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Taxation

Taxation

TAXATION ASPECTS: NON RESIDENT INDIAN INVESTMENTS

Important common taxation aspects are covered here under.

  • Section 4 - Charging Section

    Income Chargeable at rates prescribed by Finance Act provided it comes within Scope of Total Income under Section 5 and it is not exempt under Section 10.

  • Section 5 - Scope of Total Income

    Incidence of Tax depends upon a person's Residential Status and also upon the Place and Time of Accrual or Receipt of Income.

  • Section 6 - Residential Status
    • Resident and Ordinarily Resident (R)
    • Resident but not Ordinarily Resident (NOR)
    • Non-Resident(NR)

NRI is entitled to select either one of the two methods of taxation of income:

  • Method A

    Under this option, NRI can offer income from Specified Assets at Special rates of taxation and all other income under normal provisions of Income-tax Act, 1961.

    • (I) Income from Specified Assets

      Treated as a separate block of Income chargeable to tax at special rates.

      • Income by way of interest from Specified Assets is chargeable to tax @ 20% + education cess (including SHEC) @ 3%
      • Capital gains from specified assets are chargeable to tax as under:
        Specified Asset Short-term Tax Rate on STCG Long-term Tax Rate on LTCG
        Equity shares, Listed and STT chargeable on sale. If held for a period not exceeding 12 months from the date of acquisition. 15.45% Capital asset which is not a short-term capital assets is long-term capital asset Exempted
        Shares and Listed : Debentures of Public Co and Central Government Securities 20.60%. 10.30%
        Unlisted : Debentures of Public Co. and Central Government Securities. If held for a period not exceeding 36 months from the date of acquisition 20.60% Capital asset which is not a short-term capital asset is long-term capital asset 10.30%
       

      The NRI is neither entitled to claim:

      • Any deduction for any expenditure or allowance (i.e. Deductions under section 80C of Chapter VI A or cost indexation benefit, for instance). Nor
      • The benefit of basic exemption of Rs. 200,000 for F.Y. 2013-14.
    • (II) Separate Taxation of Income (OTHER THAN THE INCOME COVERED BY (I) ABOVE)

      All income other than income from specified assets is to be offered for taxation, as per the prevailing slab rates.

      Here, the NRI will have to declare interest, capital gains, rental income and any other income and claim deductions for expenditure, allowance, set-off of losses suffered in previous years and also basic exemption of Rs. 2,00,000 for F.Y. 2013-14.

      The total tax liability shall consist of tax under (I) and (II) put together.

  • Method B

    Normal Provisions of Taxation

    • NRI can opt for consolidating Income from Specified Assets and other income and offer it for taxation.
    • Here, he shall declare his consolidated Income together and he can claim deductions for expenditure, allowance, set-off of losses suffered in previous years and also basic exemption of Rs. 2,00,000/-.
    • NRI must compute his income under both the alternatives, quantify the tax liability and select the alternative where tax liability is least.
  • NON RESIDENT

    If an Individual who satisfies both the understated conditions of section 6 of the Income-tax Act, then he becomes a Non-Resident.

     
    Condition Status
    Equity shares, Listed and STT chargeable on sale.The person is not in India for 182 days or more during the relevant previous year. If yes, then the person is a non-resident. (Subject to condition “2”.)
    The person is not in India for 60 days or more during the previous year and the person is not in India for 365 days or more during the 4 years prior to the previous year. If yes, then the person is a non-resident. (Subject to exceptions mentioned below)

    *Exceptions

    The requirement of stay in India for 60 days as required in condition 2 is extended to 182 days to be considered as a Resident in India, in the following cases:

    • If an NRI, who is citizen of India or Person of Indian Origin, who is on visit to India or
    • If a person, who is citizen of India, leaves India for employment outside India or as a member of the crew of an Indian ship.

    In other words, the above categorized persons are non-resident if they satisfy condition 1 alone.

  • RESIDENT BUT NOT ORDINARILY RESIDENT (RNOR)

    A Non Resident who has returned to India for good is covered under the provisions of section 6(6) of the Income-tax Act. He is given a special status of RESIDENT BUT NOT ORDINARILY RESIDENT (RNOR) if he satisfies any one of the following conditions:

     
    Condition Status
    The person is non-resident, as per the above provisions, for at least 9 out of 10 previous years prior to the previous year under consideration. If yes, the person is RNOR
    The person’s stay in India during the 7 previous year prior to the previous year under consideration should be 729 days or less. If yes, the person is RNOR

    Note: A person who is returning to India after 9 years of stay outside India (and who was non-resident for each of the 9 years under the Income Tax Act, 1961), shall remain RNOR for the period of two years only.

    Flowchart

    *Exceptions

    The requirement of stay in India for 60 days as required in condition 2 is extended to 182 days to be considered as a Resident in India, in the following cases:

    • If an NRI, who is citizen of India or Person of Indian Origin, who is on visit to India or
    • If a person, who is citizen of India, leaves India for employment outside India or as a member of the crew of an Indian ship.
  • Taxable Period:

    Taxable period is the termed as Previous Year i.e. the period starting from 1st April to 31st March wherein the income has actually been earned by the person. Number of days stay in India during this period is to be counted.

