Individual: Basis of Taxation in India
Our readers would now know that India follows residence-basedtaxation. Our whitepaper titled Interaction of Indian and U.S. Tax Laws further illustrates the broad basis of income taxable to a resident, not ordinarily resident and nonresident in India.
Broadly, an Indian tax resident, not ordinarily resident and nonresident are taxable as under:
- resident is taxable on worldwide income;
- not ordinarily resident is taxable on income received or accrued or arisen in India; and
- nonresident is taxable on income sourced in India.
Individuals exiting India (who become nonresidents) may still be taxable on income in India even after moving out of India. Similarly, individuals entering India (who become an Indian resident)are taxable on their worldwide income. In both these situations, tax planning will help in mitigating taxes and meeting the compliance requirements specifically required by residents, not ordinarily residents and nonresidents. So, when to start planning?
An individual who is coming to India (assuming he has never resided in India) will be a nonresident Indian unless he resides in India for more than 181 days. Where such individual continues to be in India for less than 182 days in a year such that his day count is less than 365 days in four years, he will continue to be a nonresident. In essence, this gives such nonresident individual four years to plan his Indian tax implication on his worldwide income if he is considering to stay or return to India in long-term.
Similarly, an individual planning to exit India will continue to be taxable on his worldwide income unless he resides in India for less than 182 days. Consequently, when leaving India, such individual should plan whether to transfer or contribute assets in India in a manner that the tax is mitigated and converged with tax implications that may arise after moving to another country.
In our whitepaper titled Interaction of Indian and U.S. Tax Laws we have covered how tax planning for high net worth individuals and global investors is important. A word for thought for high net worth individuals is to consolidate the list of assets including business interest to plan whether they would like to distribute their Indian assets by transferring or contribute in a trust as income from such assets will be taxable in India and may further be taxed in the country where they may choose to move. For global investors, it is important to plan their business interests in Indian entities as they may become taxable on profits of the Indian company upon becoming a U.S. resident whether or not the entity is making actual distributions.
Though tax treaties between countries often prescribe the taxing rights to one of the countries, however the compliance under domestic law cannot be ignored. With changing tax regulations to congruent tax policies around the world, it is important that high net worth individuals and global investors do their tax planning before outrightly moving to another country as the stakes may be high and so the increasing compliance costs to streamline into the system after the offence has been committed.