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A S Amarnatha B.com, FCA, LLB

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Are you a Foreign National worked in India post 2008? You may have large sums lying in your India Provident Fund Account.

Background on Provident Fund regulations

Employees’ Provident Fund Act is one of the important labour legislations in India which provides for retiral benefit in case of non-government employees. The applicability of this Act is mandatory in case of an entity having 20 or more employees at any time during the year. Both employer and employee need to contribute 12% of salary each to this fund. A portion of the employee contribution may go to pension fund depending on the date of joining, wage level and age of the employee. Salary for this purpose excludes House Rent Allowance, Overtime Allowance, Bonus, Commission and similar allowances, perquisites and gifts by employer. In case of an employee whose Provident Fund (PF) wages exceed INR 15,000 has option to restrict the contribution to 12% of INR 15,000 or can opt out of the contributions subject to conditions. Employer would make a matching contribution.

Applicability to Foreign Nationals

Indian Provident Fund laws were amended to make the contributions mandatory in case of foreign nationals effective 01 Nov 2008 with a very few exceptions. Accordingly, an International Worker (IW) working for a covered establishment in India would need to make compulsory contribution to this fund irrespective of their wage level. This means that even if the salary exceeds INR 15,000 it is mandatory for him to contribute to this fund. An IW is defined as a foreign national working for an establishment in India to which the Provident Fund (PF) Act applies.

So, in case of foreign nationals 24% of salary (12% employer and 12% employee) would be contributed to the fund without any cap which could be a sizeable amount. As an illustration, if the monthly salary is INR 500,000 approximately INR 120,000 per month will be contributed to this fund. Further, the fund would fetch a very good interest (8.5% for FY 2019-20) as well. However, there could be a slight variation in the interest rates year on year.

Exceptions

If any of the following applies to an IW, it is not mandatory for him to contribute to the Provident Fund in India.

  • IWs working for an establishment to which the PF Act does not apply, basically an entity having less than 20 employees
  • IWs from social security agreement (SSA) countries contributing to their home country social security
  • Singapore Nationals / Permanent Residents eligible for exemption under the Comprehensive Economic Agreement

Social Security Agreements are bilateral agreements entered by Indian government to avoid double social security contributions. Currently India has effective SSAs with 18 countries and the list of such countries and effective dates are provided in the annexure below . If a foreign national has worked in India prior to the effective date of the SSA, there could have been contributions to the PF fund in India.  As you observe, India still does not have a social security agreement with US and UK.

Withdrawals of Provident Fund

So, what happens to this fund? Can a foreign national withdraw the amount lying in the PF account?    

Definitely ‘Yes’. However, there are certain conditions attached to this. Let us understand what these conditions are.

  • Foreign national from an SSA country can withdraw the amount lying in his Provident Fund account at or after repatriation from India. May also be eligible for monthly pension after retirement as per the SSA. The amount could be credited to the foreign bank account if there is no bank account in India.
  • Foreign nationals from non-SSA countries can withdraw the PF accumulations on attaining the age of 58 years or at the time of repatriation whichever is later. May be eligible for pension if he has contributed for a period of 10 years. Amount will be credited to the Indian bank account only.

Further, if the contributory period is less than 5 years, the withdrawals may be taxable in India as per Indian tax laws subject to relief under Double Taxation Avoidance Agreement. Further, the interest accumulations post repatriation may be taxable even if the contributory period is more than 5 years. However, the treaty relief could be explored here as well.

Annexure – Social Security Agreements with India

CountryEffective date
Belgium1-Sep-09
Germany1-Oct-09
Switzerland29-Jan-11
Denmark1-May-11
Luxembourg1-Jun-11
France1-Jul-11
Korea1-Nov-11
Netherlands1-Dec-11
Hungary1-Apr-13
Finland1-Aug-14
Norway1-Jan-15
Sweden1-Aug-14
Canada1-Aug-15
Japan1-Oct-16
Czech Republic1-Sep-14
Austria1-Jul-15
Portugal8-May-17
Australia1-Jan-16
Table showing list of countries with SSA and effective dates

The write-up is for general understanding. We suggest the readers to discuss with their consultants before deciding on their eligibility for withdrawal and related Tax Implications.

Taxability of Dividends in case of NRIs

Further to the article on NRI residential status, there were a couple of queries raised by the readers on the taxability of dividends.  Here are some of those queries and answers for the benefit of the readers.

  • Are dividends received by NRIs from Indian shares/mutual funds taxable in India?

