Tax Implication on Income earned by RNOR

[PRIYAM KHAMBHATA]

Dear Sir

My client is Citizen of USA, he came back in India in June 2024, His Residential status is becoming Resident But Not Ordinary Resident. He has employed in Indian Company and earned Rs.1.0 Cr. for the year FY 2025-26. He is also earned Salary in USD 10000 from a Unit of Indian Company in USA. This USD is credited in US Bank Account. Such Unit of Indian Co. at USA is deducted federal tax on USD salary income.

My question is that would he include Salary Income in USD 10000 in his total income for taxation in India and claim of Foreign Tax credit (FTC).

Please advice.

Thanks

[YAGAY andSUN]

Under the Income-tax Act, 1961, the scope of total income is determined by residential status as per Sections 5 and 6.

In the present case, the assessee qualifies as a Resident but Not Ordinarily Resident (RNOR) for FY 2025-26. Accordingly, under Section 5(1), his total income in India shall include:

(i) income received or deemed to be received in India;

(ii) income accruing or arising or deemed to accrue or arise in India; and

(iii) income accruing or arising outside India only if it is derived from a business controlled in or a profession set up in India.

The salary of USD 10,000 is earned for services rendered in the USA and is credited to a foreign bank account. Prima facie, such income accrues outside India. However, the determinative test is whether such employment income can be said to be derived from a business controlled in India.

Where the US unit is merely a branch or extension of the Indian company, and the employment is integrally connected with the Indian business (i.e., control and management of employment vests in India), a view may be taken that such income is derived from a business controlled in India. In such a case, the foreign salary would be taxable in India even in RNOR status.

Conversely, if the US unit constitutes an independent establishment and the employment is exercised and controlled outside India, the salary income would not fall within Section 5(1)(c). In that situation, such foreign income would not be includible in total income in India for an RNOR.

As regards Foreign Tax Credit (FTC), relief under Section 90/91 read with Rule 128 can be claimed only where such income is offered to tax in India. If the USD salary is not taxable in India, no FTC would be admissible.

Further, the applicability of the India-USA Double Taxation Avoidance Agreement may also be examined. Under Article relating to dependent personal services, salary is generally taxable in the country where employment is exercised, subject to specified conditions. This may reinforce non-taxability in India in appropriate cases.

In sum, inclusion of USD salary hinges on the "business controlled in India" test; FTC is consequential and available only if such income is chargeable to tax in India.

AI Summary

Resident but Not Ordinarily Resident foreign salary taxability turns on business controlled in India and Foreign Tax Credit availability. For a Resident but Not Ordinarily Resident individual, foreign salary is included in total income only if it is received in India, accrues in India, or is derived from a business controlled in India or a profession set up in India. Salary earned in the USA and credited to a foreign bank account is prima facie foreign-source income, but its taxability depends on whether the US unit is an extension of the Indian company or an independent establishment. Foreign Tax Credit is available only if the income is taxable in India.