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The Rediff Money Channel presents everything you wanted to know about tax issues, but didn't know whom to ask. Chartered Accountants from Ganesh Jagadeesh & Co are here to remove all your doubts.

Readers' Note: Please keep your questions short.

I am an NRI now. I came to the USA (from India) on October 15, 1998 as a software consultant (on a H1-B visa). I have stayed in USA for less 180 days for the accounting year April 1998-March 1999, hence I do not qualify as an NRI for this particular accounting year.
Do I need to pay any taxes in India for the money that I earned in USA for this accounting year? Is there any other law (like the double taxation treaty) with which I can avoid paying taxes in India for the income earned in USA?

— Prashant Jain

Since, you were resident in India for more than 182 days during the previous year 1998-99, you are deemed to be an ordinary resident of India for the year. Hence, all income earned by you during the year shall be taxable. Consequently, your earnings in the USA during the period shall be subject to tax in India. Now, if you have paid any tax for your earnings in the US for the period, you shall be entitled to a tax credit for the amount paid to the US government.

I am a software engineer on a short-term deputation at UK for a period of less than 180 days. During my stay here, I receive an Indian salary plus a living allowance. My UK employer is paying the living allowance in UK. In addition, I have a valid work-permit for working in UK. I am not paying any tax in UK.
Do I have to pay any tax on the living allowance received in UK? If 'yes', then what amount of it is taxable, i.e., is the 'whole' amount taxable or only the 'unspent part' of the living allowance is taxable? Also, under Indian laws, what expenses are considered a part of 'living expenses'? Do the following form part of living expenses: do consumer items for entertainment during stay (say VCRs/DVDs/CDs, etc ) form part of living expenses, do expenses on account of local travel for pleasure form part of living expenses? Don't software engineers come under applied science since we deal with computer science, which I think is an applied science by definition, or am I wrong in my assumption?

— Teji Thomas Abraham

As per the Indian Income Tax Act 1961, all allowances received by an employee from his employer are taxable. However, reimbursement of expenses is not taxable. In case your company reimburses the cost incurred by you for official duty then such reimbursement is outside the purview of tax.
However, in your case since you receive an allowance, the whole allowance will be taxed in your hand. Since you were not NRI, the allowance received by you will be taxed in India.
Relief is available under section 80 RRA that states that 75% of the income earned in foreign exchange and brought in India will be eligible for deduction and, hence, only 25% of the allowance so received will be taxed. In view of this, the question of what constitutes lifestyle expenses does not arise.
Applied Science: Income Tax is not very clear as far as software engineers are concerned. We feel Income Tax Department will handle such issues on a case-to-case basis.

If I as an NRI retire and return to India for good and stay unemployed, do my bank fixed deposits need to be changed to resident status immediately or can I maintain them as they are till their maturity date? How much tax will a bank FD of Rs 2 million attract and what would be the best way to break it up to get tax benefits? Are there tax benefits for skilled people who return and take up jobs or start their own business?

— J L L Vaz

In this case, we assume that the account held by you in India is a Non-Resident External rupee term-deposit account. [NRE term-deposit a/c].
Change of status from resident to Non-Resident:

• Immediately on return to India the NRE account will be redesignated as Resident Rupee Account or converted to "Resident Foreign Currency Account" at the option of the account holder. In respect of funds held in FDs in NRE accounts, interest will be payable at the rate originally fixed, provided the deposit is held for full term.

• Assuming the rate of 10% per annum, your FD will fetch an interest of Rs 2,00,000 per annum. FD interest is exempted up to Rs 12,000 under Section 80L of the Income Tax Act, 1961. Hence, your taxable income will be Rs 1,88,000 and your tax liability will be Rs 36,340. You will have to look at some other options like investment in mutual funds (tax free, as dividends declared are not taxed), investment in shares of companies, investment in Public Provident Fund, Post Office Deposit Schemes, etc. for minimal tax payment.

• There are no provisions under the Income Tax Act, 1961 granting benefits to skilled people who return and take up jobs or start their own business.

I was in USA on H1-B visa from 20-SEP-97 to 08-DEC-98. Then I went to Singapore on work permit from 16-MAY-99 to 05-JUL-99 and again came back to USA on B1 visa on Oct 30 '99 and will be staying here up to Feb 28, 2000. I have been depositing my foreign currencies amount into NRE account in State Bank Of India. What is my status? NRE or NRO? I paid taxes for the years I stayed in USA and Singapore. What document do I need to submit to the Indian IT department?

— Rakesh Naik

From your question, it surfaces that you were outside India during the financial years 97-98,98-99 & 99-2000 for more than 182 days, hence your status would be that of a Non-Resident Indian for those years. Since you were a Non-Resident Indian during the period, your income earned abroad shall not be taxable in India if it arises from a contract of employment outside India. The income earned by you shall be taxable only if it has accrued or arisen or is deemed to have accrued or arisen in India.
As far as interest accruing to the NRE account is concerned, the same is exempt from Tax. You are under no obligation to file tax returns in India for incomes earned abroad including interest earned in NRE accounts

Kindly tell me the implications of double taxation treaty between two countries. Does such a treaty exist between India and USA? If I have to file a tax return in USA, do I have to reveal income in India and pay tax on global income here in USA or in India. I would like to file IT returns in both countries. I have income in India and none in USA now but would like to file a nil return here as a Resident Alien.

