A non-resident Indian (NRI) receives gratuity and leave encashment on termination of his job contract. Is this amount taxable in India?
The taxability of an income in India depends on the residential status in India, source of income, and place of receipt of income. Residential status is determined on the basis of the physical presence of an individual in India during a financial year (FY) and the preceding 10 FYs. For Indian citizens, even if they do not become residents based on physical presence in India, they can still become Resident but Not Ordinarily Residents (RNOR) based on the absence of liability to pay tax in any other country or territory by reason of domicile or residence or any other criteria of similar nature, if India sourced income exceeds ₹15 lakh. Residential status is dynamic and needs fresh determination for each FY.
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An individual qualifying as ‘Resident and Ordinarily Resident’ (ROR) is taxable on his worldwide income in India and is required to report all foreign assets in the India income-tax return (ITR). Also, the income earned from such foreign assets during the relevant FY along with the nature of income and head of income under which such income has been offered to tax in the India ITR needs to be reported in relation to each foreign asset.
An individual qualifying as ‘Non Resident’(NR) or RNOR is taxable on the following incomes: income accruing or arising in India; income deemed to accrue or arise in India; income received or deemed to be received in India; income accruing or arising outside India if the income is derived from business controlled in, or profession setup in, India (for RNOR).
Salary for services rendered in India is taxable in India irrespective of residential status. Salary includes gratuity and leave encashment. Accordingly, gratuity and leave encashment, to the extent relating to services are rendered in India, is taxable in India. However, in case of an individual qualifying as NR under the I-T law, salary received outside India for services rendered outside India is not taxable in India.
Additionally, you may claim the following exemption
For Leave encashment: This amount is exempt subject to the least of the following:
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A sum of ₹3 lakh; leave encashment actually received; 10 months’ salary (basic average salary of last 10 months); or cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of service.
For gratuity: This amount is exempt subject to the least of the following:
Half month’s salary for each completed year of service (Calculation for half month’s salary will vary if covered under Payment of Gratuity Act, 1972); a sum of ₹20 lakh; or actual gratuity received.
Salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
