Under Indian income tax laws, residential status plays a bigger role in deciding tax liability than nationality or passport status. According to reports from Mint, many taxpayers may think that citizenship alone determines where and how they are taxed, but this is not entirely true. The distinction is crucial because residential status determines whether only Indian income is taxable or whether income earned outside India may also be subject to Indian tax. This means that non-resident Indians (NRIs) and foreign citizens staying in India for long periods may be subjected to taxation depending on the number of days spent in the country and the nature of their income.
Under Section 6(1) of the Income Tax Act, a foreign citizen becomes a 'Resident' if they meet either of these conditions: they stay in India for 182 days or more during the financial year (1 April to 31 March) or they stay in India for 60 days or more in the current financial year and have spent 365 days or more in India across the preceding four financial years. For NRIs or persons of Indian origin visiting India, if their total income other than foreign-sourced income exceeds ₹15 lakh, they will be considered a resident if they have been in India for at least 120 days in the relevant financial year and more than 365 days in four preceding financial years, as reported by Mint.
According to tax expert Pranav Sai S from ClearTax, Indian tax law divides individuals into three categories: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR). Global income becomes taxable in India only when an individual transitions into ROR status. If a foreign citizen qualifies as a 'Resident' under Section 6(1), they must determine whether they fall under the ROR category. If they do, they will owe tax on their global income if they satisfy both conditions: they have been residents of India in at least 2 out of the 10 preceding financial years and they have been in India for a total of 730 days or more during the 7 preceding financial years, as reported by Mint.
Income earned in India, such as rent from a property, salary for services rendered in India, or capital gains from Indian shares, is taxable for every person irrespective of their residential status, according to Mint reports. However, the rules differ significantly. Non-residents are taxed at the same progressive tax slab rates as residents but cannot avail the benefit of tax rebate under Section 87A. Non-residents cannot invest in certain tax-saving instruments like PPF, SSY, NSC and also cannot claim 80TTA deduction. For residents, TDS on rent or property sales is nominal (1% to 10%). For non-residents, TDS is high. If an NRI sells a house in India, the buyer must deduct TDS at the highest capital gains rate on the entire sale price, not just the profit, though they can claim a refund by filing an income tax return.
Double Taxation Avoidance Agreements (DTAAs) ensure that a person does not suffer tax on the same income in two countries. According to Mint reports, if a person earns rental income in India and is a tax resident in Canada, both countries can claim the right to tax this income. DTAA helps in determining the country that is entitled to the primary right to tax, and what relief is to be given. The methods of relief are given through a tax credit and an exemption. A tax credit means tax paid in one country is deducted from the tax that needs to be paid in another country. An exemption means certain incomes are not liable to pay tax again, as explained by Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.
