Tax Liability on International Relocation

Exit taxes are imposed by governments on individuals, businesses, and property upon departure to confiscate any capital gains accrued or unrealized before the taxpayer’s departure. In India, the term “exit taxes” is not commonly used. So how will one determine the tax liability on international relocation? There are certain tax laws and rules for regulating an individual or business leaving India. We will have a look at it.

International Relocation and Tax Implications

The Foreign Exchange Management Act 1999 and the Income Tax Act 1961 must be followed by anyone relocating outside or coming home to India. While the Income Tax Act will regulate the taxation of earned income, FEMA will oversee compliance.

The FEMA Act defines a “resident” in India as someone who has been there for 182 days or more in the previous financial year, with exceptions for those relocating for work or permanent residence.

How much Foreign Income is Tax-Free in India?

Tax liability on foreign income of an Indian resident

The resident’s total worldwide income is subject to income tax in India. Foreign income i.e. income accruing or arising outside India in any financial year is liable to income tax in that year even if it has not been received or remitted to India. You cannot avoid income tax liability even if remittance of income from abroad is restricted. In case of income derived in a foreign country whose laws prohibit or restrict the remittance of money to India, proceedings for recovery of tax assessed and payable on such foreign income cannot be initiated against the assesse until the period of prohibition or the restriction is removed.

Also read- Tax Implication: Tax on Foreign Income of Resident Indian

Tax obligation on foreign income of an individual not ordinarily resident

In the case of a person who is resident but not ordinarily resident, income accruing to him outside India in any financial year is not subject to income tax in India unless:

• not from a business controlled in India or a profession established in India;
• is not received or deemed to have been received in India in the year in question by him or on his behalf; and
• shall not be deemed to have arisen or not to have arisen in India during such year.

The exemption of foreign income from income tax is restricted to cases where the income originates or accrues abroad and is received abroad, not deemed to have originated or been received in India under the Income Tax Act 1961.

Also read: Income Tax for NRI: A Comprehensive Guide

If I move to another country do I have to pay taxes?

The Income Tax Act 1961, based on the residential status of a person, imposes taxes. Every year, the resident status is determined using the aforementioned criteria. A person having NRI/RNOR status is only required to pay taxes on income that they have earned and accumulated within India. In India, there would be no taxation on any income received from foreign assets or generated outside the country.

Those who are categorized as “Ordinarily Residents in India” must disclose all information about their foreign assets in their income tax return and are subject to income tax both in India and abroad. Therefore, to reduce the impact of income taxes on overseas income, taxpayers must arrange to sell assets held abroad before obtaining Indian resident status.

Moving to USA from India Tax Implications

To ascertain the income tax implications, an individual must be further classed between ROR and RNOR if they are deemed to be “residents,” meaning that their stay in India exceeds 182 days. If he is further classified as “Ordinarily Resident” in that year, then his global income (total income including foreign income) will be taxable. If his status is classified as “Ordinarily Resident”, only the income earned and accumulated in India will be taxable in India.

One should start the process of closing any bank savings accounts and renaming those NRE accounts before relocating to the United States. In India, interest on FCNR and NRE accounts is not subject to taxation. On the other hand, a non-resident’s interest in an NRO account is completely taxable in India. This is so that the NRO account, which oversees the NRI’s income earned in India, can manage it.

Additionally, people will need to apply to their mutual fund houses to change their residence status. This is essential because before any income, whether in the form of dividends or capital gains, must be paid, TDS at the lowest possible rate must be deducted.

Penalty for not Declaring NRI Status

FEMA does not impose any penalties for failure to declare NRI status. But, you must move your money to an NRO account or terminate your current savings account. According to FEMA standards, an NRI who keeps his resident savings account open after gaining NRI status is breaking the law and may be subject to severe penalties.

Conclusion

An individual moving abroad must keep in mind that they must indicate a change in residential status for all investments held in India or abroad. Failure to change status will result in higher withholding tax for non-residents. As the status changes, constraints and other factors and consequences will be sorted.

In case of any query regarding the tax liability on international relocation, a team of expert advisors from Legal Window is here to assist you at every step. Feel free to reach us at admin@legalwindow.in.