Tax Query: How freelancing income received from abroad is accounted for

Tax Query: How freelancing income received from abroad is accounted for

I am a software engineer with a CTC of ₹17 lakh per annum. I have been filing ITR Form-1 for the last five years. I got an onsite travel opportunity to Ireland and travelled there on January 2020 on work permit visa. During my stay there, I got my Indian component of ₹17 lakh and in addition I got salary in Ireland for which taxes were deducted at source. Due to Covid-19, I lost my employment and returned to India on October 2, 2020. Thereafter, I worked as a freelancer in November and December with an Irish client and got my payments in euros to my Irish account. For financial year (FY2021), I was out of India for 184 days and hence qualified to be an NRI. Should I declare the freelancing payment received in my Irish account? Can I still file ITR-1 for the year 2020-21? Let me know if any exemptions could be claimed.

Krishna Prasad R

We understand that you are an Indian citizen and have been primarily staying in India over the past 10 financial years (FY) preceding FY 2020-21. Taxability in India is primarily dependent on the residential status of an individual, which is based on the number of days of physical stay of the individual in India in the relevant FY and preceding FYs, and is defined under Section 6 of the Income-tax Act, 19619 (Act’).

As per the provisions in the above mentioned section, an individual is said to be a resident in India if he satisfies either of the following two basic conditions:

a. He is in India for 182 days or more in the relevant FY; or

b. He is in India for 60 days or more in the relevant FY and 365 days or more in the four years preceding the relevant FY.

An individual who does not satisfy any of the above conditions is considered as a Non-Resident (NR).

Also, from FY 2020-21, in case an Indian citizen or a person of Indian origin, who has been outside India, comes on a visit to India in any tax year, the condition of 60 days [discussed in Point (b) above] gets replaced by 120 days if his total incomes (other than incomes from foreign sources) exceeds ₹15 lakh for that tax year. However, if such income is up to ₹15 lakh, then the 182 days condition prevails.

In case where the physical stay exceeds 119 days but is up to 181 days, such individual shall qualify as Resident but Not Ordinarily Resident (NOR) and not Resident and Ordinarily Resident (ROR).

A resident individual is said to be a Resident and Ordinarily Resident (ROR), if he satisfies both the following conditions, viz.

i. He should be ‘Resident’ in India for 2 out of 10 FYs immediately preceding the relevant FY; and

ii. He should be in India for an aggregate period of 730 days or more in 7 FYs immediately preceding the relevant FY

In case, a resident individual does not satisfy either of the aforesaid additional conditions (i) or (ii), he is said to be a Resident but Not Ordinarily Resident (NOR) in the relevant FY.

From the above provisions, your analysis that you would be qualifying as an NR since you stayed outside India for 184 days during FY 2020-21, may not hold correct and would require you to redetermine your residential status in the light of the above provisions basis of your physical stay in current FY as well as past 10 FYs.

Since you came back to India for good during FY 2020-21 and considering that you satisfy the aforesaid conditions [condition b and (i) and (ii) above], you would qualify as ROR in India and be subject to tax on your worldwide incomes.

Since you qualify as ROR in India for the said year, in addition to taxing your global incomes, you will also have the requirement to report any assets held by you outside India (including bank accounts) and any incomes you might have outside India.

In case of double taxation of your Ireland income, recourse to the India-Ireland Double Taxation Avoidance Agreement (DTAA) shall be required to be considered to mitigate the impact of double taxation in India.

For filing of your tax return, the applicable tax return form would have to be selected appropriately, once such forms have been notified by tax authorities for FY 2020-21. As per the forms notified for FY 2019-20, considering you earned salary income while being on overseas assignment during some part of the year and also incomes from a profession (freelancing income), Form ITR – 3 is applicable.

You also mentioned that you started your overseas assignment in Jan 2020, i.e.,during FY 2019-20. You also mention that you have been filing ITR -1 for the five 5 years.

Considering the assignment-related income and the foreign asset and income disclosure requirements as mentioned above, ITR -1 is not the correct form to be filed for FY 2019-20.

You should have filed return of income in Form ITR – 2 for FY 2019-20, provided you did not have any income from business/profession for the subject year. The statutory due date for filing of revised return for FY 2019-20 is 31 March 31, 2021. You may revisit and file a revised return in form ITR – 2 with appropriate disclosures and amendments.

The writer is a practising chartered accountant. Send your queries to [email protected]

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