How are OCI Cardholders Taxed in India?

Understanding residency and taxation rules is important for Overseas Citizens of India (OCI) cardholders, especially as many may mistakenly believe that their tax obligations are solely determined by their OCI status. However, taxation in India mainly depends on an individual's residency status as outlined in the Income Tax Act.

This helps differentiate between Non-Resident Indians (NRIs), Residents but not ordinarily resident (RNOR), and resident and ordinarily resident (ROR), with each status having distinct tax implications. Similarly, the confusion arises due to different criteria under various laws, specifically between the Income Tax Act and the Foreign Exchange Management Act (FEMA). In this blog, you will get an overview of the residency rules for OCI holders, the impact on taxation, and much more.

What are the Residency Rules of OCI Cardholders?

Before diving into the residency rules, let's clear a common misconception. Several OCI cardholders assume that their taxability in India depends only on the OCI card itself. However, that's wrong as it depends entirely on your residency status under the Income Tax Act. 

India classifies individuals, including OCI holders, into three tax-residency categories, NRI, RNOR, and ROR, based on the duration of stay in the country. Let's understand this better:

Non-Resident Indians (NRIs)

To qualify as an NRI for tax purposes, you must:

• Stay in India for less than 182 days in a financial year
• There's also a provision for high-income earners, where the 120-day rule may apply.

Impact on Taxation

Here is how the NRI status will affect your taxability:

• Only income generated in India is taxable
• Schedule FA (Foreign Asset) reporting is not required
• Foreign income is fully exempt from taxation in India
• The interest earned in an NRE (Non-Resident External) account remains tax-free

RNOR (Resident but Not Ordinarily Resident)

The RNOR status is a transitional status for OCI holders (Overseas Citizen of India) and returning NRIs (Non-Resident Indians) who have recently returned from abroad but do not meet the duration of stay criteria to be considered full residents.

You qualify as RNOR when your stay meets residency conditions but doesn't fulfill the length of stay needed to reach the next category.

Impact On Taxation

Here is how the RNOR status will affect your tax obligation:

• Foreign income remains tax-free in India
• Only Indian income is subject to taxation during this period
• No requirement to report foreign assets, as reflected in Schedule FA.

ROR (Resident and Ordinarily Resident)

You will qualify as an ROR if you fulfill both of the following requirements:

• Stay in India for more than 182 days in the current financial year
• Resided in India for at least 730 days in the previous seven years

Impact On Taxation

Here is how the ROR status will affect your taxability in India:

• Global income becomes taxable in India
• All foreign assets must be reported in Schedule FA
• Everything, including foreign bank accounts, US stocks, and 401 k property abroad, must be reported.
• The Black Money Act applies to non-disclosure.

What are Some Key Points for OCI Holders?

It's important to understand that the OCI card does not automatically determine residency status. Instead, it's the duration of stay in India that determines your tax categorization. An OCI cardholder could end up in different tax situations based entirely on the days he/she have spent in India:

• One stayed in India for less than 182 days = NRI
• One stayed in India for more than 182 days = ROR.

What is the Difference Between an NRI and an OCI?

The key difference between an NRI and an OCI is that an NRI remains an Indian citizen, while an OCI is a foreign national of Indian origin who holds specific long-term residency rights. Here is a table detailing some more differences between an NRI vs an OCI:

What are the Taxation Rules for OCI Holders in India?

An OCI cardholder must keep these taxation rules in mind in India to ensure compliance:

• Your tax obligations are determined based on your residency status and are governed by the Income Tax Rules.
• An OCI cardholder will be considered as an Indian resident for tax purposes, provided they have stayed in India for more than 182 days during a financial year or for a total of 365 days within the preceding four financial years and at least 60 days in the previous financial year.
• In such cases, the cardholder must file an Income Tax Return (ITR) on time for both the income earned in India and abroad.
• However, if you spend fewer days in India than the required duration of stay, you only need to pay tax and file ITR for the income received within India.
• Your global income will be subject to taxation, including both earned in India and abroad, while considering the DTAA provisions.

FEMA vs Income Tax Mismatch For OCI Holders

India uses two different laws - the Income Tax Act and FEMA (Foreign Exchange Management Act) to determine your residency and tax status. This dual framework often creates confusion amongst individuals: Your status under each law can be different, as these two laws follow different rules. Here is why the mismatch happens:

Purpose

• Income Tax Act: The IT Act governs the taxation of individuals based on their residency categories, which could be NRI, RNOR, and ROR.
• FEMA: The FEMA regulates various aspects of banking and investments.

Status Determination

• Income Tax Act: An individual's residential status is mainly determined based on the number of days spent in India under the Income Tax Act.
  • Stayed for less than 182 days = NRI.
  • Stayed for over 182 days = RNOR or ROR.
• FEMA: Under the Foreign Exchange Management Act (FEMA), residency status is determined by the intention of stay. If you move to India for an indefinite or long-term stay, you will be considered a resident, even before fulfilling the tax-residency day requirement.

What are Some Common Confusing Situations for OCIs?

Here are some common situations that confuse OCI holders the most:

Resident Under FEMA, but NRI Under Income Tax

This situation arises when a returning OCI holder has not yet stayed long enough to shift tax status despite the intentions to stay in India. While foreign income is not taxable, individuals must convert NRE/NRO accounts to comply with the FEMA regulations.

Resident Under Income Tax, but Still NRI Under FEMA

In this situation, an individual stays in India for over 182 days but continues to consider their stay temporary. Their global income becomes taxable, but since they are recognized as an NRI for FEMA purposes, certain NRE/NRO rules may still apply.

NRE/NRO Rules for OCI Holders

Understanding the implications of NRE and NRE accounts is essential for OCI holders:

• An NRE account is permitted only for OCI holders classified as NRI under FEMA. The interest in an NRE account remains tax-free for NRIs.
• If your status changes to resident, your NRE account will need redesignation, and the interest earned will become taxable.
• The interest earned in an NRO account is taxable at a rate of 30% TDS, regardless of residency status.

Final Thoughts

Understanding India's taxation system as an OCI cardholder can be complex due to the specific regulations under both the Income Tax Act and FEMA. Determining how residency status impacts your taxability is crucial for OCI holders to comply with both legal frameworks. By understanding the various tax statuses (NRI, RNOR, ROR) and the requirements of NRE and NRO accounts, OCI holders can effectively plan their tax obligations and financial management.

Furthermore, if you have confusion regarding your residential status or your tax liability, connect with Savetaxs. We have a team of professionals who can assist you with determining your residency status and your tax obligations accurately. They will ensure you stay compliant and avoid any kind of legal consequences. Contact us right away.