Tax on a QROPS Pension in India
For income tax purposes in India, a person can either be a ‘Resident Indian’ a ‘Non Resident Indian’ or a ‘Resident but Not Ordinarily Resident’ (RNOR). This last category offers returning Indians generous tax breaks on their worldwide income.
In this article we will look at the exact requirements needed to satisfy the definition pursuant to the Income Tax Act 1961. If a returning India can establish that they are have RNOR status, then they will receive tax breaks on any QROPS pension income whilst they maintain this status.
So who is an RNOR?
If you have recently moved back to India after spending time living and working in the UK, you must check whether you hold the status of RNOR.
A person is an RNOR if he or she meets either of these two conditions:
He or she has been non-resident in India, that is, an NRI, in nine out of the ten previous years preceding that year, or
He or she has, during the seven previous years preceding that year, been in India for a period of 729 days or less.
Why is this distinction important?
The RNOR is a special status accorded in order to provide some valuable tax benefits to returning Indians.
For Indian income tax purposes, an RNOR is treated at par with NRI’s. This means that an RNOR needs to pay tax in India only on his Indian income. Any income from abroad will not be taxed in India.
Pursuant to section 9(1) of the Income Tax Act, pension income is only taxed in India if it was earned in India – thus any UK pension rights will be deemed to have been accrued whilst the person was living and working in the UK, and therefore not earned in India.
Consequently, an individual who has RNOR status will not pay any income tax on a pension from an overseas QROPS scheme. This will be the case irrespective of whether the overseas QROPS is based – Malta, Gibraltar, Isle of Man or New Zealand.
Illustration – Case Study
Mr A returns to India on 19th January 2011 after spending more than 15 years abroad. The first tax year for him in India would be 2010-2011.
Will he qualify as RNOR in 2010-2011? Yes, because he has been an NRI for all the years preceding 2010-2011.
Will he qualify as RNOR in 2011-2012? Yes, because he will have been an NRI for nine out of the ten previous years. That is, except for 2010-2011, he will have been NRI in all other years.
Will he qualify as RNOR in 2012-2013? He will not have been NRI for nine out of the ten previous years because he would have been RNOR for 2010-2011 and 2011-2012. During the seven previous years, that is for the seven tax years from 2005-2006 to 2011-2012, he would have been in India for the entire 2011-2012 (366 days) and for 79 days in 2010-2011. That’s 445 days in total which is less than 729 days. Because he will fulfil this second condition, he will qualify as an RNOR in 2012-2013 as well.
Will he qualify for RNOR in 2013-2014? He will not have been NRI for nine out of the ten previous years because he would have been RNOR from 2010-11 to 2012-13 -During the seven previous tax years, that is from 2006-2007 to 2012-2013, he would have been in India for 365 days in 2012-2013, 366 days in 2011-2012 and 79 days in 2010-2011. That’s 810 days in total. Since he will not fulfil either condition, he will be considered as ordinarily resident Indian in 2013-2014, and pay income tax in India on his QROPS pension income.
Therefore, if Mr A returned to India in January 2011, and started to draw down a pension from his overseas QROPS scheme, he would not pay any income tax in India on that pension until the 2013-2014 tax year.
For returning Indians who plan to immediately retire and draw down an income from their overseas QROPS pension, the RNOR status offers significant advantages, and a transfer to an overseas QROPS can be viewed as a key component of a comprehensive tax planning strategy.
However, the question of whether the status of RNOR will apply to an individual will depend on their individual circumstances, and we advise that all returning Indians seek specialist tax advice in this regard.
Moreover, even if RNOR status is conferred on a returning Indian, the question still remains as to whether the RNOR status will confer any specific tax advantages in relation to their QROPS pension income.
For example, if a 45 year old doctor returns to India after having lived and worked in the UK for 12 years, then RNOR status will not confer any benefit in relation to their QROPS pension, as the earliest they can draw a pension would be in 5 years’ time, when he or she is 50 – by which time they would not be RNOR, but ordinarily resident, and subject to Indian tax on their worldwide income.
The information contained in this section is not intended to be, nor should be construed advice of any kind, including but not limited to tax planning, pension planning or investment advice. We believe that the information as set out herein is correct as of April 2014, but no representation or warranty of accuracy or completeness is given.
You are advised to seek the advice of a suitably qualified accountant or lawyer to seek the correct position in your personal circumstances.
Definition of ‘ordinarily resident’ as per Income Tax Act 1961 (as amended): http://cbec.gov.in/aar/definitions.htm
Definition of ‘Income deemed to arise or accrue in India’ as per Income Tax Act 1961 (as amended): http://law.incometaxindia.gov.in/DIT/Income-tax-acts.aspx
For more information about transferring your UK pension into a QROPS scheme, please contact us.