Specific tax treaties may benefit as overseas salary may not be taxable in India

For an Indian tax resident, worldwide income is taxable in India. For a non-resident, only income accrued in India or received in India is taxable. Therefore, when a resident leaves India for taking up employment abroad or a non-resident returns to India after having completed her employment, it is important that her residential status under Indian tax laws is that of a non-resident for that particular year and for the years in which she is employed outside India, to ensure that her overseas salary is not taxed in India.

A person is normally a resident if she has been in India for more than 182 days during the relevant financial year. She is also considered as a resident if she is in India for more than 60 days during the relevant financial year, having also been in India for at least 365 days during the earlier four years. However, an exception has been made for a person leaving India for the purpose of employment outside India, for a member of crew of an Indian ship and for a non-resident Indian or person of Indian origin who, being outside India, visits India during the year. For such persons, the 60 days period does not apply, but the period of 182 days does.

Therefore, a person who leaves India for taking up a job abroad needs to ensure that she is in India for less than 182 days during the year, so that her overseas salary is not taxed in India. There is, however, no benefit of such extended period requirement for a person who quits her overseas job and returns to India for good. Therefore, if a person leaves her overseas job after a few years and returns to India, she needs to ensure that she is in India for less than 60 days during the year, particularly if she has been on visits to India during the preceding four years for extended periods totalling more than 365 days, or has left India within that period of four years by virtue of which her stay during the past four years exceeded 365 days.

Of course, if a person has been employed overseas for more than nine years and has, therefore, been non-resident for at least nine years during the last 10 years or has been in India for less than 730 days during the past seven years, she may qualify for the status of “not ordinarily resident”. In this case, her overseas salary would still not be taxed in India.

Also, specific tax treaties may grant certain benefits, by virtue of which, overseas salary may not be taxable in India.

The problem faced by returning non-resident employees was brought home in a recent advance ruling. In that case, an Indian citizen was employed with an Indian company from 2002 till 2007. Her employment was thereafter shifted to a Chinese company of the same group from October 2007 till January 2011. She returned to India on 12 February 2011, but her total stay in India (including earlier visits to India) during the financial year 2010-11 was for 119 days. Due to the fact of her employment in India earlier, the number of days that she was in India during the earlier four years was 625 days.

Before returning to India, the taxpayer encashed her stock options, which she had become entitled to due to her employment with the Chinese company. The proceeds of the stock options were first credited to her US account, and then remitted to India.

The taxpayer claimed that she had not returned to India with the intention of permanently staying or settling in India, but was on a visit to meet her family and friends. Her husband’s house in India continued to be occupied by tenants, and the taxpayer had been travelling to different locations for holiday and to meet with family, friends and relatives, staying in hotels at different places after her return to India. She had a valid Chinese employment permit till 31 March 2012, and could take up fresh employment in China, if she so desired.

The Authority for Advance Rulings pointed out that the test to be applied was whether the taxpayer had come on a visit to India as a non-resident, and whether she came to India only for a visit. Looking at the facts and circumstances, it concluded that the taxpayer was not just on a visit to India, particularly as she did not leave India thereafter for any employment. It therefore held that the taxpayer was a resident of India during the relevant year and that the income by way of encashment of stock options received by the taxpayer was taxable in India during the year.

The facts of this case show that if the taxpayer had taken a little bit of care in returning to India after a couple of months, in April instead of February, it would have saved her a considerable amount of tax in India and ensured that the hard earned savings from her Chinese employment were not significantly eroded.