Many Non-Resident Indians (NRIs) believe that just because they reside outside India, their business and professional income is exempt from Indian taxes. But is that really the case?
The Income Tax Act does not just consider where you live; it also looks at where your business is controlled from and where your profession is set up.
This blog dives into key case studies and tax laws to answer the pressing question: When is an NRI’s business or professional income taxable in India?
Misconceptions About NRI Taxation
- “I Don’t Live in India, So My Business Income is Not Taxable”
- “If I Own a Business with a Family Member in India, I’m Not Liable”
- “I Run My Professional Practice from UAE, So My Income is Foreign”
To better understand these common misconceptions, let’s analyse case studies and see how Income Tax laws apply in each situation. These examples will help clarify when business and professional income is taxable in India and when it is exempt.
Case Study 1: Business Income from India – Taxable or Not?
Scenario:
- Mr. A, an Indian citizen, has been living in UAE since 2006.
- In FY 2023-24, he spent 180 days in India and managed a trading business that operates in India and UAE with an office in India.
Income Breakdown:
- Interest on NRO account – ₹5,00,000
- Profits from his Indian business – ₹10,00,000
Key Question:
Should his business profits be taxed in India or UAE?
Answer:
Since Mr. A has spent more than 120 days in India and his Indian-sourced income exceeds ₹15 lakhs, he qualifies as a Resident but Non-Ordinary Resident (R-NOR).
Tax Implication: His business profits are taxable in India because the business is controlled from India.
Case Study 2: Business Income from UAE – Taxable in India?
Scenario:
- Mr. A starts A Bros., a diamond trading firm in UAE with his brother.
- Their father, residing in India, makes key business decisions and oversees finances.
Income Breakdown:
- Interest on NRO account – ₹5,00,000
- Profits from ‘A Bros.’ – ₹10,00,000
- Sales Commission from ‘A Bros.’ – ₹20,00,000
Key Questions:
- Since the business is in UAE, is the profit taxable in India?
- What about the sales commission earned from the UAE company?
Answer:
- Profits from ‘A Bros.’ are taxable in India because the business is controlled by Mr. A’s father from India.
- Sales commission is NOT taxable in India because it is earned from services performed in UAE.
Case Study 3: Professional Income from India – Taxable or Not?
Scenario:
- CA Shah, an Indian citizen, moves to UAE but continues to manage his Indian professional practice remotely with help from staff in India.
- He spends 170 days in India and 140 days in UAE in FY 2023-24.
Income Breakdown:
- Professional fees from Indian clients – ₹13,00,000
- Interest income from Indian bank accounts – ₹1,00,000
- Professional fees from NRI clients in UAE – ₹2,00,000
- Interest income from UAE bank accounts – ₹1,00,000
Key Question:
Which part of his income is taxable in India?
Answer:
- Professional fees from Indian clients and Indian bank interest are taxable.
- Professional fees from NRI clients in UAE are ALSO taxable in India because his professional practice is set up in India.
- Interest income from UAE bank accounts is NOT taxable in India.
Tax Implication: Since his Indian-sourced income exceeds ₹15 lakhs, he qualifies as an R-NOR, making his Indian and business-controlled income taxable in India.
Why Does This Happen? Understanding the Legal Framework
The Income Tax Act, 1961 has clear rules on this:
Key Sections to Know
- Section 5(1): Income is taxable in India if it is received, accrued, or deemed to accrue in India.
- Section 6(1A): Defines residential status based on days spent in India and taxable income.
- Section 5(1) Proviso: Income from a business controlled or profession set up in India is taxable in India—even if earned abroad.
- Business is Controlled or Managed from India: If an NRI operates or makes key business decisions from India, even if the business is located abroad, the income may be considered Indian-sourced and taxable in India.
- Business has a Permanent Establishment (PE) or a Fixed Place in India: If an NRI’s business has a fixed presence in India, such as a sales office, client support centre, or production unit, the income generated through that PE is taxable in India.
These laws ensure that businesses controlled from India do not escape taxation just because the owner is an NRI.
What is the Impact?
- NRIs with business interests in India must check if their business is controlled from India to determine tax liability.
- Professionals working remotely need to assess whether their practice is set up in India, which may bring their foreign earnings into Indian taxation.
- Proper tax planning is crucial to avoid unnecessary tax burdens and ensure compliance with Indian laws.
Final Thought: NRIs Must Look Beyond Residency
Living abroad does not automatically mean that business or professional income is tax-free in India. If an NRI controls a business or profession from India, some of their income remains taxable in India.
Key Takeaways:
- Business profits are taxable in India if controlled from India.
- Professionally earned income is taxable if the profession is set up in India.
- Sales commission and UAE-sourced personal income are not taxable in India.
- Understanding residential status is crucial to determining tax liability.
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