Are tips and holiday receipts received by an NRI taxable in India?

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A Non-Resident Indian (NRI) receives a gratuity and leave receipt at the end of his contract of employment. Is this amount taxable in India?

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The taxation of income in India depends on the residency status in India, the source of income and where the income is received. Residential status is determined on the basis of an individual’s physical presence in India in one financial year (FY) and the previous 10 FYs. For Indian citizens, even if they do not become resident due to physical presence in India, they can still become resident but not ordinarily resident (RNOR) due to the absence of tax liability in any other country or territory by reason of their domicile or residence or any other criterion of a similar nature, if the income derived from India exceeds 15,000,000. Residential status is dynamic and requires re-determination for each fiscal year.

A person who qualifies as a “Resident and Ordinary Resident” (ROR) is taxable on his worldwide income in India and is required to declare all foreign assets in the Indian Income Tax Return (ITR). Further, the income derived from such foreign assets in the relevant financial year, together with the nature of the income and the head of income under which such income has been offered for tax in the Indian ITR, must be reported for each foreign asset.

A person qualifying as a “non-resident” (NR) or RNOR is taxable on the following income: income earned or generated in India; income deemed to accrue or arise in India; income received or deemed to be received in India; income from or derived from outside India if the income is from a controlled business or established profession in India (for RNOR).

Salary for services rendered in India is taxable in India regardless of residency status. Salary includes gratuity and collection of leave. Accordingly, gratuities and holiday receipts, to the extent that services are rendered in India, are taxable in India. However, in the case of a person qualifying as an NR under the IT Act, salary received outside India for services rendered outside India is not taxable in India.

Additionally, you can claim the following exemption

For the collection of leave: this amount is exempt subject to the lesser of the following elements:

A sum of 3,000,000; collection leave actually received; 10 months salary (average basic salary for the last 10 months); or the cash equivalent of unused leave calculated on the basis of a maximum of 30 days of leave for each year of service.

For tips: This amount is exempt subject to the lesser of the following:

Half a month’s salary for each year of service completed (the calculation of half a month’s salary will vary if covered by the Payment of Gratuities Act 1972); a sum of 20,000,000; or the actual gratification received.

The salary includes the dearness allowance, if the conditions of employment provide for it, but excludes all other allowances and perquisites.

Sonu Iyer is Tax Partner and Head of People Advisory Services, EY India.

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