Tax accountability upon international relocation
February 17, 2024
Departure levies are enforced by governing bodies on individuals, enterprises, and assets upon exiting to seize any accrued or unrealized capital gains before the taxpayer’s departure. The term “exit levies” is not prevalent in India. So how does one ascertain the tax accountability upon international relocation? Certain tax statutes and regulations govern individuals or enterprises departing from India. Let’s delve into it.
International Relocation and Tax Consequences
What is the Threshold for Tax-Free Foreign Earnings in India?
Must I Fulfill Tax Obligations If I Relocate to Another Nation?
Tax Implications of Relocating from India to the USA
Consequences for Failing to Declare NRI Status
Conclusion
International Relocation and Tax Consequences
The Foreign Exchange Management Act of 1999 and the Income Tax Act of 1961 must be adhered to by anyone relocating from or returning to India. While the Income Tax Act governs the taxation of earned income, FEMA oversees compliance.
The FEMA legislation defines an “inhabitant” in India as someone present for 182 days or more in the preceding fiscal year, with exceptions for those relocating for employment or permanent residency.
What is the Threshold for Tax-Free Foreign Earnings in India?
Tax liability on foreign earnings of an Indian inhabitant
The total global income of the inhabitant is subject to income tax in India. Foreign earnings, i.e., earnings accruing or arising outside India in any fiscal year, are liable to income tax in that year, even if not received or remitted to India. Income tax liability cannot be evaded even if remittance of foreign income to India is restricted. In the case of income derived in a foreign country whose laws prohibit or restrict the remittance of funds to India, proceedings for the recovery of tax assessed and payable on such foreign income cannot be initiated against the assessee until the period of prohibition or restriction is lifted.
Must I Fulfill Tax Obligations If I Relocate to Another Nation?
The Income Tax Act of 1961 imposes taxes based on a person’s residential status. The residential status is determined annually using the aforementioned criteria. An individual with NRI/RNOR status is only required to pay taxes on income earned and accumulated within India. Income received from foreign assets or generated outside the country is not subject to taxation in India.
Those categorized as “Ordinarily Residents in India” must disclose all information regarding their foreign assets in their income tax return and are subject to income tax both in India and abroad. To mitigate the impact of income taxes on foreign income, taxpayers must arrange to liquidate assets held abroad before acquiring Indian resident status.
Tax Implications of Relocating from India to the USA
To determine the income tax ramifications, an individual must be further classified as ROR or RNOR if deemed a “resident,” meaning their stay in India exceeds 182 days. If classified as “Ordinarily Resident” in that year, their global income (including foreign income) will be taxable. If classified as “Ordinarily Resident,” only income earned and accumulated in India will be taxable in India.
Prior to relocating to the United States, individuals should initiate the process of closing any domestic bank savings accounts and converting them to NRE accounts. In India, interest on FCNR and NRE accounts is not subject to taxation. Conversely, interest on an NRO account held by a non-resident is fully taxable in India. This is to facilitate management of the NRI’s income earned in India by the NRO account.
Additionally, individuals will need to request a change in their residence status from mutual fund houses. This is crucial because before any income, whether in the form of dividends or capital gains, can be disbursed, TDS must be deducted at the lowest feasible rate.
Consequences for Failing to Declare NRI Status
FEMA does not impose penalties for failing to declare NRI status. However, individuals must transfer their funds to an NRO account or close their existing savings account. According to FEMA regulations, an NRI retaining their domestic savings account after attaining NRI status is in violation of the law and may face severe penalties.
Conclusion
Individuals relocating abroad must ensure that they indicate a change in residential status for all investments held in India or abroad. Failure to update status may result in higher withholding tax for non-residents. As the status changes, constraints, and other factors and consequences will be addressed.
Mr. Nipun Khanna is the founder of this firm- Startup Solicitors LLP
Nipun Khanna
