The Indian Income Tax Act runs into 298 sections with a lot of notifications, amendments, rules and circulars thrown in. For a layman, all this can be quite daunting and it’s quite pointless ignoring it or wishing it to go away. This series is intended to simplify the everyday experiences with income tax and encourage taxpayers to make the most of, if not enjoy, the tax planning process. This series will begin with the basics. But do leave your comments on what you would like to read in this series.
Part 1: Do you have to pay income tax in India?
There are two parameters to judge whether you pay a tax in India or not. The first is very obvious, the income criteria, that is, you must have income to pay a tax. The tax laws exempt people below a certain income limit from paying tax. The second is your residential status. Read on to understand if you are an Indian taxpayer or not.
Income criteria
You must pay tax when your total income, after all deductions and exemptions, exceeds Rs 1.8 lakh. If you are a woman, then you will have to pay a tax only if your income exceeds Rs 1.9 lakh. For senior citizens (both male and female), that is those over 60 years of age, the news is even better. You pay tax only if your total income exceeds Rs 2.5 lakh. In later parts of this series we will see what total income includes.
Residential status criteria
The second parameter is the residential status. If you are a non-resident Indian, then you would be paying taxes in the country of your residence. Therefore, you would be exempt from paying certain taxes in India.
For the purpose of residential status, there are three types of status and given below are the tax liabilities for each:
1. Resident in India
You are considered a resident Indian if you satisfy one of the following two conditions:
i. Have been living in India for more than 182 days, in a financial year (April to March)
ii. Have been living in India for at least 60 days in a financial year and more than 365 days in the four financial years before that financial year
Tax liability: All incomes of Indian residents, whether it was earned in India or abroad are taxed in India.
2. Non resident Indian
If you are not a resident of India by the above definition, then you are a non-resident Indian or NRI.
Tax liability: If you are a non-resident, then only the income that you earned in India will be taxed. That is, if you have a property in India and receive rent in India, that would be taxed in India. All your global income will not be taxed in India.
3. Resident, but not ordinarily resident
Strange as it may sound, this is a special status that is granted especially for those of you who have been non-residents for a long period of time, and come back to settle in India. In such case, it may happen that all your global income (such as interest on deposits kept abroad) would be taxed in India. But that would be unfair.
So if you were an NRI and came back to India and lost your NRI status, you will not be subject to tax in India on your world-wide income if either of the following two conditions are satisfied:
1. You have been in India for less than 729 days during the last seven financial years before the year you came back; or
2. You were qualified as a non-resident for nine out of 10 last financial years before you came back
So if you came back in the financial year 2009-2010, you must have been a non-resident for 9 years out of 10 years counting backward from 2008-2009. Or you must have been in India for less than 729 days during the 7 years counting backward from 2008-2009.
However, this exemption is only for the first two years of your return to India. It is assumed that after that, you would bring back all your money into India and so, you will be treated like a resident.
Do remember that this is for the most common population of people. There are certain exceptions such as difference in definition for those on the merchant navy or persons of Indian origin. Do leave your comments below if you have specific queries.
Fun quiz: Recently an Indian female actor claimed her status to be an NRI in order to reduce her tax liability. The actress, who had performed various shows abroad and earned an income from those shows, claimed that she was an NRI during the period of those shows and hence she was not liable to pay tax on those shows. Her case is still pending in the income tax courts. Name the actress.
Coming up in part 2: Various components of salary income
