Indians have become accustomed to taking up jobs outside India as an offshore assignment or project. That means spending some part of the year in India and rest of the career period outside India. While the opportunity is much awaited by many of the professionals here, the only brain twisting barrier is ambiguity on taxation. Will a person working both in India and outside for a certain time be taxed in both the countries or is there any tax regulation present. The relieving information is that a person could save himself from Double Taxation under 'Double Tax Avoidance Agreements (DTAA)' arrangement between the various countries and India.
An individual's tax liability is dependent on his residential status and source of income. A Non-Resident or Not Ordinarily Resident (NOR) is taxed on the Indian sourced income while a Resident and Ordinarily Resident (ROR) is taxed on his global income. A person can take either the exemption method or tax credit method to get relief from double taxation. Let's understand the two methods.
1) Exemption Method
- Under this route, an individual could pay tax in either of the states with respect to the income arising in the source state. For instance, a UK national qualifying ROR in India during 2014-15 could be exempted to pay tax in India based on tie-breaker clause. Here a person would not be required to pay tax for his income earned in UK, provided a Tax Residency Certificate (TRC) is submitted along with Form 10F for claiming exemption.
2) Tax Credit Method
- This method allows an individual to get foreign tax credit in the resident state for tax paid in the source state. For instance, an ROR in the year of deputation would be taxed both in India and the UK. But, through tie-breaker clause, an individual could get a tax credit in India for the tax paid in the UK for double-taxed income.
In the absence of DTAA, an Indian resident could claim foreign tax credit as per the domestic tax laws under the section 91 of the Act.