As the last date for filing tax returns nears, those who earned income abroad (‘global income’) may have to make some extra effort while computing their tax liability. In case of employees on deputation abroad, the Income Tax (I-T) Department computes the tax on the basis of their residence status over a certain period of time.
If the deputation is for less than 180 days or six months, he/she is considered an Indian resident. Consequently, their incomes — Indian salary and foreign allowance — are clubbed and taxed in India. According to the I-T Act, such individuals are deemed Resident and Ordinarily Resident (ROR).
Those working overseas for more than 180 days and less than two years are considered non-resident Indians (NRIs) under the I-T Act. The allowance paid to them is considered global income and does not come under the Indian tax regime in case you have a treaty with the foreign country, However, India-sourced income will be taxed.
In case there is no treaty with the host country, the situation could be tricky. In order to avoid double taxation, you need to produce a tax credit certificate. And, if you have paid extra tax, there will be no refund.
But the situation can get more confusing for a person who has spent more than six months but less than two years in a foreign country. Reason: The I-T Department classifies anyone who has stayed abroad for over six months as an NRI for two years.
N C Hegde, tax partner, Deloitte Haskins & Sells, said: “If a person has stayed for just a little more than six months, say eight months, the person is considered an NRI only for that financial year. The income earned for the rest, in this case four months, is taxable according to the I-T Act.”
There are two probable situations in case of an NRI’s tax computations:
- If you stay abroad for more than six months in one financial year, you become an NRI for the entire financial year.
- If you have stayed for eight months abroad and paid tax there, you will be taxed only on the salary earned in India for the rest four months. Also, though the I-T Department gives you the NRI status for two years, your local income in the second financial year will be taxed in India.
For professionals, consultants or corporate heads who earn income in India and abroad over longer periods, there is a special category — Resident, but Not Ordinarily Resident (RNOR) status. “This is a transition status, similar to an NRI. In this situation, your income in India is taxed. The global income earned is taxed in the host country,” added Mukherjee. You will be required to produce a copy of your tax credit abroad for getting tax relief in India.
However, if the pay cheque for the deputation abroad is received in India, the tax incidence on the income will occur locally. On the other hand, if the salary is deposited in a bank account abroad, you will not be taxed.
But the I-T Act has some clauses governing an individual’s inclusion in this category too:
- One should have been an NRI for nine out of the last ten years, or,
- One must have stayed in India for 729 days (nearly two years) or less in the last seven years.
“Being in this category works best for expatriates. When they are hired in India, they are exempted from paying tax for the first two years of their stay here,” Hegde added.