Why Indian tax residency matters: Key insights for UAE residents

The most common misconception among our Indian living abroad is- “Wespend more than 182 days outside India, so we are non-residents for thepurpose of taxation in India.”

In reality, this is just one of the conditions that is tested to determine their tax residency in India. Someone who has not lived in India for even a single day can still become a resident of India!

In an increasingly globalised world, the movement of individuals between India and the UAE for work and personal reasons is becoming commonplace. It is important to understand that an individual’s tax liability is determined by their residential status, not their citizenship. This concept is pivotal for expatriates and foreign investors as it dictates how their income is taxed by the Indian government.

The Indian Income Tax Act categorizes individuals based on their residential status, which in turn influences their tax obligations. There are three main residential statuses under the Act: 1) Resident and Ordinarily Resident (ROR), 2) Resident but Not Ordinarily Resident (RNOR), 3) Non-Resident (NR).

For instance, if an Indian citizen with Indian income of more than Rs1.5 Mn decides to move to the UAE and start a business here after living his whole life in India, then for that tax year, he can become the resident (ROR) of India even if has stayed in India for 60 days or more since he will satisfy the 365 days’ condition. However, had he moved for the purpose of employment, only 182 days or more criteria would’ve been considered. Moreover, since there is no personal income tax in the UAE, even if he has stayed in India for less than 60 days, he will be considered a resident (RNOR) under the recently inserted tax nomad provisions.

For UAE residents with income sources in India, the application of tax treaty is vital. This agreement ensures that taxpayers are not unfairly taxed on the same income by both nations, providing clarity on which country has taxing rights over specific types of income. For instance, the treaty provides that if a UAE resident invests in Indian mutual funds, then the gains will not be taxed in India.

When an individual qualifies as a resident in both India and the UAE under their respective tax laws, the tie-breaker rule in the DTAA comes into play. This rule helps determine the country of residence for tax purposes, based on various criteria such as the individual’s permanent home, center of vital interests, and habitual abode.

The writer is Partner, MICS International

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