What are India’s tax rules for nom-doms based abroad and why Rishi Sunak’s wife might benefit from them

As an Indian citizen, Akshata Murthy claims non-domiciled status in the UK

British chancellor Rishi Sunak is facing questions over his family’s financial affairs after it emerged that his wife Akshata Murthy pays no tax in the UK on her vast foreign earnings, potentially saving her millions of pounds.

On Thursday, The Independent revealed that Ms Murthy has claimed non-domicile status in order to save on taxes. In a statement, she said that she had to use the special status because of her Indian citizenship.

Ms Murthy, whose family business is estimated to be worth around £3.5bn, has continued to use the valuable tax status even after Mr Sunak became the chancellor in February 2020.

A spokesperson for Ms Murthy said: “India does not allow its citizens to hold the citizenship of another country simultaneously. So, according to British law, Ms Murty is treated as non-domiciled for UK tax purposes. She has always and will continue to pay UK taxes on all her UK income.”

The revelation has earned the chancellor the ire of the opposition, just days after he raised taxes for millions of people in the UK, compounding the cost of living crisis through his spring statement.

Mr Sunak has not declared his wife’s shareholdings on the Register of Members’ Interests and previously said he has ”followed the ministerial code to the letter”.

In a statement on Thursday Mr Sunak defended his family’s financial affairs and hit out at what he called “smears” directed at his family, adding that scrutiny of his wife was unfair because she is a “private citizen”.

To understand Ms Murthy’s tax liability in India, experts said that is important to first clarify whether she is a resident or non-resident taxpayer in the country.

Under the Indian income tax law, an individual’s residential status plays a vital role in their taxability.

According to the Indian government’s tax authority, the Income Tax Department, for the purposes of income tax law, an individual can have any one of the following residential status: Resident and ordinarily resident in India (also known as resident), Resident but not ordinarily resident in India, and Non-resident.

The residential status of the individual is reviewed every year and depends on their physical presence in the country in the previous financial year.

Under the Finance Act 2020, an Indian citizen shall be deemed to be resident in India or a person of Indian origin whose total income (other than income from foreign sources) exceeds Rs. 15 lakhs (£15,185) during the previous year, and who has been in India for a period of 120 days or more but less than 182 days.

“However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.”

Explaining the rules, Ashutosh Chaturvedi, partner at PricewaterhouseCoopers in New Delhi, said to The Independent: “A tax resident in India is required to pay taxes on their global income. If they are a non-resident, they should pay tax only on Indian income.”

Income tax rules also suggest that a non-resident Indian who is either a citizen of India or a person of Indian origin, is also required to designate their existing resident (Indian) bank accounts to non-resident accounts due to a change in their residential status.

Ms Murthy is an entrepreneur with a range of business interests and met Mr Sunak while the two were studying in Stanford University in the US.

Born in India, she is the daughter of one of India’s richest businessmen Narayan Murthy, co-founder of Infosys, and hailed as the father of India’s IT boom.

While Infosys is only one of Ms Murthy’s business investments, dividends from Infosys calculated from her stake in the company of 0.93 per cent suggest the payments could have totalled around £11.6m in the past year, The Independent had reported.

As a non-dom, Ms Murthy would not have had to pay tax on these dividend payments in the UK, therefore saving a bill of around £4.4m in tax in the UK.

The non-dom status means she would not have to pay UK tax at a rate of 39.35 per cent on dividends. India sets the rate for non-residents at 20 per cent, but this can fall to 10 per cent for those who are eligible to benefit from the UK’s tax treaty with India.

The treaty was signed between the two countries in 1993 for the purpose of avoiding double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains.

“From an Indian perspective if she is a tax resident of UK, then she is a nonresident in India. If she receives dividend on her income from Infosys, she will suffer tax as a non-resident taxpayer in India. As a nonresident taxpayer, she will also be eligible under the India-UK treaty in this scenario which allows her tax concessions in the UK,” Mr Chaturvedi said.

Speaking to The Independent, Suranjali Tandon, assistant professor at National Institute of Public Finance and Policy, a New Delhi-based think tank that assists the Indian government in formulating policies, said that the non-domiciled resident taxpayers have a special advantage in planning their tax liabilities due to the treaty.

“An individual who holds an Indian citizenship, can’t hold dual citizenship and for UK tax purposes will be treated as non-domiciled resident taxpayers which allows them a special advantage to plan their tax liability through the exemption of foreign incomes, provided they have not stayed for more than 15 years or have severed family ties for them to be deemed domiciled in UK.”

Ms Tandon added that this regime proves to be “beneficial” as “you get this golden opportunity of non-dom status to minimise tax liabilities.”

“In effect, if Ms Murthy is a nonresident, which she should be as she has been living in the UK and is married there, she will be paying taxes as a non-resident tax payer in India which would include tax liabilities on her Indian income and suffer lower tax rates on her UK income due to her non-domicile status,” Mr Chaturvedi added.