Artices

One of the most common questions we receive from NRIs or Indian citizens who have gone abroad and later settled outside India or alternatively Indian citizens who have returned to India & became resident of India again is regarding the taxability of their income in India & abroad.

In such cases, once a person leaves India and becomes a Non-Resident under the Income-tax Act, 1961, they may continue to have investments or income sources in India, such as mutual funds, shares, or rental income.

A frequent query is whether such income is taxable in India or in the foreign country of residence.

Let us understand this through the following scenario:

Scenario 1: Indian citizen becomes an NRI or Foreign citizen earning incomes from India (tax resident of a foreign country).

As per the Income-tax Act, 1961, any income that accrues, arises, or is deemed to accrue or arise in India is taxable in India, irrespective of the residential status of the taxpayer. Accordingly, income such as rent from property in India, capital gains from Indian assets, or interest/dividend from Indian investments is taxable in India.

At the same time, since the individual is a tax resident of a foreign country, that country may tax the person on their global income, including income earned from India.

Relief from double taxation (DTAA)

To avoid double taxation, India has entered into Double Taxation Avoidance Agreements (DTAA) with several countries.

Under the applicable DTAA:

• India, being the source country, has the right to tax income arising in India.
• The country of residence allows the taxpayer to claim Foreign Tax Credit (FTC) for taxes paid in India, subject to the provisions of the DTAA and local tax laws.

This means:

• The taxpayer includes the Indian income in their foreign tax return.
• Claims credit for taxes paid in India.
• Ensures that the same income is not taxed twice.

Scenario 2: Indian Citizen Returning to India and Re-acquiring Resident Status or a foreign Citizen becoming a resident of India

In this scenario, an Indian citizen has returned to India and qualifies as a resident for Indian income-tax purposes. The individual continues to hold investments such as mutual funds, equity shares, and immovable property located in a foreign country.

Outlined below is the tax treatment of commonly earned incomes arising from such foreign assets, in accordance with the United Nations Model Convention (“UN Model”), applicable Double Taxation Avoidance Agreements (“DTAAs”), and the Indian Income-tax Act, 1961.

1. Dividend Income

As per Article 10 of the UN Model Convention and most DTAAs entered into by India, dividend income is primarily taxable in the country of residence of the recipient.

Suppose an Indian citizen, being a resident of India, holds investments in the United States, the dividend income arising therefrom shall be taxable in India under the applicable DTAA.

If tax is withheld at source in the United States on such dividend income, the Indian resident shall be eligible to claim a Foreign Tax Credit (“FTC”) in India for the taxes paid abroad, subject to the provisions of the Indian Income-tax Act and the relevant DTAA.

2. Interest Income

As per Article 11 of the UN Model Convention and most DTAAs, interest income is taxable in the country of residence of the recipient.

Suppose where an Indian resident earns interest income from investments held in the United States, such income shall be taxable in India in accordance with the applicable DTAA.

Similar to dividend income, interest income earned from a foreign country is required to be included in the total income taxable in India. Any tax withheld in the foreign country may be claimed as a Foreign Tax Credit in India, subject to prescribed conditions.

3. Rental Income from Immovable Property Situated Outside India

As per Article 6 of the 𝐔𝐍 𝐌𝐨𝐝𝐞𝐥 𝐂𝐨𝐧𝐯𝐞𝐧𝐭𝐢𝐨𝐧 𝐚𝐧𝐝 𝐦𝐨𝐬𝐭 𝐃𝐓𝐀𝐀𝐬, income from immovable property is taxable in the country in which the property is situated.

Accordingly, rental income arising from immovable property located outside India may be taxed in the foreign country where the property is situated.

However, under the Indian Income-tax Act, 1961, a resident of India is required to include such rental income in their total taxable income in India. In such cases, relief by way of Foreign Tax Credit may be claimed in India for taxes paid in the foreign country, in accordance with the applicable DTAA and Indian tax provisions.

Conclusion: To check the taxability of income, first step is to check the residential status of the person & second step is to check the taxability of the incomes in accordance with Income Tax Act, 1961 & along with DTAA provisions. Nature & source of income plays an important role to check the taxability of incomes.

By ~ CA Vidhu Duggal

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