place of control and management.
2. Income Taxability Based on Residential Status
Resident: Taxed on worldwide income.
RNOR (Resident but Not Ordinary Resident): Taxed on income earned or received in India or from a business controlled in India.
ROR (Resident and Ordinary Resident): Taxed on worldwide income.
Non-Resident: Taxed only on income earned in India or from a business controlled in India.
3. Documents Required for Income Tax Return
- Passport details
- Bank account statements (if any)
- Form 16 or equivalent from employer (if applicable)
- Details of income earned in India
- Tax identification number (if available)
4. Income Considered for Taxability
For non-residents, income typically includes:
- Salary for services rendered in India
- Rental income from property in India
- Capital gains on transfer of assets in India
- Interest income from Indian sources
- Any other income earned in India
5. Deductions and Foreign Tax Credit
Non-residents can claim:
- Deductions under Section 80C to 80U if eligible.
- Foreign Tax Credit under Double Taxation Avoidance Agreements (DTAA) if taxes are paid in both India and their home country.
Forms required:
- Form 67 for claiming foreign tax credit.
6. Income Exempt for Non-Residents
- Income not earned in or deemed to be earned in India (like income from a business controlled abroad).
- Income covered under DTAA provisions.
- Interest received in NRE account.
7. Income Tax Rate, TDS, and Other Taxable Rates
- Income Tax Rate: Typically, higher than for residents, as non-residents do not benefit from certain exemptions and lower tax slabs.
- TDS (Tax Deducted at Source): Deducted at higher rates on various types of income earned in India.
- Other Taxable Rates: Capital gains tax rates, especially for short-term gains, are higher for non-residents.
8. Income Tax Forms and Due Dates for Non-Residents
Forms typically used:
- ITR-2 for non-residents (individuals).
- ITR-5 for non-resident entities (companies, HUF, AOP, BOI).
Due dates:
- July 31st of the assessment year for individuals.
- September 30th of the assessment year for non-resident entities.
Example Scenario
Mr. X, a citizen of the USA, visits India for a business assignment from January to March, earning a salary of INR 10 lakhs during this period. He has no other income from Indian sources.
Taxability:
- Mr. X qualifies as a non-resident since his stay is less than 182 days.
- His taxable income in India is INR 10 lakhs.
- He needs to file ITR-2 by July 31st of the assessment year.
- Since he has no other income in India, he won’t benefit from deductions under Indian tax laws.
Conclusion
Understanding tax obligations as a non-resident in India is crucial to ensure compliance and avoid penalties. It’s advisable for NRI’s to seek professional advice to navigate the complexities of Indian tax laws effectively. By adhering to these guidelines, non-residents can manage their tax liabilities efficiently while ensuring they meet all legal requirements.