When an individual move abroad for work or business, their residential status changes, leading to significant tax implications. Some of the key questions they ask include: 

• Will my salary income be taxed in India once I become a Non-Resident (NRI)?

• Do I still need to file an ITR in India?

• Will I get tax benefits on my investments in India?

• What happens to my PPF, NRO account interest, and other assets?

• Do I need to report my global income while filing taxes in India?

This article will clarify these key tax concerns for individuals transitioning from Resident to Non-Resident under the Income Tax Act, 1961. 

What is Unclear About NRI Taxation? 

Many people wrongly assume that their Indian income remains taxable in the same way even after becoming an NRI. However, the tax treatment of salary, investments, and foreign income changes significantly when an individual’s residential status changes from Resident (R) to Non-Resident (NRI). 

Additionally, many NRIs are unaware of the Double Taxation Avoidance Agreement (DTAA), which helps them avoid paying tax in both India and their country of residence. 

Some key unclear aspects include: 

• How is my salary taxed if I qualify as a dual resident?

• What happens to my NRO account interest after I become an NRI?

• Do I need to report my global assets while filing an ITR in India?

Case Study: What Happens When a Returning NRI Has Dual Residency? 

Mr. X, an Indian citizen, has been working in the United States for several years. In FY 2024-25, his residency status is as follows: 

✔ In India: 

• Stayed for more than 120 days and earned ₹15 lakhs+ in the financial year.

• Qualifies as a Resident under Section 6(1A) of the Income Tax Act, 1961.

✔ In the USA: 

• Stayed for more than 182 days, meeting the criteria for U.S. tax residency under U.S. tax laws.

✔ Key Residency Factors: 

• Domicile: Mr. X holds Indian citizenship and maintains family ties in India.

• Tax Residency: He qualifies as a tax resident in both India and the USA based on stay duration.

• Place of Effective Management (POEM): His employment, business operations, and primary income sources are in the USA.

Key Tax Questions: 

1. Will Mr. X’s ITR for FY 2024-25 be filed as a Resident or Non-Resident in India?

2. Will Mr. X’s salary earned in the US be taxable in India?

Applying the Tie-Breaker Rules: Determining Mr. X’s Tax Residency 

Since Mr. X qualifies as a resident under both Indian and U.S. tax laws, the Tie-Breaker Rule under Article 4 of the DTAA (Double Taxation Avoidance Agreement) will decide his final tax residency status. 

Step 1: Domicile – Where is Mr. X’s Permanent Home? 

✔ Fact: Mr. X owns homes in both India and the USA. 
✔ Analysis: This test is inconclusive as he has permanent homes in both countries. 

Step 2: Centre of Vital Interests – Where Are His Stronger Economic & Social Ties? 

✔ Fact: Mr. X’s employment, bank accounts, and major economic activities are in the USA. 
✔ Analysis: Since his primary financial and economic connections are in the USA, he is more likely to be a U.S. tax resident under DTAA. 

Step 3: Habitual Abode – Where Does He Spend More Time? 

✔ Fact: Mr. X spends more than 182 days in the USA, compared to 120+ days in India. 
✔ Analysis: Since he resides in the USA for a longer duration, this factor favors U.S. tax residency. 

Step 4: Nationality – Which Country’s Citizenship Does He Hold? 

✔ Fact: Mr. X is an Indian citizen. 
✔ Analysis: If the previous factors were inconclusive, his Indian nationality would favor Indian residency. However, as his centre of vital interests and habitual abode are in the USA, nationality alone does not override the previous findings. 

Final Determination: 

Mr. X will be considered a US tax resident under the DTAA. 

✔ Final Verdict: Mr. X is considered a dual resident, but his salary income will be taxable in the US as per DTAA, avoiding double taxation in India. 

How Can NRIs Optimize Their Tax Liabilities? 

NRIs should strategically plan their tax obligations to maximize benefits and avoid unnecessary tax liabilities. 

✔ DTAA helps avoid double taxation on salary income. 
✔ NRIs should carefully assess their residential status under DTAA to determine tax liability. 
✔ Investments in India should be structured wisely to benefit from concessional tax rates. 

By properly planning their income sources, investments, and tax residency, NRIs can optimize their tax benefits and avoid compliance issues. 

Why Should NRIs Plan Their Taxes Before Moving Abroad? 

Indian tax laws provide specific provisions for NRIs, ensuring they are not unfairly taxed on foreign income. 

Key benefits include: 
✔ Foreign Tax Credit (FTC): NRIs can claim tax credit for taxes paid abroad. 
✔ Lower tax rates under DTAA: Many foreign incomes are exempt or taxed at lower rates under tax treaties. 
✔ Relaxed reporting obligations: NRIs do not need to report global assets unless they become Residents and Ordinarily Residents (ROR). 

However, NRIs must ensure compliance with TDS rules, ITR filing requirements, and FEMA regulations to avoid legal and financial issues. 

What Are the Legal Provisions Governing NRI Taxation? 

The Income Tax Act, 1961, along with DTAA provisions, governs the taxation of NRIs. 

Key Legal Provisions: 

• Section 6(1A) – Residential Status: Defines when an individual becomes an RNOR or Non-Resident.

• Article 4 of DTAA – Tie-breaker rules: Helps determine residency when a person qualifies as a resident of both countries.

• Article 16 of DTAA – Salary Taxation: Salary is only taxed in the country where employment is exercised.

• Section 115E – Special Tax Rates for NRIs:

• Investment income is taxed at 12.5%.

• Long-term capital gains on listed securities are taxed at 12.5%.

These provisions ensure fair taxation for NRIs and help them avoid double taxation. 

What Happens to an NRI’s Investments in India? 

✔ NRIs investing in India are taxed at beneficial rates: 

• Investment income is taxed at 12.5% under Section 115E.

• Long-term capital gains (LTCG) on listed securities are taxed at 12.5%.

✔ NRO Account Interest Taxation: 

• Interest on NRO deposits is taxed at 20% as per Section 115C(c).

• Even if received in INR, the tax rate remains 20%.

✔ PPF Rules for NRIs: 

• NRIs cannot open new PPF accounts but can continue existing ones until maturity.

• Withdrawals are tax-free in India but taxable in their country of residence.

✔ TDS on Portfolio Investment Scheme (PIS) Accounts: 

• Short-term gains (<12 months): 20% tax.

• Long-term gains (≥12 months): 12.5% tax.

✔ Foreign Tax Credit (FTC) for Global Income: 

• NRIs do not need to report global income in their Indian ITR.

• Tax credit is available under DTAA for taxes paid abroad.

What Happens to NRE/NRO Accounts? 

✔ NRE accounts must be converted to resident accounts upon return. 
✔ Interest on NRE accounts remains tax-free only during RNOR status. 
✔ NRO accounts remain taxable. 

Final Thought: NRIs Must Plan Their Tax Transition Wisely 

Changing from Resident to Non-Resident (or vice versa) has major tax implications. Proper planning of tax residency, investments, and filings can help NRIs optimize their tax liability and ensure compliance. 

Key Takeaways: 

✔ DTAA helps avoid double taxation on salary income. 
✔ NRIs get concessional tax rates on Indian investments. 
✔ Interest on NRO accounts is taxed at 20%, even if received in INR. 
✔ Foreign Tax Credit (FTC) ensures NRIs do not pay tax twice on the same income. 
✔ PPF accounts can be held till maturity, but NRIs cannot extend them. 

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