A Comprehensive Legal & Practical Guide to Avoid Tax Defaults and Optimize Planning
Introduction
In an increasingly globalized world, Indian taxpayers relocating abroad mid-financial year face complex tax implications. Questions frequently arise regarding the taxability of salary income earned before and after the move, especially when remuneration is credited abroad, the impact of employer changes, and how to utilize India’s Double Tax Avoidance Agreements (DTAA) effectively.
Moreover, compliance with foreign asset disclosure norms and FEMA regulations adds layers of complexity. This article presents a section-wise, authoritative analysis based on the Income Tax Act, DTAA provisions, RBI guidelines, and judicial precedents—equipping taxpayers with a clear, actionable framework for FY 2024-25.
1. Residential Status – The Crucial Determinant of Taxability
Legal Reference:
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Income Tax Act, 1961 (hereinafter “ITA”) Section 6(1)
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CBDT Circular No. 749/06/99-IT
The scope of taxable income under Indian law fundamentally depends on the individual’s residential status for the financial year. The ITA classifies individuals as:
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Resident: Present in India for ≥182 days during the FY, or ≥60 days during the FY and ≥365 days in the preceding four FYs;
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Non-Resident (NRI): Does not meet these criteria;
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Resident but Not Ordinarily Resident (RNOR): A resident with limited prior residency.
Trigger: If the taxpayer is a Resident, global income is taxable under ITA Section 5(1)(c). Conversely, a Non-Resident is taxed only on income received or deemed to accrue in India (Sections 5(1)(a) and (b)).
Interpretation: For a daughter moving abroad in December 2024, if her stay in India in FY 2024-25 exceeds 182 days, she remains a Resident for the entire year, thereby making all global income taxable in India.
2. Taxability of Salary Income – Location and Receipt of Income
Legal Provisions:
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ITA Section 5(1)(a), (b), (c)
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Explanation 1 to Section 9(1)(ii)
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CBDT Circular No. 7/2019
Key Points:
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Salary is taxable if received or deemed received in India, or accrues/arises in India.
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A Resident’s salary income is taxable irrespective of where it is earned or received (Section 5(1)(c)).
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The place of receipt (India or abroad) does not exempt a Resident from tax liability.
Foreign Salary Credited Abroad:
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Taxable in India if the individual is Resident, regardless of employer or place of credit.
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Employer change (Indian to foreign or vice versa) does not affect taxability if the individual’s residential status remains Resident.
Judicial Precedent: The Supreme Court in CIT v. Morgan Stanley & Co. Inc. affirmed that salary income is taxable based on residential status and source, not merely on receipt location.
3. Double Tax Avoidance Agreement (DTAA) and Foreign Tax Credit (FTC)
Legal Framework:
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ITA Sections 90 & 90(2) (DTAA implementation)
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India-US and India-Luxembourg DTAAs (OECD Model)
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ITA Section 91 (Unilateral Relief)
DTAA Principle:
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Income from employment is generally taxable in the country where the employment is exercised (Article 15 of respective DTAAs).
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If tax is paid abroad, India allows a foreign tax credit to avoid double taxation.
Claiming FTC:
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File Form 67 before filing the Income Tax Return (ITR), as mandated by Rule 128 of IT Rules.
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Disclose foreign income under Schedule FSI and foreign tax paid under Schedule TR in the ITR.
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Maintain evidence: foreign payslips, tax deduction certificates, employer documents.
4. Foreign Asset Disclosure and Compliance
Statutory Requirements:
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ITA Section 5A (Income from undisclosed foreign assets taxable)
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Rule 114F(1) (Disclosure of foreign assets in ITR)
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Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
Disclosure: Residents must report:
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Foreign bank accounts and balances
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Immovable property held abroad
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Shares, mutual funds, financial interests in foreign entities
Non-compliance Consequences:
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Penalties under Section 271AA (₹10,000 per day of default)
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Prosecution under the Black Money Act
5. FEMA Compliance and Bank Account Regulations
Legal Framework:
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Foreign Exchange Management Act, 1999 (FEMA)
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RBI Master Direction on Liberalized Remittance Scheme
Obligations:
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Residents moving abroad should convert existing resident savings accounts to NRO/NRE accounts as per RBI instructions.
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Timely reporting of foreign bank accounts and investments is mandatory.
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Adherence to repatriation rules, currency exchange, and investment restrictions.
Failure invites FEMA penalties and possible prosecution.
6. Case Illustration: Moved Abroad Mid FY 2024-25
| Period | Employer | Salary Credited | Residential Status | Taxability in India |
|---|---|---|---|---|
| Apr – Dec 2024 | Indian Employer | Credited in India | Resident | Fully taxable globally (including foreign income) |
| Dec 2024 onwards | Foreign Employer | Credited abroad | Resident (till departure) | Salary till departure taxable in India |
| Dec 2024 onwards | Foreign Employer | Credited abroad | Non-Resident (post departure) | Salary earned post departure not taxable in India |
7. Common Pitfalls & Preventive Measures
| Pitfall | Risk | Preventive Action |
|---|---|---|
| Incorrect residential status determination | Wrong tax liability & penalties | Accurately track stay days & document (Section 6) |
| Assuming foreign salary credited abroad exempt if Resident | Tax evasion notices and penalties | Disclose global income fully (Section 5) |
| Failure to file Form 67 for foreign tax credit | Loss of FTC & double taxation | Timely Form 67 filing & maintain proofs |
| Non-disclosure of foreign assets | Heavy monetary penalty & prosecution | Full disclosure in Schedule FA & Rule 114F |
| FEMA non-compliance on bank accounts | Financial penalties & prosecution | Convert accounts as per RBI/FEMA guidelines |
8. Tax Planning & Filing Recommendations for FY 2024-25
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Ascertain Residential Status early: Track presence diligently to fix tax residency.
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Maintain documentation: Payslips, foreign tax certificates, employer letters.
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Declare global income if Resident: Use appropriate ITR forms with Schedule FSI and TR.
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File Form 67 prior to ITR filing to claim foreign tax credits under DTAA.
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Convert resident accounts to NRO/NRE accounts timely under FEMA regulations.
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Consult professionals to time departures or salary credits, optimize tax impact.
9. Comprehensive Compliance Checklist for FY 2024-25
| Step | Action | Legal Reference & Remarks |
|---|---|---|
| 1 | Compute stay days in India | ITA Section 6(1) |
| 2 | Determine residential status | Based on presence and previous stay |
| 3 | Collect all salary and foreign tax documents | Employment contracts, salary slips, tax certificates |
| 4 | Report worldwide income if Resident | ITA Section 5(1)(c) |
| 5 | Disclose foreign assets & bank accounts | Schedule FA, Rule 114F |
| 6 | File Form 67 to claim foreign tax credit | Rule 128 |
| 7 | Convert resident savings accounts as per FEMA | RBI Master Direction on LRS |
| 8 | File Income Tax Return with full disclosure | ITA Section 139(1) |
| 9 | Pay any tax due after credit claim | Avoid interest and penalty |
| 10 | Maintain evidence for future audits | Preserve all documents for minimum 6 years |
Conclusion
For individuals moved abroad in FY 2024-25:
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If Resident, all salary income earned worldwide (including foreign salary credited abroad) is taxable in India as per Sections 5 and 6 of the ITA.
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DTAA provisions with the US and Luxembourg allow for foreign tax credits, subject to timely filings and documentation.
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Comprehensive foreign asset disclosures and FEMA compliance are mandatory to avoid severe penalties.
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Proper tax planning, timely filings, and adherence to statutory obligations safeguard taxpayers from defaults and optimize tax efficiency.
