I am a NRI living out of UAE. If an Indian company pays me a salary in my UAE bank account, then whether I claim exemption under Article 15(2) of the India—UAE DTAA which says that my stay in India should be below 183 days, which it indeed will be?
— Name withheld on request
I have assumed that you are a non-resident for tax purposes in India.
As a non-resident earning salary income from an Indian company, your taxability under Indian tax law is restricted to income that accrues or arises in India, is deemed to accrue or arise in India, or is received in India.
Place of accrual
According to Indian judicial rulings, the place where employment is exercised is the key factor in determining where employment income accrues. In other words, income accrues at the location where the employee is physically present while performing the duties for which the salary is paid.
In your case, although the employer is an Indian company, you are physically present in the UAE while carrying out your employment responsibilities. Therefore, the salary accrues in the UAE and not in India.
The deemed accrual provision relating to salary under the Income-tax Act, 1961 was introduced to eliminate any ambiguity regarding the place of accrual of employment income. It clarifies that salary shall be deemed to accrue in India where services are rendered in India, irrespective of the place where the employment contract is executed or enforced.
However, in your case, since the services are not performed in India, the salary would not be taxable in India even under the deemed accrual provisions.
Further, since the salary is credited directly to your bank account in the UAE, it cannot be regarded as income received in India. Accordingly, under Indian domestic tax principles, such a salary would not become taxable in India.
Treaty position
From the India-UAE treaty perspective, the relevant provision to examine is Article 15 (Dependent Personal Services) of the India-UAE DTAA.
Article 15(1) provides that salary income is taxable in the country of residence of the taxpayer unless the employment is exercised in another country. As your employment is exercised only in the UAE—i.e., your country of residence—the taxing right under the treaty rests with the UAE only.
Therefore, based on Article 15(1) itself, the income is not taxable in India.
In such a situation, there is no need to examine Article 15(2), since that clause becomes relevant only when employment is exercised in the other contracting state—i.e., India, in your case.
Accordingly, despite the salary being paid by an Indian company, you would not be liable to tax in India on such salary income.
It should also be noted that your presence and activities in the UAE may create a Permanent Establishment exposure for the Indian company in the UAE. This is a separate matter that your employer would need to evaluate from a corporate tax perspective.
Harshal Bhuta is partner at P. R. Bhuta & Co. CAs
