One of the most prevalent misconceptions among Indians living abroad is the belief that spending more than 182 days outside India automatically classifies them as non-residents for tax purposes. However, this is merely one of several criteria used to ascertain their tax residency status in India. It is possible for someone who has never resided in India to still be considered a resident for tax purposes!
In today's increasingly interconnected world, the frequent movement of people between India and the UAE for professional and personal reasons is becoming more common. It is crucial to recognize that an individual's tax liability is determined by their residency status, not their nationality. This is particularly important for expatriates and foreign investors, as it influences how their income is taxed by the Indian government.
The Indian Income Tax Act categorizes individuals based on their residency status, which subsequently affects their tax obligations. There are three primary residency statuses under the Act: 1) Resident and Ordinarily Resident (ROR), 2) Resident but Not Ordinarily Resident (RNOR), and 3) Non-Resident (NR). For example, an Indian citizen with an Indian income exceeding Rs1.5 Mn who moves to the UAE to start a business, despite having lived in India their entire life, could be classified as an ROR in India for that tax year if they meet the 365-day condition, even if they have only stayed in India for 60 days or more. However, if they moved for employment purposes, only the 182-day criterion would apply. Additionally, due to the absence of personal income tax in the UAE, they could be considered an RNOR under the newly introduced tax nomad provisions if they have stayed in India for less than 60 days.
For UAE residents with income sources in India, the application of the tax treaty is crucial. This agreement ensures that taxpayers are not doubly taxed on the same income by both nations, providing clarity on which country has the right to tax specific types of income. For instance, the treaty stipulates that if a UAE resident invests in Indian mutual funds, the gains will not be taxed in India. When an individual qualifies as a resident in both India and the UAE under their respective tax laws, the tie-breaker rule in the Double Taxation Avoidance Agreement (DTAA) comes into effect. This rule aids in determining the country of residence for tax purposes, based on criteria such as the individual's permanent home, center of vital interests, and habitual abode.
Accurate determination of tax residency is essential to avoid double taxation. It helps identify the residence and source countries when accessing treaty benefits. Incorrectly determining residency status can lead to unexpected tax obligations in both countries, complicating financial management and potentially resulting in legal disputes. In conclusion, while citizenship serves as a personal identifier, it is the residency status under the Indian Income Tax Act that dictates tax obligations for individuals. For UAE residents, utilizing DTAAs and understanding the tie-breaker rules are crucial steps in achieving tax efficiency and compliance.
As international interactions continue to expand, staying informed and proactive about tax residency and double taxation provisions will remain a fundamental aspect of sound financial management.
