Out whitepaper titled Interaction of Indian and U.S. Tax Laws discusses the residence rules in India and the U.S. In this blog, I will cover the individual residence rules in India.
The tax code in India, like in the United States, sets out objective determination of the tax residence of an individual based on the number of days such individual resides in India. But this determination may be complex and requires facts to be analyzed in further detail in accordance with the rule or regulations that elaborate the main legal provision. .
An individual residential status is to be determined for each tax year separately. The annual tax year in India is called the assessment year and generally follows the financial year beginning from April 1 to March 31 in the next year. An individual may either be a resident, nonresident or not ordinarily resident in India during a tax year. In principal the fundamental residence rules are:
- An individual is an Indian tax resident if he resides in India:
- for 182 days or more during the current tax year; or
- for 60 days or more in India during the current tax year and for 365 days or more during 4 tax years preceding the current tax year. The period of 60 days is replaced by 182 days where an Indian citizen or a person of Indian origin (i.e., a person who’s either parents or grand-parents were born in undivided India) comes on a visit to India, but not for a permanent stay.
- An individual is a not ordinarily resident in India if he:
- has been a nonresident in India for 9 out of 10 tax years preceding the current tax year; or
- has been in India for 729 days or less during 7 years preceding the current tax year.
- An individual is a nonresident Indian is he does not satisfy any of the above requirements during the tax year.
India follows residence-based taxation, i.e. the income is taxable in India based on the residence. Taxation is not based on citizenship as is the casein the U.S. An Indian resident is taxable on his worldwide income like a U.S. citizen or resident. However, a nonresident Indian is only taxable for the income received, accrued or derived from India, unlike in the U.S. where even if the U.S. citizen even if residingoutside the U.S., he will still be considered as a US resident and taxable on his worldwide income.
Indian residents who are moving to the U.S. should take into consideration that the income from Indian sources will be taxable in India. Further, if they become US residents, then such income is also taxable in the US. The US tax authorities have been making constant efforts to educate taxpayers to be compliant with tax filing and reporting requirements.