UAE Gratuity and End-of-Service Benefits: India Tax Implications for NRIs

Unlike India and other countries, the UAE does not provide pension income or social security for expatriate workers. However, the country offers UAE gratuity, which is an end-of-service benefit. It is also called end-of-service benefits and is an essential part of the UAE employment system. It is a lump-sum amount that you receive at the end of your UAE employment.
Everyone knows the UAE does not impose personal income tax, but does that also mean income isn't taxable in India when an NRI returns there? The quick answer depends on your residential status and where the income arises.
Confused and want to know more? Read the blog for complete information on UAE gratuity and end-of-service benefits and their Indian tax implications for NRIs.

What is End-of-Service Gratuity?

UAE gratuity is an end-of-service benefit employees receive when they leave their jobs, whether by termination or resignation, subject to the applicable UAE labour rules. Under UAE labor law, gratuity is a lump-sum amount employees receive after completing their employment. The amount is calculated based on years of service and the employee's basic salary.

Who is Entitled?

Any non-GCC expatriate or NRI employee with at least one year of continuous service in the UAE is eligible for UAE end-of-service benefits. In simple terms, it is available to expats who are not enrolled in the country's state pension scheme.

• NRIs can receive gratuity only after one year of continuous service.
• Depending on the contract, it can be available for non-full-time and part-time employees.
• It is not automatically forfeited if an individual is dismissed for misconduct before the end of the contract.
• If you resign before completing one year, you will not qualify for UAE gratuity.

Under the current UAE labour law, employment contracts are generally on a fixed-term basis. Gratuity eligibility is determined under the applicable end-of-service benefit rules.

End-of-Service Benefits NRIs Receive

An employee leaving their job in the UAE after one year of continuous service may receive the following payments:

• End-of-service gratuity
• Leave encashment
• Unpaid salary
• Notice-period compensation
• Contractual or performance bonus
• Insurance benefit
• Employer savings-scheme proceeds
• Airfare or relocation allowance
• Compensation for termination

How is UAE Gratuity Calculated?

The UAE gratuity is calculated on the employee's last basic salary. The UAE gratuity calculation does not include transport, housing, utilities, and other allowances. Here is how you can determine the gratuity amount:

• First 5 Years: For each year of service, 21 days of your basic salary
• From 6th Year Onwards: 30 days of your basic salary for every additional year.
• Overall Cap: Your gratuity amount cannot exceed two years of your total salary.

Confused? Let's better understand this with an example.

When Must It Be Paid?

Employers are obliged to settle the final dues, i.e., outstanding salary, gratuity, and payments in lieu of accrued leave, within 14 days of the job ending. Late transfer of the amount is a labor breach, and employers can face penalties. In simple terms, employers need to calculate the gratuity amount and have it ready for transfer within 14 days of the employee's last day.

This was all about UAE end-of-service gratuity. Moving ahead, let's find out whether this amount is taxable in India for NRIs.

Is Gratuity Taxable in India for NRIs?

This is one of the most common questions asked when UAE NRIs build a retirement corpus. The short answer is that UAE gratuity is not automatically taxable in India for NRIs. As an NRI, you are not liable to pay tax on your UAE gratuity in India if it is foreign-source income that accrues outside India and is first received outside India.

• UAE gratuity is not automatically tax-free in India
• Income earned outside India by an NRI is generally not taxable in India if it accrues outside India and is first received outside India.

Now the question is: in what cases is UAE gratuity taxable in India? Let's understand this in the next section.

When Could it Become Taxable?

UAE gratuity can become taxable in India depending on your residential status, where the gratuity accrues or arises, and where it is first received. This is because Indian residents are generally liable to pay tax on their global income, while the scope of taxation for NRIs and RNORs is different.

However, if you receive UAE gratuity while being an NRI in India, it may remain non-taxable there if it is foreign-source income that accrues outside India and is first received outside India. In addition, if you return to India after a long time, you may be eligible for RNOR (Resident but Not Ordinarily Resident) status if you meet the applicable RNOR conditions. During this status, you are generally not liable to pay tax in India on foreign income, subject to the applicable conditions.

This was all about India tax implications on UAE gratuity. Moving further, let's learn how to send gratuity from the UAE to India.

How to Send Gratuity from the UAE to India?

If you receive your UAE end-of-service benefits in the UAE, you have several options to remit them to India. Here are the most common ones:

NRE Account

This is a preferred transfer choice for most UAE-based NRIs. It offers benefits such as:

• You can fully transfer both interest and principal amounts without any threshold limit, if needed.
• Interest earned on an NRE account is tax-free in India
• No maximum or minimum deposit limit

TCS on Remittances

The Liberalized Remittance Scheme (LRS) applies to permitted outward remittances from India by resident individuals. It does not apply when you receive your UAE gratuity from the UAE into India.

Further, TCS on remittance does not apply when you receive the UAE gratuity amount from the UAE into India through an NRE account. If your UAE gratuity amount is more than AED 50,000, there is no need to divide your transfer amount into 2-3 parts for LRS-TCS purposes.

So, this is how you can transfer your UAE gratuity amount to India. Remember, the right option depends on your gratuity amount, your bank account, and timing. Now, moving forward, let's look at the documents NRIs should have when returning to India.

Documents NRIs Should Keep When Returning to India

Here is the list of documents NRIs should keep when returning to India:

• UAE employment contract
• Joining and resignation/termination letter
• Visa history or work permit
• Final settlement statement
• Payslips
• Gratuity calculation from employer
• Proof of length of service
• UAE bank statement showing amount received
• NRE bank statement
• Passport travel records
• Form 16 or Indian tax records where needed
• Indian residential status calculation
• Evidence of gratuity received from previous employers.

Keep these documents with you even when you do not have Indian tax obligations. This is because if Indian tax officials ask about overseas remittances, these papers will help you support your case.

Final Thoughts

Lastly, UAE gratuity provides financial stability to NRIs and UAE expats leaving their jobs. Under UAE Labor Law, gratuity is calculated based on service tenure and the employee's basic salary, subject to the applicable rules. Generally, for returning NRIs, the UAE end-of-service benefits are not taxable in India if the income accrues outside India and is first received outside India while they are an NRI. However, if their residential status changes and the gratuity becomes taxable under the applicable Indian tax rules, they may be liable to pay tax on it.

If you are still confused and need assistance with India-UAE tax obligations, contact Savetaxs. Our team of cross-border experts provides personalized guidance to resolve your queries and help you stay compliant with the tax laws of both countries.