Income Tax Filing for Foreigners in India

Difference Between NRI and Foreign Nationals

An NRI is an Indian citizen who resides outside India for business, employment, education, or other purposes. An individual can be classified as an NRI if they meet the specific residency criteria as defined by the Indian government. In simple words, a person of Indian Origin living abroad is known as a Non-Resident Indian(NRI).

Foreign nationals may reside in India temporarily for work, education, tourism, or other reasons, but their primary residence is in another country. In simple words, a person who is not a citizen of the host country in which he or she is temporarily residing.

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Taxability for Foreign Nationals in India

Foreign nationals under Income Tax Act are taxed in India based on their residential status. Various norms are made in the Income Tax Act for the taxability of foreign nationals in India. They are :

The expatriates who become residents of India are liable to pay taxes on the income they earn from all over the world. The incomes from their own country will be considered, though this income may have been earned or received outside – it shall be taxed in India. If this income is also taxable in another country, the taxpayer can take advantage of DTAA.

Those individuals who are non-resident Indians(NRI) or residents but not ordinarily resident (RNOR) are liable to pay income tax on all the incomes acquired within India.

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Taxation Based on Residency Status of Foreign Nationals

There are three categories of foreign nationals who are liable to pay taxes in India based on their residential status:

Non-Resident

All the expatriates who moved from India to another country for a limited period of time, that is, for a period of six months or more, are Non-residents. The major purpose of their migration is service, education, employment, residence, and so on.

The following conditions must be fulfilled by them to be a Non-Resident Indian:

• The individual must have resided in India for less than 182 days in the taxation year.
• He or she should have resided in India for less than 365 days in the period of 4 years prior to the taxation year.

For this category of foreign nationals, the total income earned in India is exempt from tax by Indian tax laws.

Resident But Not Ordinarily Resident (RNOR)

A Resident But Not Ordinarily Resident (RNOR) is considered after fulfilling two major conditions. These are as follows:

• The individual must be residing within India for a minimum of 2 years out of the last ten years of taxation.
• Seven years prior to the taxation year, the individual has resided within India for a duration of a maximum of 730 days or less in the last 7 years.

Resident and Ordinary Resident

Those individuals who do not meet the requirements specified to be Resident but Not Ordinarily Resident (RNOR) are called Resident and Ordinary Residents. All the income they earn in a financial year from all over the world is taxable for these individuals in India.

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Which Incomes are Taxable for Foreign Nationals?

All the incomes that are considered for any foreign nationals who are residing in India for taxation purposes are as follows:

Employment income: This includes -

• Salaries
• Wages
• Cash compensation
• Allowances
• Reimbursements
• Different types of Perks:
  • Company cars, along with a driver
  • Residential accommodations
  • Utilities
  • Sweeper, security, gardener, or domestic help
  • Gifts, vouchers, tokens
  • Meals
  • Club memberships
  • Free or concessional travel
  • Employer paying tax on his or her behalf

Non-Employment Income: This includes-

• Income from investments made abroad but sent to a bank account in India.
• Short-term or long-term capital gains from the sale of assets in India.
• Payments of interest on infrastructure debt funds in India.
• Royalties received from an Indian organization.

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Tax Relief on Income Arising from Foreign Retirement Funds

Section 89A of the Income Tax Act provides for a relief to foreign nationals who have income from foreign retirement funds and have to pay taxes in India. The income from such foreign retirement benefits accounts is taxable on a receipt basis in some countries. However, the amount withdrawn from such accounts is taxable in India on an accrual basis. The foreign nationals can claim relief under section 89A and avoid paying tax twice on the same income by filing Form 10EE.

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Deductions and Exemptions for Foreign National

Foreign nationals living and working in India may be subject to Indian income tax laws. However, they can also benefit from certain deductions and exemptions available under Indian tax regulations. Here are some deductions and exemptions that may apply to foreign nationals in India only if the taxpayer opts for the old tax regime:-

Deductions:

• Section 80C:
  - Foreign nationals may be eligible for deductions under Section 80C for investments made in certain tax-saving instruments.
  - The maximum deduction allowed under this section is INR 1.5 lakhs. The following deductions are allowed to NRI under Section 80C -
  • LIC Premium payment
  • Children’s tuition fee payment
  • Principal repayment on loan to purchase house property
  • Unit-linked Insurance plan
  • Investment in ELSS
• Section 80D:- Deductions under this section are available for health insurance premiums paid for self and dependents.
• Section 80E:- Deductions for interest on an education loan are available under this section.
• Section 80G:- Deductions for donations made to certain charitable institutions and organizations.
• Section 80TTA:- Deductions on income from interest on savings banks account upto Rs.10,000.

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Deductions Not Allowed to Foreign Nationals

Some Investments Under Section 80C -

• Investment in PPF
• Investment in NSC
• Post-office 5-year deposit scheme
• Senior Citizens Savings Scheme (SCSS)

Deduction for differently abled under Sections 80DD, 80DDB, and 80U

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Tax Exempt Income for Foreign Nationals

The following income earned by foreign nationals who are considered residents in India during a tax year are exempt from income tax -

• Remuneration Received by Diplomats - Any remuneration received by an official of an embassy, legation, commission, consulate, foreign state, or a member of staff is exempt from income tax.
• Remuneration Received by Foreign National as Employee of Foreign Enterprise - Remuneration received by foreign national as an employee of foreign enterprise is exempt if the following conditions are fulfilled -
  • The foreign enterprise does not conduct any business or trade in India.
  • The foreign nationals stay in India should not exceed 90 days in the previous year.
  • The remuneration received by a foreign national is not liable to be deducted from the employer’s income.
• Employees of Foreign Ships - Salary received by a foreign national who is a non-resident and is employed on a foreign ship is exempt in India if his stay does not exceed 90 days in the previous year.
• Remuneration to Foreign Government Employees - Remuneration received by a foreign national who is an employee of the Government of a Foreign State during his/her stay in India for training in any office or establishment owned by specified institutions will be exempt from tax.

