Income Tax Filing for Foreign Nationals/Citizens 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 taxable 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 9 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 729 days or less.

These types of foreign nationals are liable to pay tax on the total income that is earned within India. They are deemed to be a resident of India and have to pay tax for the total of their income earned within India if they fulfill the following conditions according to the income tax law:

• They have to reside in India for 182 days or more in the taxation year.
• If the individual is residing in India for 60 to 182 days in the taxation year and has been living in the country for 365 or more days in the four years prior to the taxation year.

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.

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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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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 like Public Provident Fund (PPF), National Savings Certificates (NSC), tax-saving fixed deposits, and certain life insurance premiums.
  - The maximum deduction allowed under this section is INR 1.5 lakhs.
• 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.
• Other Deductions:- Foreign nationals may be eligible for deductions under sections such as 80DD (for maintenance of a differently-abled dependent) and 80U (for individuals with disabilities).

Exemptions:

• Basic Exemption Limit:
  - Foreign nationals working in India may benefit from the basic exemption limit, similar to Indian citizens, for their income earned in India.
  - This limit varies depending on the individual's age.
• Double Taxation Avoidance Agreement (DTAA):- Foreign nationals may benefit from DTAA between India and their home country, which can prevent them from being taxed twice on the same income (both in India and their home country).
• Housing Allowance:- Housing allowances provided by employers may be exempt from income tax, subject to certain conditions (available in case of the old tax regime).
• Leave Travel Allowance:- Leave travel allowance provided by employers for travel within India can be exempt from income tax, subject to certain conditions. (available in case of the old tax regime).
• Gratuity and Provident Fund:- Exemptions for gratuity and provident funds may be available to foreign nationals under certain conditions. (available in case of the old tax regime).

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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Global Financial Transparency: 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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Visa and income tax implications for foreign workers in India

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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Should NRIs & Foreign Nationals File Income Tax Returns 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.

File your Income Tax Return for FY 2023-24 with the help of tax2win tax experts here:- https://tax2win.in/nri-tax-filing. You can also connect with us at +91 91166 84439 [email protected].

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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.

The deadline to file ITR for foreign nationals is same as for resident Indians and approaching soon. Filing your ITR before the deadline can save you from potential tax troubles. Don’t wait for the last-minute rush! If you need assistance, our online CAs are here to help you file your Income Tax Return and maximize your tax refund. Book your eCA now!

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