Taxation For Residents And Non-Residents

The provisions regarding taxation and filing of returns would differ depending on your residential status in India. Also, for taxes paid in USA in respect of income earned there, Double Taxation Relief may be claimed.

KEY POINTS:

• For non-residents, income earned outside India is not taxable in India.
• For individuals with Resident but Not Ordinarily Resident (RNOR) status, only that income earned outside India which is controlled from India, will be taxable here.
• For individuals with Resident and Ordinarily Resident (R&OR) status, all their income, whether earned within or outside India, is taxable in their hands.
• For taxes paid in USA in respect of income earned there, individuals are entitled to claim Double Taxation Relief either under the Double Taxation Avoidance Agreement with USA or under the relevant provisions (Section 91) of the Income Tax Act, 1961.

Q: I was an NRI based in the US, and presently, my status in India is that of a Resident but Not Ordinarily Resident (RNOR). I derive income from the US from various sources, including US Social Security Disability Benefits (SSDI), Long Term Disability Benefits from my employer in the US, a small amount of distributions from a rental real estate partnership I still hold in the US (in which I am a limited partner), as well as some marginal and one-time items of income. My employer in the US is currently under bankruptcy proceedings, and is expected to stop paying me Long Term Disability Benefits very soon, but I will continue to receive Social Security Disability Benefits. I don't have taxable income from India to report for FY 2011-12.

I have certain points on which I need your help and clarification.

1. I came to India towards the end of December 2010 and surrendered my US Green Card in the same month after having lived in the US for over 20 years. I would like to know whether my RNOR status ends in FY 2011-12, or whether it can be extended to FY 2012-13.
2. I presume that since I am an RNOR during FY 2011-12 and have no taxable income in India, it may not be mandatory for me to file Income Tax returns for FY 2011-12. However, if it is essential for me to file an tax returns this year, I have to furnish information about my US accounts and other details in ‘Schedule FA’ only as per an ITR form (2 or 3) and no other details of income, etc. from sources in the US need to be reported. Please confirm whether this understanding is correct.
3. When my status changes to Ordinary Resident, would the Social Security Benefits that I receive from the US be shown as income under a specific head in India? If yes, which head of income would that be? Can I claim foreign tax credit from the Indian Income Tax authority for taxes I pay to the US Tax authority, OR can I show this income under a specific head and then claim exemption for it from my taxable income such that the Social Security Disability Benefits I receive do not increase my tax bracket/slab in India?

- Rahul

Reply:

1. You have come to India in December 2010. I am assuming here that you have retained Indian citizenship or are a person of Indian origin. Your residential status for the following years will be:
   
   1. Financial year ended March 31, 2011 (AY 2011-12): Non-resident
   2. Financial year ended March 31, 2012 (AY 2012-13): Resident but not Ordinarily Resident (RNOR)<
   3. Financial year ended March 31, 2013 (AY 2013-14): Resident and Ordinarily Resident
2. For the financial year ended March 31, 2011 (AY 2011-12), you were considered a non-resident, and hence, in case you did not have any income in India, you need not file your return of income for that year. As you are a non-resident, income earned outside India is not taxable here.
3. For the financial year ended March 31, 2012 (AY 2012-13), as your status is Resident but Not Ordinarily Resident (RNOR), only that income earned outside India which is controlled from India, will be taxable here. Thus, your Social Security Benefits would not be taxable in India.
4. For the financial year ended March 31, 2013 (AY 2013-14), your status will change to Resident and Ordinarily Resident (R&OR), and once you attain this status, your world income, that is all your income, whether earned within or outside India, will be taxable in your hands.

 Regarding the Social Security Benefits that you will receive from your ex-employer, those can be shown under the head ‘Income from Salaries’. Any income in respect of which there is an employer-employee relationship will fall under the head ‘Income from Salaries’. You will be taxed in India in case your taxable world income exceeds the basic exemption applicable to you.

As for any tax paid by you in USA in respect of income earned there, such as Social Security Benefits, you will be entitled to claim Double Taxation Relief either under the Double Taxation Avoidance Agreement with USA or under the relevant provisions (Section 91) of the Income Tax Act, 1961. However, the said income will not be eligible for exemption in India.