In today's globalized employment market, finding job opportunities in a foreign country can be highly rewarding. With this come some challenges in understanding taxation on the income earned.
As an Indian residing in the UAE, navigating tax residency regulations, understanding your tax obligations and optimizing your tax liability will be critical components of your overall financial planning. The tax-free personal income policy in UAE is a significant benefit for NRIs in saving more, but it is also critical to determine your tax residency status in India to optimize tax obligation. Understanding the India-UAE Double Taxation Avoidance Agreement (DTAA) can help in NRI tax planning strategies.
The first important step is to determine your tax residency status in both India and UAE.
Understanding tax residency status in India and UAE
- In India, you are considered an NRI if you spent less than 182 days in India in the previous financial year. Additionally, you should be in India for a period of not more than 60 days during the previous year and not more than 365 days during the 4 years immediately preceding the previous year. You can read about these requirements in more detail here.
- In UAE, an individual who has resided for at least 183 days can apply for tax residency. Even though there is no personal income tax in the UAE, it is important to establish tax residency for the purposes of availing the relevant India-UAE DTAA provisions.
What is DTAA (Double Taxation Avoidance Agreement)?
A Double Taxation Avoidance Agreement (DTAA) is a tax agreement signed between two countries to prevent individuals and businesses from being taxed twice on the same income. It outlines which country has taxation rights on various types of income to avoid double taxation and ensure smoother tax compliance.
Similarly, if you are an NRI living in the UAE, the NRI Double Taxation Avoidance Agreement between India and the UAE relieves you from paying tax in both India and UAE on the same income. To avail of this, an NRI can take advantage of tax deductions, tax exemptions, or tax credits based on the applicable taxes in the respective country.
Exemptions under the DTAA between India and the UAE
Under the DTAA between India and UAE, certain types of income are either exempt from tax in one of the countries or are subject to some form of tax relief. These are:
Income type and exemption | Rationale |
Income from employment in the UAE is exempt from taxation in India for NRIs | Ensures NRIs working in UAE are not taxed on UAE sources' salaries in India |
Interest income from deposits in the UAE is not taxed in India | Interest income earned in one country should not be taxed in a different country. Interest from FCNR and NRE savings/deposit accounts in India is also tax-exempt as per Indian tax law. |
Income from property located in the UAE is not taxable in India | NRIs owning property in the UAE can earn rental income without tax obligations in India |
Capital gains from the sale of movable and immovable property in the UAE are not taxable in India | Gains from assets in the UAE, including property, stocks, mutual funds, etc., are not taxed in India. Only capital gains from assets owned in India would be liable for tax in India. |
The dividend paid by a UAE-based company is not taxable in India | Promotes NRI investments in UAE-based companies |
If the business has no ‘permanent establishment’ (such as an office, branch, workshop, or factory) in India, business profit in the UAE is not taxed in India. | Encourages NRIs to pursue entrepreneurship in the UAE without the concern of double taxation |
Pension from UAE employment is tax-exempt in India | Ensures NRI’s retirement income is protected from double taxation. |
Income Tax Slabs for NRIs in India
The currently applicable tax slabs as of FY 2024-25 for NRIs in India, as per the old and new tax regimes, are as follows:
Old Regime | New Regime | ||
Tax slab | Rate | Tax slab | Rate |
Up to INR 2.5 lakhs | Nil | Up to INR 3 lakhs | Nil |
INR 2.5 lakhs to INR 5 lakhs | 5% | INR 3 lakhs to INR 7 lakhs | 5% |
INR 5 lakhs to INR 10 lakhs | 20% | INR 7 lakhs to INR 10 lakhs | 10% |
Above INR 10 lakhs | 30% | INR 10 lakhs to INR 12 lakhs | 15% |
INR 12 lakhs to INR 15 lakhs | 20% | ||
Above INR 15 lakhs | 30% | ||
Note: Standard deduction of INR 75,000/- under the New Regime is available only for individuals reporting salary income in India. Further, surcharge, health and education cess would be added as applicable.
Total Income | Surcharge under Old Tax Regime | Surcharge under New Tax Regime |
Upto ₹ 50 lakhs | Nil | Nil |
>₹ 50 lakhs and upto ₹ 1 CR | 10% | 10% |
>₹ 1 CR and upto ₹ 2 CR | 15% | 15% |
>₹ 2 CR and upto ₹ 5 CR | 25% | 25% |
>₹ 5 CR | 37% | 25% |
The Health and Education Cess is 4% on the amount of income tax plus surcharge.
How can NRIs optimize their tax obligations?
Understanding tax laws in both countries and careful tax planning considering the NRI double taxation avoidance agreement can help you save some tax. Here are some NRI tax optimization techniques:
- Leverage the UAE's tax-free salary regime to maximise savings.
- Invest in financial products in the UAE that offer tax-efficient returns.
- Use tax-efficient savings and deposit accounts in India like NRE and FCNR to enjoy tax-free interest.
- Maintain proper documentation of income earned and taxes paid in both countries, as it is crucial to claim the NRI tax credit in India and the NRI tax credit in UAE under DTAA. Once a tax component is paid in one country, you can avail of a “tax credit” on the same income in the other country, wherein only the differential amount, if any, needs to be paid.
- If you are filing taxes under the old regime, invest in tax-saving instruments to claim deductions and diversify your portfolio with tax-efficient investments such as ELSS Mutual Funds and NPS. You can also claim other allowed deductions against health insurance premiums, interest for certain education and housing loans, and donations to charities.
- Engage with NRI tax consultancy services to help you navigate complex tax regulations in both countries and assist in NRI tax audit procedures.
Conclusion
Understanding the complex tax laws in India and the UAE, along with professional financial planning help and effective tax planning strategies, can help you reduce and optimize your tax obligations in both countries.
