Residential Status and Taxation

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When it comes to financial matters, many Indians who live overseas are concerned with their status with regards to the Indian authorities – and one of the most confusing areas relates to the tax you are expected to pay.

This article will therefore outline your tax status with regards to the Indian authorities, and then illustrate which areas you should expect to pay tax in – as well as the circumstances where you are not.

First, are you an NROR, NRI or a ROR?

Generally speaking, if you own an Indian passport, or your parents or grandparents were born in undivided India, you are either a citizen of India or a person of Indian origin.

Within this bracket, you are considered a resident Indian if you either spend over 182 days of the year in India, or have been in India for 60 days or more in the specific year; and 365 days or more total in the 4 years previously.

If you are a resident of India, for the purposes of Income tax, you can either be an NROR, or ROR.

If you usually live in India, you are a resident and ordinary resident (i.e. “ROR”). If you are a resident but not usually resident in India, you are a “RNOR”.

Finally, if you do not live in India but are considered an Indian citizen as outlined in the beginning of this section, you are a non-resident Indian – an “NRI”.

What does your status mean with regards to paying Indian income tax?

Your status matters because it determines which income you can be taxed on. This still applies even if you live in the tax-free UAE.

The following table outlines the variables within Indian income tax (please note Indian income tax also includes tax on capital gains):

IncomeRORRNORNRI
Received in IndiaTaxable in IndiaTaxable in IndiaTaxable in India
Accrues or arises in IndiaTaxable in IndiaTaxable in IndiaTaxable in India
Accrues or arises out of IndiaTaxable in IndiaNot taxable in IndiaNot taxable in India

Indian income tax is charged in the financial year following the year in which the income is earned. The year in which the tax is actually charged is called the “assessment year”.

The tax rates now stand at 0%, 5%, 20% or 30% – depending on your total income.

Where are the most tax-efficient places to keep your money?

Looking at the table above, if you are an NRI or RNOR, you may benefit from keeping your funds in accounts outside of India.

If, however, you need to keep money in India, there are three bank accounts which can prove beneficial:

  • Non-resident external rupee account (NRE Account)
  • Non-residential ordinary rupee account (NRO Account)
  • Foreign currency non-resident (bank) account (FCNR Account).

Transferring funds from a bank outside of India into one of these accounts means you shouldn’t have to pay Indian income tax on these proceeds (though you may have to pay tax on the interest earned in a NRO Account).

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