India as a nation only taxes people on their residential status in India and income level, meaning it follows ‘Residency’-based taxation and not `Citizenship`-based taxation. This signifies that Foreign nationals who are employed in India are liable to income tax and citizens as non-residents are not liable to pay income tax.
According to India’s Income Tax Act (ITA), there are three levels of residency for tax purposes:
- Non-resident – these individuals are not liable to income tax;
- Resident but not ordinarily resident (RNOR) – these individuals are taxed on their worldwide income; and
- Resident and ordinary resident (ROR)- these individuals are tax only on their Indian sourced income. Who is a foreign national in India, Persons of Indian Origin, and Citizens of India (OCI).
Who are Persons of Indian Origin (PIO), Overseas Citizens of India (OCI), and Foreign Citizens?
According to the Ministry of external affairs
- Any individual who is not a citizen of India is considered a foreign national.
- A Person of Indian Origin (PIO) means a foreign citizen who at any time held an Indian passport or who or either of their parents/ grandparents/ great grandparents was born and permanently resident in India or Who is a spouse of a citizen of India or a PIO.
- And Any foreign national, who was eligible to become a citizen of India on 26.01.1950 or was a citizen of India on or at any time after 26.01.1950 or belonged to a territory that became part of India after 15.08.1947 is eligible for registration as an Overseas Citizen of India (OCI).
How do one Determine his Residential Status?
Anyone who is in India for at least 6 months (182 days to be exact) during the financial year or when you spent 2 months for the year in the previous year and have lived for one whole year (365 days) in the last four years will be considered a resident for that financial year.
Different types of Income
- Employment Income
The income of a foreign national includes all that he has earned either in cash of in-kind, which will include his/her wages, pensions, bonuses, benefits or reimbursement, sweat equity, etc. Indian law recites that any benefits and allowances must also be included in the income as they are taxed differently.
Benefits can be anything in addition to salary. Benefits do also add up in the income of employees. However, Government has given rules for the valuation of the following benefits provided by the employer.
An allowance may define as a fixed quantity of cash given regularly in along with the salary of employees to meet specific requirements. Allowances also increase taxable income.
- Non-employment income
There are special taxes levied for expatriates on income arising from non-employment sources which include long and short-term capital gains and the investments in shares by non-resident foreign nationals are governed by the Indian foreign direct investment policy.
Double Taxation Avoidance Agreements
Most of us will be having this question what if someone is double taxed i.e. taxed by both nations on the same income. A foreign national taxpayer working in India is able to reduce taxable income in their country (and double taxation) under a double taxation avoidance agreement.
Incomes Exempt from Tax of foreign national
There are some types of income that are exempted from the tax, which are as follows:
(1) Remuneration of embassies’ officials, high commission, etc.
(2) Any type of remuneration acquired from a foreign enterprise for services rendered in India.
(3) when any remuneration is done of an employee on a foreign ship where his stay in India does not exceed 90 days.
(4) Remuneration which is received from any foreign Government, on training in certain establishments in India.