Both India and the US have their independent statutes and mechanisms of tax administration, however both follow a consistent global rule i.e. to tax the residents on their global income and nonresidents on their income “sourced” in the tax jurisdiction. Since, the way you are taxed is based on your residency status, it becomes pertinent to understand the tax residency rules.
To illustrate, we have taken a simple case of Mr. Jason, who is a tax resident of the United States and has following incomes:
- Employment income in the United States (W2) – $100,000
- Dividend income in India – $10,000
- Global income (total) – $110,000
Following the general tax consensus, Mr. Jason being a tax resident of the United States will report and pay tax on global income ($110,000) to the Internal Revenue Service (IRS) and will report and pay tax on the dividend income sourced in India ($10,000) with the Indian tax authorities. Please note that India and the United States being treaty countries have an agreement to nullify the double taxation and therefore, Mr. Jason will get a foreign tax credit on his federal tax return of the income tax paid to India.
The tax rules and residency implications become serious and more complex when a person qualifies to be a tax resident in more than one country. Is this possible? Let us examine…
Globally, all countries including India determine tax residency based on the number of days a person has stayed in the country. However, one stand out exception to this global rule is the United States. The United States not only follows the number of days rule to tax a person (applicable for non-US citizens), it also taxes its citizens irrespective of where they live. Given this, it is not uncommon to see a US citizen becoming a tax resident of more than one jurisdiction. Even for non-US citizens, becoming a resident of more than one tax jurisdiction is common, especially given the fact that the United States follows a calendar year as its tax year and India follows a fiscal year (April-March) with many cases occurring in the year of entry or exit in or from the United States.
The IRS goes one step further by equating US citizens living outside the United States with US citizens living in the United States and therefore requires them to not just pay tax to the IRS on global income, but also ensure accurate reporting of the asset base they have generated outside the United States. To mention here, the US tax system has up to $10,000 penalty just for not filing an FBAR return (also known as FinCen 114) timely.
Given this background of the complexities of the tax and residency provisions between India and the United States, we have attempted to write a series of articles to cover many such questions and scenarios. Today, being the first article, we have provided the background and its importance and also provided a brief about how the residence tax statutes of both the countries.
Residential status in India
Basic rules as explained under the Indian Income Tax Act, 1961 provides that if a person stays in India for more than 182 days in a tax year, he is regarded as a tax resident. This is true whether you are an Indian citizen or a foreign citizen, your immigration status, the purpose of your visit etc. Additionally, the statute provides the following condition as well:
- If a person has stayed for more than 60 days in a tax year and has stayed for more than 365 days in last four preceding tax years, he is considered as a tax resident of India, subject to the following exceptions:
- Being a citizen of India, he left India in the tax year as a member of the crew of the Indian ship; or
- Being a citizen of India, he left India in the tax year for the purposes of employment outside India; or
- Being a citizen of India or a person of Indian origin, who being outside India, comes on a visit to India; or
- Being a citizen of India or a person of Indian origin, who has income from Indian sources exceeding fifteen lakh rupees (in this case, if he stays in India for more than 120 days, he is regarded as a tax resident of India)
Residential status in the United States of America
The IRC provides the following broad categories of tax residency:
- You are a tax resident of the US, if you are a citizen of the US
- You are a tax resident of the US, if you hold a green card issued by the USCIS
- You are a tax resident of the US, if cumulatively you spent more than 182 days in the tax year calculated as below:
Say, if you do not satisfy the first two conditions and you wish to know whether you are a tax resident of the US for 2020, calculate your number of days as below and if the total of (1+2+3) is more than 182 days, you are considered as a tax resident of the US
- Days spent in 2020 X 1
- Days spent in 2019 X ⅓
- Days spent in 2018 X ⅙
Role of the Double Tax Avoidance Agreement
India and the United States signed a Double Tax Avoidance Agreement (DTAA) and Article 4 of the DTAA, known as a tie-breaker rule comes to the rescue when a person qualifies to be a tax resident as per the domestic tax laws in both India and the United States. The tie-breaker rule suggests following sequence of questions to determine a person’s ultimate tax residency:
- Where the person has his permanent home available to him
- If he has a permanent home in both countries, then the country where his personal and economic interests are more?
- If the person either does not have a permanent home available or has permanent home or economic interests in both the countries, then the country which is a habitual abode to the person
- If the conflict still continues, the country where he is a citizen