  • Stay in India:

    Day of Arrival into India and the Day of Departure from India are counted as 1 day each in India (i.e. 2 days stay in India). Dates stamped on Passport are normally considered as proof of departure from and arrival in India. The stay in India is to be counted on the basis of physical stay of a person.

  • Departure from India:

    In the 1st year of leaving India for Employment, one shall leave before September 28th so that the person is a NRI for the said FY. Otherwise his total income (including foreign income) in the year of leaving India, is taxable in India.

  • Return to India:

    An NRI, returning to India for good, should generally try and come back on or after February 1 (or February 2 in case of a leap year) so as to maintain his residential status of NRI. However, if your stay in India in prior 4 previous years does not exceed 365 days then one may return after 2nd October (or October 3rd in case of a leap year). In both the cases, you will remain non-resident for that financial year (i.e. April-March) ensuring your income earned outside India is non-taxable in India for that financial year.

  • Double Taxation Avoidance Agreement (DTAA)
    • The Double Tax Avoidance Agreement (DTAA) is essentially a bilateral agreement entered into between two countries.
    • The provisions of DTAA override the general provisions of taxing statute of a particular country.
    • With the insertion of Sec. 90(2) in the Indian Income-tax Act, Non-Residents have an option of choosing to be governed either by the provisions of a particular DTAA or the provisions of the Income-tax Act, whichever is more beneficial.

    This is explained as under: -

    Interest on NRO FD is subject to a tax deduction at source at the rate of 30.90% if DTAA benefit is not allowed. There are different beneficial lower rate of tax on Interest prescribed for different countries which usually ranges from 10% to 15%.

    As per Finance Act 2013, a Person shall not be entitled to claim any benefit of relief under DTAA unless he furnishes a Tax Residency Certificate (TRC) to Deductor. Further, the Act also specifies that along with TRC, a Person has to produce other documents and information as prescribed by Central Government to avail the benefit of DTAA (e.g. Declaration in Form NO.10F).

  • Income Totally Exempt from Tax for Non Residents.

    The following Incomes of Non Residents are exempt from tax under the provisions of the Income-tax Act:

    • Section 10(4)(ii)

      Interest on Non Resident External Account (NRE). OCBs are not eligible for exemption under this section.

    • Section 32(1)(aa) of the UTI Act

      Income from units of UTI acquired in foreign exchange or from NRE account/FCNR account by Indian citizen / person of Indian origin.

    • Section 10(15)

      Interest, premium on redemption and other payment on notified securities, bonds, certificates and deposits.

    • Section 10 (15) (iv)(fa)

      Interest paid by a schedule bank to non-resident or to a person who is not ordinarily resident on RBI approved foreign currency deposits i.e. FCNR & RFC deposits and Interest earned by OCBs on FCNR deposits. The exemption, in respect of RFC account, continues till such time as the account holder continues to be RNOR.

    • Section 10(33)/ 10(34)

      Dividends earned on shares of the Companies and Income on distribution from units of Unit Trust of India / Mutual Funds.

    • Section 47(viia)

      If eligible foreign currency Bonds or Shares/GDR of Indian company issued under GDR scheme are transferred outside India, by one non-resident to another non-resident then capital gains arising on such transfer is exempt from Income-tax.

    • SSection 10(38)

      Any capital gains income arising from the transfer of long term capital asset being an equity share in a listed company or a unit of equity oriented fund.

Taxability of wealth, as per Section 6 of the Wealth Tax Act, 1957 is based on one s Residential Status and citizenship in India.

Sr. No. Status of an Individual Assets located in India Assets located outside India
1 Resident and citizen of India Taxable Taxable
2 Otherwise Taxable Not Taxable
  • Only specified assets taxable
    • Urban Land
    • Building
    • Motor car
    • Cash in hand in excess of Rs. 50,000/-
    • Yacht s, boats and aircrafts
    • Jewellery
  • Basic exemption limit of rupees Rs. 30 Lacs and thereafter flat 1% rate.
  • ASSETS OF A NON RESIDENT

    A Person of Indian Origin (or a citizen of India) who was ordinarily residing in a foreign country and who, on leaving such country, has returned to India with the intention of permanently residing in India then, the following assets shall be exempt for 2 successive assessment years commencing with the assessment year next following the date on which such person returned to India:

    • Moneys brought by him into India.
    • Asset brought by him into India.
    • Moneys standing to the credit of such person in a Non-resident (External) Account in any bank in India on the date of his return to India.
    • Assets acquired by him out of money referred to in (a) and (c) within one year prior to the date of his return and at any time thereafter.

Taxability in India of Income for a person is based on the Residential Status of a person as per Income-tax Act, 1961 explained here under: The following Incomes of Non Residents are exempt from tax under the provisions of the Income-tax Act:

  • A person who is a non-resident:
    • Income earned from any source in India is taxable in India.
    • Any other income earned or received in India is taxable in India.
    • Income other than the above is not taxable in India.
  • A person who is resident but not-ordinarily resident (RNOR):
    • Income earned from any source in India is taxable in India.
    • Income earned outside India from business controlled or profession set-up in India is taxable in India.
    • Any other income earned or received in India is taxable in India.
    • Income other than above is not taxable.
  • A person, who is resident and ordinarily resident in India (ROR), is liable to pay tax in India on his world income.