Till 31 Mar 2020, dividend income from an Indian source was completely exempt in the hands of NRIs. However, from 01 April 2020, such dividends would be taxable in India and NRIs would need to pay tax at applicable rates. If there is a Double Taxation Avoidance Agreement (DTAA/tax treaty) between India and the country of residence, a beneficial rate as per the treaty could be applied. Taking the UK as an example, most dividends are taxed at 10% as per India-UK DTAA. This is subject to the availability of TRC from the country of residence.

  • What is TRC? Is it mandatory to avail treaty relief?

TRC stands for Tax Residency Certificate. This will be issued by the tax authorities of the respective country certifying that the individual NRI is a resident of such country. Most countries have a specific form prescribed for this purpose and an NRI who wishes to avail the treaty benefit would need to apply for the same to the respective country’s tax authorities. As per the Indian tax laws, TRC is a mandatory document required to avail any treaty relief by a non-resident.

  • Is withholding tax/Tax Deduction at Source (TDS) applicable in case of dividends paid to NRIs?

Yes, the dividends paid to NRIs would generally be subject to 20% withholding tax in India. However, the actual tax on dividends may vary depending on the total income of an individual and applicable slab rates. So, the differential taxes would get adjusted at the time of filing the tax return.

  • Can an NRI avail the beneficial rate as per the treaty at the time of tax withholding itself?

Yes. An NRI can avail of the beneficial rate on dividends at the time of tax withholding. In order to avail this, the individual needs to submit the TRC and other prescribed documents to the company. Some companies are contacting individual shareholders to confirm their residential status and other documentation to avail of the treaty benefit. Please ensure that this information is submitted to the companies so that the beneficial rate is availed at the time of withholding itself. In this way, refunds on the tax return could be avoided as well.

  • Can an NRI avail Foreign Tax Credit in his home country on taxes paid on dividends in India?

Generally, yes. However, this may also depend on any specific conditions/documentation requirement specified in the tax treaty or domestic tax laws of such resident country. It is advisable to go through the same and ensure that those requirements are met before availing the credit.

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on tax implications.

Recent Changes in Residential Status

Mr. Ram is an Indian citizen (NRI) living abroad for several years now. He has his extended family, immovable properties and other investments in India. He frequently visits India to meet his family and friends and to manage his investments. During his recent conversation with an Indian friend, he came to know that there have been sweeping changes to the Indian tax laws with respect to residential status of an individual which may result in expanding his tax base in India and he may qualify to be a ‘stateless’ person. Ram is curious to know more about these changes.

So what are these changes? Does it really have far reaching impact on NRIs like Ram? Who is a state less person? Let us understand these in detail.

Hitherto (till 31 March 2020), an Indian citizen or a person of Indian origin living outside India and coming on a visit to India could have stayed in India for a period less than 182 days without triggering residency in India. However, the new rule (applicable from 01 Apr 2020) reduces this threshold to 120 days. Further, the new rule has inserted an income threshold of INR 1.5 million from sources within India in order to trigger residency. So, both the conditions i.e., no. of days and the income level need to be satisfied in order to trigger a residency. In case of Ram, he would be considered as Resident but Not Ordinarily Resident in India provided his stay in India during the relevant tax year exceeds 119 days (but less than 182 days) and his total income from Indian sources exceeds INR 1.5 million.

Stateless person or Deemed resident

A stateless person in the context of taxation means a person who is not liable to tax on his income in any country during the year. It may be possible for an individual to position his affairs in such a manner that he is not liable to tax in any country. In order to curb these kinds of arrangements, the new rules introduced the concept of ‘deemed residential status’.  As per this, an Indian citizen having total income exceeding INR 1.5 million or 15 lacs from sources within India during the relevant year, will be deemed to be a resident of India (RNOR) if he is not liable to pay tax in any country outside India.

So in case of Ram, since he is a resident of foreign country and is a citizen of India, he may be considered as RNOR for India tax purposes provided his total income exceeds INR 1.5 million from sources within India and he is not liable to tax in his country of residence.

For the purpose of above rules, the income from sources within in India includes income arising outside India from a business controlled in India or profession set up in India.

So you are an RNOR. Is your global income taxed, then? uh!

So what happens if an individual qualifies as RNOR? Will his global income be taxed in India?

Definitely NO. In case of an RNOR, in addition to the Income derived from Indian sources, the individual would be taxed on income arising outside India from a business controlled /profession set up in India.

Further, in case an RNOR who is liable to tax on his income arising outside India from a business controlled /profession set up in India, may result in double taxation of income both in India and in his resident country. So in order to mitigate the double taxation implications, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India has entered into with other countries in order to mitigate the possibility of paying taxes in two countries.

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on their residential status and related tax-implications.