In the complex landscape of Indian tax laws, an individual's residential status holds the key to understanding the scope of taxable income and reporting obligations. According to Section 6 of the Income-tax Act, 1961, individuals can be categorized as Ordinarily Resident, Not Ordinarily Resident, or Non-Resident (NR) based on certain conditions.
For NR taxpayers, taxation in India is limited to income earned or received within the country. The 'other sources' category includes interest from bank accounts/deposits and dividend income from investments in shares and mutual funds within India. The applicable tax rates depend on the provisions of the Act and double taxation avoidance agreements.
An individual working in the US will qualify as an Non Resident in India and a Resident in the US. The interest income from Indian sources is taxable in India at slab rates, potentially reaching 42.744% under the old tax regime. However, the India-US tax treaty offers relief, taxing such income at 15%, making it advantageous for the taxpayer.
To benefit from the treaty, the NR taxpayer must obtain a Tax Residency Certificate (TRC) from US tax authorities and consider filing Form 10F for income exemption. Similarly, dividend income from Indian investments may be taxed at 20% in India or 25% under the tax treaty, prompting careful evaluation by the taxpayer.
If NRI taxpayers own mutual fund units or shares of Indian companies and receive dividend income from these investments, the income is typically taxable at 20% (plus any applicable surcharge and cess) without being eligible for any Act-provided deductions for things like life insurance, public provident fund, NPS, etc. A dividend given by an Indian firm to an NRI who meets the requirements to be a US resident may be subject to 25% taxation under the terms of the India-US tax treaty.
In comparison to the tax rate under the Act, the dividend tax rate under the tax treaty is higher. Therefore, if it is more advantageous for them, the taxpayer may elect to offer the dividend income for tax in India at the local tax rate of 20%.
It's crucial for NR taxpayers to ascertain their residential status annually, ensuring accurate income reporting. Forms like AIS and TIS from the Indian tax authorities streamline this process, detailing financial transactions. However, reconciliation with personal records is essential to avoid duplication or omissions in income reporting and mitigate future queries from tax authorities.
Choosing the correct Return of Income (ROI) form is equally vital for NR taxpayers. Forms like ITR-1 and ITR-4 are unsuitable for those qualifying as NR under Section 6. NR taxpayers must be careful when determining reportable income and assets, considering the distinctions from ordinarily resident taxpayers under the Act and applicable tax treaties.
