The residence status of an individual is crucial in comprehending the extent of taxable income and reporting requirements within the intricate framework of Indian tax laws. Section 6 of the Income-tax Act, 1961 states that depending on a number of factors, a person may be classified as an Ordinarily Resident, Not Ordinarily Resident, or Non-Resident (NR).
In India, taxes are only levied on income received or earned domestically for nonresident taxpayers. Interest from bank accounts and deposits, as well as dividend income from shares and mutual fund investments made in India, fall under the category of “other sources.” The Act’s provisions and agreements aimed at avoiding double taxation determine the applicable tax rates.
A person who works in the US is both a resident of the US and a non-resident of India. Under the previous tax system, interest income from Indian sources could have been subject to slab rates as high as 42.744%. The India-US tax treaty, on the other hand, provides relief by taxing such income at a rate of 15%, which benefits the taxpayer.
The NR taxpayer must apply for an income exemption on Form 10F and receive a Tax Residency Certificate (TRC) from US tax authorities in order to take advantage of the treaty. Similarly, dividend income from investments made in India may be subject to tax treaty rates of 25% or 20% in India, requiring the taxpayer to carefully consider their options.
NRI taxpayers who own shares of Indian companies or mutual fund units and receive dividend income from these investments are generally not eligible for any Act-provided deductions for things like public provident fund, life insurance, NPS, etc.; instead, the income is taxable at 20% (plus any applicable surcharge and cess). According to the terms of the India-US tax treaty, a dividend paid by an Indian company to a non-resident Indian (NRI) who satisfies the residency requirements in the US may be subject to 25% taxation.
The dividend tax rate under the tax treaty is higher than the tax rate under the Act. 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%.
To ensure accurate income reporting, it is imperative that non-resident taxpayers determine their residential status on an annual basis. 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.
For non-resident taxpayers, selecting the appropriate Return of Income (ROI) form is equally important. Forms such as ITR-1 and ITR-4 are inappropriate for individuals who meet Section 6’s definition of NR. The Act’s differences from taxpayers who are normally residents and any applicable tax treaties should be taken into account by NR taxpayers when calculating reportable income and assets.
