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Income Tax

FEMA/RBI Regulations

NRIs Working Abroad - Receipt Of Salary Income Into NRE Bank Account In India - Not Taxable In India

Recently, in a decision, the Mumbai ITAT (an Appellate Authority for Income Tax Litigation Matters in India) has held that just receipt of Salary Income by an employee (working in a Ship plying on Innternational routes, Run by Singapore based Shipping Company), in NRE Bank Account in India, will not trigger a tax incidence in India.

Under the Indian tax laws, the tax incidence arises on the basis of residential status, which in turn depends on the number of days stayed in India. A tax resident of India is subject to tax on his worldwide income. However, a non-resident is subject to tax in India only under two situations, i.e. (i) income accrued in India and (ii) income received in India. Hence, in case of non-resident, income is considered as taxable in India even if it is received in India (though employment done abroad).

In the present case, the ITAT rejected the contention of tax department that the salary amount credited to the bank account in India should be subject to tax. It observed that the employee had a lawful right to receive the salary amount at the place of employment (which is the location of the foreign employer outside India).

The ITAT held: "The connotation of an income having been received and an amount having being received are qualitatively different. The salary amount is received in India in this case but the salary income is received outside India".

In the abovementioned case, The ITAT in this order has highlighted a new aspect relating to income received in India. It has drawn a distinction by holding that salary income was not received in India as the employee had the lawful right to receive salary outside India. The salary amount was at the employee disposal outside India and he merely exercised his right to transfer it to India.

Hence, the Employee agreements should be properly structured. These agreements may bring out the point that the salary for services rendered overseas is being credited to a bank account in India, at the employee request for the sake of convenience, this ITAT decision could help mitigate litigation.

By NRI Tax Service: Dec 20, 2014