Taxation of NRIs – Residential Status, Computation, Return of Income

Taxation of NRIs – Complete Details, Find Everything You want to know about Taxation of NRIs, In this article you can find all details related to Taxation of NRIs like – Residential Status (Section 6 of the Income Tax Act), Income liable to tax (Section 5, 5A and 9 of the Income Tax Act), Special provisions relating to certain incomes of Non-resident Indians [Chapter XII-A of the Income-tax Act], Meaning of Convertible Foreign Exchange, Computation [Section 115D], Tax on investment income and long-term capital gains [Section 115E], Withdrawal of exemption, Return of Income (ROI) not be filed in certain cases [Section 115G], Some other notable taxation points for NRIs etc. Now you can scroll down below and check more details for “Taxation of NRIs”

Taxation of NRIs

Residential Status (Section 6 of the Income Tax Act):

Resembling Income tax laws of many other countries, the liability under Indian Income tax also varies with the residential status of the concerned tax payer and not according to the nationality/domicile of the Tax Payer

Section 6, does not define who is non-resident, TAXATION OF NRIs but defines who is resident. Therefore an Individual who is not a resident under the Income-tax Act is a non-resident Indian. Indian Income tax classifies an Individual as Resident (further classified into Ordinary resident and not ordinary resident) and Non-Resident

Given below is the definition of Resident Individual given by Section 6 (only individuals covered and not HUF, Corporates, AOP, BOIs):

Income liable to tax (Section 5, 5A and 9 of the Income Tax Act):

Important Points:

• NRIs are liable only for income received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India
• NRIs are not at all liable for Income that accrues or arises outside India even if such Income is remitted to India

Special provisions relating to certain incomes of Non-resident Indians [Chapter XII-A of the Income-tax Act]:

Non-Resident Indians (NRIs) are given an option with respect to taxability of their specified incomes. Th at is with respect to certain specified Incomes an NRI may choose to be taxed applying the normal provision of the Income Tax Act or the provision of this chapter whichever are more beneficial. A NRI may elect not to be governed by the provisions of this chapter for any assessment year by furnishing [his return of income for that assessment year under section 139 declaring therein] that the provisions of this chapter shall not apply to him for that assessment year. This option may be altered every year on year-toyear basis. [Section 115I]

Definitions [Section 115C]:

Convertible Foreign Exchange means foreign exchange which is for the time being treated by the RBI as convertible foreign exchange for the purposes the FEMA, 1999

Foreign exchange asset means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange

Specified Asset means any of the following assets, namely:-

• Shares in an Indian Company (both public and private limited)
• Debentures by an Indian company which is not a private company
• Deposits with an Indian company which is not a private company
• Securities of the CG
• Such other assets as the CG may specify in this behalf by notification

Investment Income means any income derived other than diviends referred to in section 115-O from a foreign exchange asset

Must Read – Do NRIs need to file Return of income in India?

Long-term capital gains means income chargeable under the head “Capital gains” relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset;

Non-resident Indian means an individual, being a citizen of India or a person of Indian origin who is not a “resident

Computation [Section 115D]:

While computing the investment income of a NRI no deduction in respect of any expenditure or allowance shall be allowed. However, Transfer expenses will be allowed while calculating Long term capital gains on transfer of specified foreign exchange assets.

No deduction will be allowed under Chapter VI-A in both the cases and also the benefit of basic exemption limit will not be available.

Tax on investment income and long-term capital gains [Section 115E]:

Capital gains exemption on transfer of foreign exchange assets [Section 115F]:

In case of an NRI, any LTCG arising from the transfer of a foreign exchange asset (original asset) can be claimed exempt on satisfaction of the following condition:

• Net consideration (Sale consideration less expenditure incurred for such transfer) is invested in another foreign exchange assets or
• In Saving certificates referred to in clause (4B) of Section 10

WITHIN 6 MONTHS OF TRANSFER OF ORIGINAL ASSET

If Amount invested => net consideration, then entire LTCG is exempt

If Amount invested < net consideration, then Exemption

= LTCG X Amount Invested / Net Consideration

Withdrawal of exemption

Where the new asset is transferred or converted into money, within a period of three years from the date of its acquisition, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as computed above shall be deemed to be income chargeable under the head “Capital gains” in the previous year in which the new asset is transferred or converted into money

Return of Income (ROI) not be filed in certain cases [Section 115G]:

It shall not be necessary for a non-resident Indian to furnish Return of Income under 139 (1) income if—

• his total income in respect of which he is assessable under this Act during the previous year consisted only of investment income or income by way of long-term capital gains or both; and
• the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

However, in case there is refund to be claimed then return of Income is required to be filed.

Benefit under Chapter to be available in certain cases even after the assessee becomes resident [Section 115H]:

[Section 115H]: Where a person, who is a NRI in any previous year, becomes assessable as resident in India he may furnish to the Assessing Offi cer a declaration in writing along with his return of income under section 139 for the assessment year for which he is so assessable, to the eff ect that the provisions of this Chapter shall continue to apply to him

However such application may be made only in relation to the investment income derived from any foreign exchange asset being

• Debentures by an Indian company which is not a private company
• Deposits with an Indian company which is not a private company
• Securities of the CG
• Such other assets as the CG may specify in this behalf by notification

and if he does so, the provisions of this Chapter shall continue to apply to him in relation to such income for that assessment year and for every subsequent assessment year until the transfer or conversion into money of such assets.

(Thus, this option to go for provisions of XII-A cannot be opted in respect of Shares of Indian Company once the NRI becomes Resident)

Chapter not to apply if the assessee so chooses [Section 115I]:

A Non-Resident Indian is by default governed by the provision of Chapter XII-A. However, Chapter XII-A is optional. Th e assessee may opt to be governed by normal provisions of the IT Act, 1961 if he wishes to. Moreover, this choice is available for every year on year-to-year basis.

Some other notable taxation points for NRIs:

No variable tax slabs for NRIs: NRIs are taxed as per the tax rate and slabs prescribed for resident Indians below 60 years irrespective of whether he is a senior citizen or not.

TDS provisions applicable: NRI interested in maintaining a Rupee account in India has two options – NRE account or NRO account. Interest earned on NRE account is tax free and hence no TDS is deducted. However, in case of every single Rupee (no limit of `10,000 as in case of Residents) of interest earned in NRO account is liable for TDS at maximum marginal rate of 30%.

Benefit of Double Taxation Avoidance Agreements: By virtue of Section 90 (2) of the Income-tax Act, 1961, assessee has an option of choosing to be governed by the provisions of a specific DTAA as applicable to him or to be governed by the provisions of the Income Tax Act, whichever are more beneficial to him. To avail this benefit, assessee is required to furnish Tax Residency Certificate (TRC), issued by the authorities of the country in which such NRI resides.

Conclusion:

In order to attract NRIs to invest foreign currency in India, the Central Board of Direct Taxes has off ered them a separate concessional tax regime for certain specifi c income falling under Chapter XII-A. Moreover, DTAAs that have an overriding eff ect on the provisions of Income Tax Law, has proved to be benefi cial to these NRIs in avoiding double taxation of their Income. However, in order to avail this benefi t of DTAAs the taxpayer is required to furnish a TRC, which is at times a cumbersome process