It's important for foreign nationals to review the specific tax rules and deductions available to them based on their residency status and the provisions of any tax treaty between India and their home country.

Consulting a tax professional or advisor is advisable to ensure compliance and maximize available deductions and exemptions.

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Factors that Determine Taxability of Foreign Nationals in India

The taxability of foreign nationals in India is determined by their residential status, which is based on the number of days they stay in India during a tax year. Here are the key factors that determine the taxability of foreign nationals in India:

• Residential Status: This is the most important factor in determining the tax liability of foreign nationals in India. The residential status is calculated based on the number of days a person is present in India during a financial year (April 1st to March 31st).
• Residency Tests: There are two tests to determine the residential status:
  - Basic Residency Test: A foreign national is considered a resident in India if they stay in India for 182 days or more in a tax year.
  - Additional Residency Test: Alternatively, a person may also be considered a resident if they are in India for 60 days or more during the tax year and have lived in India for at least 365 days in the preceding four tax years. However, this 60-day rule does not apply to Indian citizens or persons of Indian origin who come to India on a visit.
• Scope of Income:
  - Residents: If a foreign national is considered a resident, they are taxable in terms of their global income in India.
  - Non-Residents: If they are considered non-residents, they are only taxable on income that is received in India or accrues or arises in India.
• Type of Income: The source of income (e.g., salary, business income, rental income, or capital gains) also affects taxability. Different types of income may be subject to different tax rates and provisions.
• Double Taxation Avoidance Agreement (DTAA): India has DTAA treaties with various countries. Foreign nationals from these countries may benefit from these agreements, which can provide relief from double taxation and specify how different types of income are to be taxed.
• Permanent Establishment (PE): If a foreign national's business activities establish a PE in India, this can have implications for their taxability and the income generated in India.
• Other Considerations:
  - Residential Visa Status: The type of visa and purpose of stay (work, study, etc.) can influence the foreign national's taxability.
  - Work Arrangement: The terms of their work arrangement (e.g., employer, duration, compensation structure) can affect their tax liability.

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How to Comply with FATCA and CRS

Transparency is your tax ally. Declare your foreign assets and income on your returns. FATCA and CRS are making global financial transparency the norm, so hiding these details isn't an option. Reporting them demonstrates responsibility and eases your tax journey. It's a win-win for you and the authorities.

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How Visa Type Affects Income Tax for Foreign Nationals

Visa matters for taxes! Your employment visa could mean tax on all your earnings, while a business visa might just tax what you make within India. Knowing your visa's tax implications helps you plan, budget, and avoid surprises.

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When & Why NRIs and Foreign Nationals Must File Taxes in India

Yes, once they are clear on their residential status as per the above-mentioned structure, NRIs and foreign nationals should file their income tax return in India if they have any earned income or income that accrues in India.

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How DTAA Benefits Foreign Nationals

Tax Credit Relief

If a foreign national pays tax in India, their home country may allow them to deduct that amount from their tax liability there.

Lower Tax Rates

• Many DTAAs set reduced withholding tax rates for dividends, royalties, interest, and capital gains.
• Example: Interest income for US residents in India is taxed at 15% instead of 30% under DTAA.

Exemption from Double Taxation

• Some countries have agreements where specific types of income are only taxed in one country, eliminating double taxation.

Tax Benefits for Expats Working in India

• If a foreign employee’s stay in India is less than 183 days in a financial year, their salary may be taxable only in their home country under certain DTAA provisions.

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Documents Required by Foreign Nationals for Filing Income Tax Returns

Foreign nationals are also required to provide various documents while filing their income tax returns in India. The documents they require are:

Form 16

This form is very important and given by the employer of the individual. This form includes all the relevant information related to the income of the individual and the deductions, if any, made from the income of the individual throughout the financial year.

Bank Statements

It is very important for foreign nationals to provide bank statements that include all transactions made in the taxation year. These transactions consist of all the investments, expenditures done, income accrued, and so on.

TDS Certificate

The Tax Deduction at Source (TDS) Certificate is also called Form 16A. This form is furnished by taxation organizations. It includes details related to the tax deducted at source (TDS) on any other income that is earned by the individual.

Details of Property

Information of any property or asset that is sold within India that has capital gains that are taxable as a tax on the income received from the sale must be given. The details regarding the sale of any asset or property are to be presented when filing an income tax return.

Investment Proofs

Any individual’s investment-related information that is not given in Form 16 is required as evidence.

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Meaning of Double Tax Avoidance Agreement (DTAA)

For foreign nationals, there is a special benefit called a Double Tax Avoidance Agreement (DTAA). This agreement is made between both countries, which allows the individual to avoid paying any income tax in either of the countries. For incomes that can be taxable in both the country, India and the other country, the taxpayer can take the help of a Double Tax Avoidance Agreement (DTAA) and avoid paying tax in one of the countries. He or she will only be liable to pay tax for that income only in one country.

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