— Sheena Vaidyanathan

The central government has entered into an agreement of double taxation avoidance with the various government for following reasons: -

1. For granting of relief in respect of the income for which tax has been paid both under the Indian Income Tax Act, and the legislation in a foreign country. A treaty of double taxation does exist between USA and India. In a double taxation treaty, there are two countries viz. The resident country, [the place of ordinary residence] and the source country [the country where the doubly taxed income is generated]. As a result of such Double Taxation Avoidance Treaties, tax credit is given in the resident country in respect of the tax paid in the source country.
2. Filing of returns in India and disclosing income in India is a function of residential status and the nature of income earned by you. We will be able to comment on your question if you can let us know your residential status. However, in case you are Non-Resident and are earning income from occupation in USA then you need not file your returns in India nor it is mandatory for you to disclose your income to Indian Income Tax Officers. However, if you are earning income by way of Investments in India or from some other source in India then your income will be subject to Indian Income Tax Act.

My company recently went public in India. I work in the US office and have been granted stock options. Since the shares are only listed in India at the moment, our transactions will take place out there. When I pay for the shares I will have to pay in dollars. My question is how will I get my money back in dollars once I sell these shares.

— Sanjay Malani

As per FERA an Indian Passport holder is considered Non-Resident if he stays abroad for employment or for carrying on any business or vocation or for any other purpose indicating indefinite period of stay abroad.
For such Non-Residents there are two schemes of investment in India: Repatriable Scheme and Non-Repatriable Scheme.
In case you have invested in the company before listing and in case it is New Issue of Shares then under the automatic approval route repatriation is allowed provided the company in which you have invested has sought permission of RBI to offer shares to NRI.
In view of the above you will be allowed to sell the shares which can be credited to your account in India and then after meeting the tax obligation the balance can be repatriated by you by instruction to your banker.

As an Indian returning to India from the US, and giving up NRI status, how long can the person hold stock and mutual funds? Are the capital gains on the stock taxable in India or the US? Can the person having returned invest in the US stock market? What are the answers to questions 1, 2, and 3 if the person returning is a US citizen?

— Jay Pandey

We would first like to clarify about your residential status, on your return to India. You can continue to hold stock and mutual funds abroad so long as your status is that of a 'not ordinary resident', capital gains on your foreign-stock, shall be taxable in India, if it is received or deemed to be received in India or accrues or deemed to accrue or arise in India.
But once you become an 'ordinary resident' such capital gains would be taxable in India. Taxability of the capital gains in the US does not come under our scope.
The person can invest in the US stock market only out of the foreign currency assets at his disposal.
(1) Same as in 1 above.
(2) Same as in 2 above.
(3) Same as in 3 above.

You have said in an earlier answer that on return to India, Money earned legally abroad can continue to be kept in a foreign account. You have not stated for how long and whether one has to notify RBI, etc. Please clarify.

— Suresh Rao

Persons who have returned to India on or after 18th April 1992 and have stayed abroad for a continuous period of not less than ONE year have been granted general permission/exemption from the requirement of surrendering/declaring their foreign currency assets abroad. As a result, they can continue to maintain their foreign currency accounts and other assets -- foreign currency shares/securities or immovable properties abroad -- without declaration to Reserve Bank, provided these funds/assets were lawfully acquired by them out of foreign currency earned through employment, business or vocation outside India taken up or commenced while they were resident outside India.
As can be observed there is no time period mentioned and, hence, foreign account can be maintained as per the will of the Returning Indian. Declaration to RBI is not required.

Earlier:

"Do I have to intimate the Income Tax Office when I move out of India?"
"Do I have to pay tax in India on allowance earned in the US?"
"What is the tax treatment for an NRI selling his stock options of a company listed in India?"
"Can my father buy a house from the money that I gift him?"
"Do I need to apply for a PAN account in India when I return?"
"Is the money that I saved on a business trip to the US taxable in India?"
"What are the tax implications for an NRI selling shares of Indian companies?"
"If an NRI gifts Rs 1 lakh to a relative from his NRO account in India does he have to pay any Gift Tax? (The NRO account is funded from abroad in US dollars.)"
"Do I need an income tax clearance certificate if i go abroad for a two-year contract?"
"Will my father be taxed if I send him money to buy a flat in my name?"
"What is the difference between personal taxation of an NRI and of a resident but not ordinarily resident?"
"We are software engineers investing in the form of NRNR deposits, FCNR deposits, etc. How will we be taxed?"
'I am an NRI getting salary from a US firm. Can I invest in Indian securities? What are the tax implications?'

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