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When you move abroad for work or business, your residential status changes, which can significantly impact your taxes. Many people wrongly assume that their Indian income remains taxable in the same way even after becoming an NRI (Non-Resident Indian). However, the tax treatment of salary, investments, and foreign income changes significantly when an individual’s residential status changes from Resident (R) to Non-Resident (NRI). Additionally, many NRIs are unaware of the Double Taxation Avoidance Agreement (DTAA), which helps them avoid paying tax in both India and their country of residence.
### Key Tax Concerns for NRIs
* Will my salary income be taxed in India once I become an NRI?
* Do I still need to file an ITR in India?
* Will I get tax benefits on my investments in India?
* What happens to my PPF, NRO account interest, and other assets?
* Do I need to report my global income while filing taxes in India?
* How is my salary taxed if I qualify as a dual resident?
* What happens to my NRO account interest after I become an NRI?
* Do I need to report my global assets while filing an ITR in India?
### Case Study: Dual Residency
**Scenario:** Mr. X, an Indian citizen, has been working in the United States for several years. In FY 2024-25, he stayed for more than 120 days in India and earned ₹15 lakhs+, qualifying as a Resident under Section 6(1A) of the Income Tax Act, 1961. He also stayed for more than 182 days in the USA, meeting the criteria for U.S. tax residency under U.S. tax laws.
**Residency Factors:**
* **Domicile:** Mr. X holds Indian citizenship and maintains family ties in India.
* **Tax Residency:** He qualifies as a tax resident in both India and the USA based on stay duration.
* **Place of Effective Management (POEM):** His employment, business operations, and primary income sources are in the USA.
**Tax Residency Determination:**
Since Mr. X qualifies as a resident under both Indian and U.S. tax laws, the Tie-Breaker Rule under Article 4 of the DTAA will decide his final tax residency status. After analyzing factors like domicile, center of vital interests, habitual abode, and nationality, it’s determined that Mr. X will be considered a US tax resident under the DTAA.
**Final Verdict:** Mr. X is considered a dual resident, but his salary income will be taxable in the US as per DTAA, avoiding double taxation in India.
### Optimizing Tax Liabilities for NRIs
* Strategically plan tax obligations to maximize benefits and avoid unnecessary tax liabilities.
* Assess residential status under DTAA to determine tax liability carefully.
* Structure investments in India wisely to benefit from concessional tax rates.
### Benefits of Planning Taxes Before Moving Abroad
* **Foreign Tax Credit (FTC):** NRIs can claim tax credit for taxes paid abroad.
* **Lower tax rates under DTAA:** Many foreign incomes are exempt or taxed at lower rates under tax treaties.
* **Relaxed reporting obligations:** NRIs do not need to report global assets unless they become Residents and Ordinarily Residents (ROR).
### Legal Provisions Governing NRI Taxation
* **Section 6(1A):** Defines when an individual becomes an RNOR or Non-Resident.
* **Article 4 of DTAA:** Helps determine residency when a person qualifies as a resident of both countries.
* **Article 16 of DTAA:** Salary is only taxed in the country where employment is exercised.
* **Section 115E:** Investment income is taxed at 12.5%. Long-term capital gains on listed securities are taxed at 12.5%.
### Taxation of Investments in India for NRIs
* Investment income is taxed at 12.5% under Section 115E.
* Long-term capital gains (LTCG) on listed securities are taxed at 12.5%.
* Interest on NRO deposits is taxed at 20% as per Section 115C(c).
* NRIs cannot open new PPF accounts but can continue existing ones until maturity. Withdrawals are tax-free in India but taxable in their country of residence.
### NRE/NRO Accounts
* NRE accounts must be converted to resident accounts upon return.
* Interest on NRE accounts remains tax-free only during RNOR status.
* NRO accounts remain taxable.
### Key Takeaways
* DTAA helps avoid double taxation on salary income.
* NRIs get concessional tax rates on Indian investments.
* Interest on NRO accounts is taxed at 20%, even if received in INR.
* Foreign Tax Credit (FTC) ensures NRIs do not pay tax twice on the same income.
* PPF accounts can be held till maturity, but NRIs cannot extend them.