Monday, July 15, 2019

How NRI can avoid Tax on Foreign Income by timing Departure and Return

If you are an NRI returning to India for good or an Indian going abroad, you need to be aware that you need to pay tax on your foreign income (earned outside India a.k.a global income) if you come before February 1st or leave after September 28th. Taxation in India depends upon individuals residential status. An Indian citizen, who is NRI for a financial year i.e. from 1st April to 31st March is not required to pay tax on their global income but if his residential status is Resident and Ordinarily Resident (R) then his global income is also taxable. In order to attain NRI status, you need to stay more than 182 days outside India, remember the arrival and departure dates are also counted as stay in India.

So if you somehow manage to do that by timing your arrival or departure then you can save good amount of tax by avoiding your foreign income to be taxed in India @ higher rate of 33% . Though those dates are little bit adjustable depending upon whether current year is a leap year or not and depending upon whether you have spent less than 365 days in India in preceding four years, but it gives an indication how an NRI can prevent his foreign income to be taxed at higher rate on India.

Things to remember about NRI taxation

If you are an NRI then its very important for you to be aware of how taxation on India works and whether you need to file tax returns or not.

1) Always remember taxable period. Financial year in India starts at 1st April and ends at 31st March. Number of days stay in India during this period is counted to ascertain individuals residential status for taxation purpose.

2) An Indian citizen is considered NRI if he stays less than 182 days in India during a financial year and has not stayed for more than 60 days in previous year or not in India for 365 days or more during the last four years prior to the previous year. The limit of 60 days is extended as 182 days for persons leaving India for employment outside India.

3) Remember, Day of departure from India and day of arrival into India are counted as 1 day each i.e. total of 2 days of stay in India. Dates stamped on person's passport are normally considered as proof of departure from and arrival.

4) You can avoid tax on your global income in the 1st year of leaving India for Employment, if you leave before September 24th, to attain NRI status for the said financial year. Otherwise, your total including, including foreign income the the said financial year (the year when you leave India) is taxable in India.

5) Similarly, you can save your foreign income from tax in India if you are an NRI and returning to India for good, by going on or after February 1st (or February 2nd in case of leap year) to keep your residential status as an NRI.

How NRI can avoid tax on their foreign income

You also have an advantage if your stay in India for previous 4 years does not exceed 365 days. In that case you can return India as early as 2nd October (or 3rd October in case of leap year) to maintain NRI status and avoiding tax on foreign income.

That's all about how you can avoid tax on your foreign income if your depart or arrive India at right time in a financial year. In both cases, i.e. when you leave India after 24th September or arrive after 2nd February, you will remain non-resident for that financial year (i.e. 1st April to 31st March) ensuring your income earned outside India is non taxable in India for said financial year. BTW, you can also claim tax rebate if you have already paid tax on your foreign income in the country you are currently staying and you couldn't avoid taxation on your global income.

Other frequently asked questions on NRI savings and taxation :
  • Do you need to pay tax when you transfer money to India from Overseas [answer]
  • Can NRI invest in public provident fund or PPF? [answer]
  • Can NRI open more than one NRE or NRO account? [answer]
  • What happens to NRE, NRO or FCNR fixed deposit when NRI returns India for good? [answer]
  • Can you withdraw money from PPF before maturity? [answer]
  • Can you invest more than 1 lakh in PPF account? [answer]

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