NRIs are liable to file Return of Income only if their taxable income* in India in the relevant Financial Year (1st April to 31st March) exceeds the basic exemption limit (Rs. 200,000/- for F.Y. 2013-14)

*NRIs earning below mentioned income shall be liable to file returns in India, irrespective of their Total Income being less than the Basic Exemption limit:

  • Income from Short Term Capital Gains on equity shares or units of equity oriented mutual fund.
  • Income from Long Term Capital Gains, which are chargeable to tax.

Exception:

It shall not be necessary for a Non-Resident Indian to furnish a return of income if

  • his total income in respect of which he is assessable during the relevant financial year consisted only of investment income or income by way of long term capital gains or both.
  • The tax deductible at source has been deducted from such income.

Hence, if an NRI has only Investment Income or Long Term Capital Gains or both (only from foreign exchange assets, as explained above) and the tax has also been deducted at source from such income, then he is not required to file his Return of income for that relevant Financial Year.

It is however recommendatory for NRIs to file their Return of Income in India as the tax deduction at source for NRI is prescribed at maximum rate as per Income-tax Act. However, the actual liability to tax for the year computed in accordance with the provisions of the Act is generally lower.

The profit on sale of Immovable property is taxed under the Income-tax Act 1961 as under:

The capital gains are segregated into long-term capital gains and short- term capital gains in following manner: -

Capital Asset Short-term Long-term
Immovable property If held for a period not exceeding 36 months from the date of acquisition. Capital asset which is not a short-term capital asset is long-term capital asset
Tax Rates At applicable normal rates i.e. as per the slab rates. 20%*

* Plus applicable "Education Cess" (2%) tax and "Secondary and Higher Education Cess (1%).

Capital Gains is to be calculated in the following manner

Particulars Amount (Rs.)
Full value of Sales consideration 100
Less: Expenditure incurred wholly and exclusively in connection with such transfer 5
Net Sales Consideration 95
Less: Cost of Acquisition 35  
Cost of Improvement 15 50
Long term / Short term Capital Gains / Loss 45

NRIs are entitled to claim exemption from the tax if they reinvest long term capital gains /net sale consideration into certain specified assets.

  • Purchase of immovable property Applicability of Section 194IA
    • Section 194IA, a newly inserted section, mandates a person to deduct Tax at Source (TDS) @ 1% while paying consideration for buying any Immovable property other than rural agricultural land in India to any resident seller/builder.
    • The said provisions are applicable where the transaction value is more than Rs. 50 lacs. Also, the given provisions have become a concern while buying and paying any amount for underdeveloped plot or under construction apartment/villa etc from Builders.
    • This amendment has taken effect from 1st June, 2013.
    • Further in case if the builder does not provide Permanent Account Number (PAN) to the buyer, then the buyer has to deduct TDS at higher rate i.e. at the rate of 20%.
  • Tax Exemption Certificate (TEC) is an order of Assessing Officer issued under provisions of section 195(2), 195(3) or 197 of Income-tax Act 1961.
  • The rate prescribed for TDS from NRI's income is the maximum rate of tax at which relevant Income is taxable in India. However, in majority of the cases of NRI, the actual tax liability is lower than this. Also, the higher deduction of tax so made is generally not claimed as refund by filing Return of Income. In order to assist in such situations, the Income-tax Act has provided procedure under section 197 whereby a NRI can apply to the Assessing officer to issue specific certificate authorizing the payer of income (who deducts tax at highest prescribed rate) to deduct tax at a lower rate or nil rate as the case may be. Such a certificate would be binding on the payer and he shall deduct tax in accordance with the certificate of the Assessing officer.
  • Thus whenever a persons actual tax liability as per the provisions of Income-tax Act is lower than the tax deducted at source he may apply for Tax Exemption Certificate.
  • Permanent Account Number (PAN) is a ten-digit alphanumeric identifier, issued by Income Tax Department to each assessee (e.g. individual, firm, company etc.). Permanent Account Number (PAN) is mandatory for transacting in financial markets in India.
  • PAN enables the department to link all transactions of the person with the department. A person is required to quote his PAN while executing many transactions in India, for example opening NRO bank account, investment in shares, mutual funds, filing return of income, property deals, vehicle deals, investment in bank.
  • As per rules of Income-tax Act, 1961, PAN is mandatory for Non Residents and there is requirement to furnish to Income Tax Department, registrar and other parties who makes payment to Non Residents on which payer is liable to deduct tax. 
  • Also, with the introduction of Section 206AA (w.e.f 1st April 2010)
    • Incase if any person is not holding the PAN Card, the rate at which the Tax be deducted shall be higher of 20% or
    • Rate of TDS actually to be deducted i.e. 10% (DTAA rate for Interest Income in certain countries) or 15% (certain Short Term Capital Gains) or 30% (other Incomes) etc.
  • In view of above it is advisable for Non Residents to obtain PAN.
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