Salary of Non-Residents Paid in India Not Taxable, Says Ruling

A non-resident person’s income from services rendered abroad is not taxable in India, the Authority of Advance Rulings (AAR) said. Such a salary will not be taxed despite it being paid into an Indian bank account, the Times of India reported.

The decision by AAR, which is a quasi-judicial body, would help expat workers, especially Indians working on H-1B visas in the United States. The ruling came following a case involving a Texas Instruments employee TN Santhosh Kumar, who was sent to Texas Inc. in the United States for a period of two years. Kumar was paid a part of the salary and certain bonuses in India per month.

“Based on the India-US tax treaty, the AAR held that the place where the employee performs their duties is what is considered and not where the income is received or where the company providing the remuneration is based,” the publication quoted a statement by EY India as saying. “As the salary is paid for work performed in the US, the income would be taxable in the US alone and no tax would be required to be withheld in India.”

A person becomes a tax resident in India only if the period of residence in the country is 182 days or more in a financial year, or the stay in India spans for 60 days during a financial year and at least a year during the four previous years.

The ruling gives relief to employees from being taxed doubly. When a non-resident is employed in a white-collared job in India and is “seconded” on an overseas project by an Indian company, the salary arrangement is split. According to the “secondment,” the employee is transferred on the payroll of the group company or the overseas parent. The basic salary and some allowances are paid by the overseas parent or group company in the overseas country, while a part of the salary is deposited by the Indian company and it is credited in the Indian bank account of the employee in India.

Taxable entities are divided into three categories depending upon their residential status. These categories are resident, resident but not ordinary resident and non-resident. While people residing in India are taxed on their income earned globally, regardless of which country it is earned in, things are different for non-residents. The income that is accrued in India, for instance, interest from a savings account in India, or income from renting out a house, can be taxed in India. For the third category — resident but not ordinarily resident (RNOR) — the procedure for taxation is the same as non-residents. Salary received by non-residents in a bank account overseas for services performed outside India is not subject to tax in India.