Salaries of NRIs going for job overseas is not taxable.. in the same way as salaries of expats are not taxable in their home countries

[Vivek Jalan]

The Income Tax Department plays hot and cold at the same time in the matter of Non-Residents moving out of their own countries for being employed in another Country. They wish to tax in India, expatriates who become residents of India on the income earned by them from all over the world. On the other hand, they also wish to tax salaried Indian Non-Residents who are deputed to work outside India by holding that since these individuals are employed by Indian Companies, so their salaries will be taxed in India as the salaries are received in Indian Bank Accounts.

Under the Indian tax laws, the tax incidence arises on the basis of residential status, which in turn depends on the number of days stayed in India. A tax resident of India is subject to tax on his worldwide income.

However, a non-resident is subject to tax in India only under two situations, i.e.

(i) income accrued in India and

(ii) “income received” in India.

Hence, in case of non-resident, income is considered as taxable in India even if it is “received” in India (though employment done abroad).

The important point here is that the terms “income received” and “amount received” are qualitatively different. The “salary amount” of NRIs is received in India in case of NRIs but the “salary income” is received outside India. Such employee had the lawful right to receive salary outside India. The salary income is at the employee’s disposal outside India, and he merely exercises his right to “receive the amount” or “transfer the amount” to India. This was the decision of the ITAT Delhi in the case of Devi Dayal.

The field authorities also try to dispute the taxability of NRI salaries on account of the following-

1. Non-furnishing of Tax Residency Certificate (TRC) of the Country of employment
2. Non-furnishing of proof of payment of taxes in the Country of employment

Hence, to avoid disputes at the field formation level we suggest the following –

1. The Employee agreements should be properly structured. These agreements may bring out the point that the salary for services rendered overseas is being credited to a bank account in India, at the employee request for the sake of convenience. It may be a better option to pay the salaries in the foreign bank account of the employee itself.

2. While in these cases Tax Residency Certificate (TRC) of the Country of employment is not required as there is no DTAA benefit being claimed, but the income itself is exempt; However, it is advisable to have a TRC and produce before the Indian Tax Authorities to avoid disputes at the field formation level.