Income Tax Rules When Moving Outside India

Points to be kept in mind and steps to be taken by a person leaving India:

1. Planning of Residential Status (RS): It is important to plan departure out of India to ensure RS is Non-resident (NRI) as per Income-tax Act, 1961 (‘the Act’). This helps to limit taxability to “Indian income” only and any overseas income may not liable to tax in India in the year of departure (i.e. 1st April to 31st March).

• Note: If an Indian Citizen is leaving India for employment abroad during FY 2020-21, he shall be NRI as per Act if he leaves India on or before September 28, 2020 (except for certain cases where Indian citizen are considered as deemed resident of India, irrespective of their number of days of stay in India)

2. Bank accounts in India by NRIs: Upon leaving India for good, one is required to intimate Bankers about change in status to “Non-Resident” under FEMA and re-designate resident bank account to Non Resident Ordinary (NRO) Account.

Further, NRIs are eligible to open Non-Resident External (NRE) account and Foreign Currency Non Resident (FCNR) account.

• Note: Interest earned from such NRE a/c and FCNR deposit is exempt from tax in India.

3. Tax deduction rates for NRI: Incomes taxable in the hands of NRI, tax is deducted at source (TDS) rates as applicable to NRIs under the Act.

• Note: TDS applicable to NRI is generally higher than rates applicable to Residents. For purpose of appropriate TDS deduction, NRI must inform the payer (Bank/Broker, etc) that his/her residential status is that of NRI.
  
  

The following are TDS rates applicable to NRIs:

*Plus applicable Surcharge, Health and Education Cess

**Taxable if such Long-Term capital gains exceeds Rs. 1 lakh (w.e.f. 01st April, 2018)

4. Benefit under Double Taxation Avoidance Agreement (DTAA): If NRI’s income is chargeable to tax in India as well as Foreign Country, he/she may claim benefit of DTAA, if available. A DTAA is a bilateral agreement entered into between two countries to avoid/mitigate double taxation of income in both the countries (i.e. double taxation of same income). Where there is no DTAA or if the said income is taxable in both the countries, one may be eligible to claim Foreign Tax Credit in the “resident” country.

• Note: If any benefit of lower tax is available under DTAA, NRI may submit Tax Residency Certificate of his resident foreign country and other required documents to Bank/Broker etc. in India to deduct tax at lower rate (as prescribed in respective DTAA).

5. Tax Exemption Certificate (TEC): In cases where tax deducted is at a higher rate and actual tax liability is much lower as per the Act, NRI may make an application to Indian Income tax Department for TEC authorising the Payer of income to deduct tax at lower/Nil rate as applicable.

6. Requirement to file Income Tax Return of Income (ITR) in India: A NRI is generally liable to file ITR, if his/her taxable income in India during the relevant Financial Year (F.Y.) (1st April to 31st March) exceeds the basic exemption limit (i.e. Rs. 2,50,000/- for F.Y. 2020-21), subject to certain conditions.

• Note: By filing ITR in India, NRI can claim refund of taxes deducted over and above his/her actual tax liability in India.

7. Prohibited businesses for NRI: NRI must retire from firm/company if it is carrying on business of real estate, Nidhi, chit fund, lottery, betting, gambling, manufacturing of cigars, etc., trading in TDRs etc. as per FEMA provisions.

8. PAN Migration: When a person becomes NRI, his PAN jurisdiction must be transferred from Domestic Taxation Ward to International Taxation Ward. This process of transfer is typically referred to as ‘PAN Migration’.

9. Impact on Assets held in India: Upon leaving India, NRIs can continue to hold or transfer any security, immovable property situated in India, which were acquired by him when he was resident in India or inherited by him from a person resident in India

10. Remittance of Funds: Once he leaves India and becomes NRI, he may be allowed to remit/repatriate funds from balances held in NRO account up to One Million USD per Financial year (viz- a- viz. USD 2,50,000/- allowed by Resident individual per Financial Year under the Liberalised Remittance Scheme)
    
    

• Note: Funds from NRE account are freely repatriable, without any restriction.
  
  

Wondering how to manage your investments after migrating? Read more on NRI Investment tips in India to know more!

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* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.