For determining whether the expat is liable to tax in India or not, we need to look at the residential status of such expat. The matrix of taxability of expats income based on residential status is as hereunder:
ncome | Residential Status | ||
Resident and Ordinarily Resident | Resident but Not Ordinarily Resident | Non-Resident | |
Income received or deemed to be received in India | Yes | Yes | Yes |
Income accrues or arises or deemed to accrue or arise in India | Yes | Yes | Yes |
Income that accrues or arises outside India from a business controlled in India or a profession set up in India | Yes | Yes | No |
Other income | Yes | No | No |
The residential status of the expats can be classified into 3 categories:
The following are the provisions that are key to determining the residential status of expats in India:
An individual shall be considered as resident in India if
An individual shall be considered as resident but not ordinarily resident if:
All the other individuals that fail to satisfy the conditions prescribed under Section 6(1) or 6(6) of the Income Tax Act, 1961 shall be classified as non-resident in India.
Thus, whether the expat’s income will be taxable in India or not and if yes, then which portion of his income will be taxed depends upon the residential status under which such expat falls.
The expat’s income might be subject to jurisdictional double taxation whereby both the home country and the source country would levy taxes on the same income. The expat seconded to India will be subject to Indian income tax because the income was earned in India. Also, such expat will also be taxable for the same income under his home country’s tax law because that is the home country where he is resident.
To avoid such instances of double taxation, Double Taxation Avoidance Agreements (DTAAs) are entered into between the nations. DTAAs lays down broad provisions relating to the incomes that are liable to tax and which countries are authorised to tax which income. Further, in India, the provisions of DTAA override the provisions of the Income Tax Act, 1961 if they are more beneficial to the assessee. Thus, while determining the tax liability of the expats, it is important to consider the provisions of both the taxation laws of the respective nations and the DTAA entered into between them if any.