Income Tax and Income Tax Rules for NRI

Non-resident Indian is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India. Thus, in order to determine whether an Individual is a Non-resident Indian or not, his residential status is required to be determined. As per section 6 of the Income-tax Act, an individual is said to be Non-Resident in India if he is not a Resident in India. An individual is deemed to be Resident in India in any previous year if he satisfies any of the following conditions:

  •  He is in India for a period of 182 days or more during the relevant previous year; Or
  • He is in India for a period of 60 days or more during the relevant previous year and 365 days or more during 4 years immediately preceding the relevant previous year.

Income tax NRI

However, condition No. 2 does not apply where an individual being a citizen of India who leaves India, as members of the crew of an Indian Ship or leaves India for employment outside India during the previous year or an Indian citizens or persons of Indian origin who, being engaged outside India in any business or employment, comes to visit India during the previous year.

Tax incidence or Taxability of Non-Resident shall cover the following topics relevant to a Non-Resident.

  •         Scope of Taxation
  •         Taxable Income of NRI under various heads of Income
  •         Special provisions applicable to NRI
  •         Deductions and Exemptions available to NRI
  •         TDS applicable to NRI
  •         Applicability of Advance Tax Payment to NRI
  •         DTAA
  •         Is Income Tax Return (ITR) to be filled by the NRI and what is the due-date

Scope of Taxation:

Any income which is received or deemed to have been received in India or any income which accrues or arises or is deemed to accrue or arise in India shall be taxable in the hands of the Non-Resident (NRI). Any income which accrues or arises to an NRI outside India shall not be taxable in his hands in India.

Taxable Income of NRI under various heads of Income

Salaries

  • As per sec 9(1)(ii), Salary Income of an NRI from services rendered in India shall be deemed to accrue or arise in India.
  • As per sec9(1)(iii) Salary received by an Indian citizen from the Govt of India for services rendered abroad shall be deemed to accrue or arise in India, however, perquisites and allowances received from the Govt. of India shall be exempt.

Income from House Property

  • Income from House Property situated in India shall be taxable in the hands of the NRI. The computation of the income from house property shall be calculated in the same manner as in the case of a Resident.
  • The Standard deduction of 30% on the Net Annual value shall be available.
  • The NRI can claim the benefit of deduction available in respect of interest on loan borrowed.
  • The NRI can claim the deduction under sec 80C in respect of the repayment of the principal amount of the loan borrowed.

Income from Other Sources

  • Interest on Savings A/c and Fixed Deposits held in India shall be taxable in the hands of the NRI. Interest received on NRE and FCNR A/c. shall be tax-free. Interest received on NRO A/c. shall be taxable.
  • In respect of interest on debentures, bonds issued by Indian Concerns or Indian Govt. TDS shall be deducted at appropriate rates.
  • Dividend received from Indian company shall be exempt.

Income from Business and Profession

  •  Any Income arising to NRI from any Business or Profession controlled from India shall be taxable in the hands of the NRI in India.

Income from Capital Gains

  • Any Capital Gain arising on the transfer of any capital asset situated in India shall be taxable in India.
  • The Capital Gain arising on the sale of shares or securities of an Indian Concern shall be taxable in India.

Special Provisions Applicable to NRI under Chapter XII-A (This provision is optional for the NRI)

Long Term Capital Gain

Long Term Capital Gain to NRI on sale of Foreign Exchange Assets i.e.any of the below assets acquired in Foreign Currency

  • Shares of Indian Company (Public/Private)
  • Debentures of Indian Public Company
  • Deposits with ab Indian Public Company
  • Securities of Central Govt.
  • Any other asset as may be notified by the Central Govt.

Tax Rates applicable to the Long-Term Capital Gain and income arising from the above assets (sec 115E)

                                                                                           Tax Rates

Nature of Income Tax Rates
Long Term Capital Gain (LTCG) 10%
Interest 20%
Other Income Normal Tax Rate

Certain conditions to be fulfilled while computing the LTCG and Interest Income under sec 115D:

  • First, provision to sec 48 i.e. the Capital Gain in respect of the above assets which are acquired in foreign currency by way of purchase or reinvestment shall be calculated in Foreign currency and it shall be reconverted into Indian Currency.
  •  The second provision to sec 48 i.e. Benefit of Indexation shall not be available
  • Deduction under Chapter VI-A (under sec 80) shall not be available 
  • Deduction in respect of any expenditure incurred to earn the interest income shall not be allowed.
  • Normal provisions of Income Tax Act shall apply to in case of Other Income

Exemption allowed under sec 115F:

The LTCG arising on the sale of above FOREX assets shall be exempt if the Net Consideration (Sale proceed – Cost of Transfer) is utilized for acquiring other FOREX assets within 6 months from the date of transfer.

Amount of exemption: LTCG X Cost of New Asset.  

Net Sale Consideration.

Conditions to be fulfilled to claim the exemption:

  • The New asset should not be transferred within a period of 3 years from the date of acquisition. If the new asset is transferred then the LTCG which was earlier exempt shall be taxable in the year in which the asset is transferred.

Sec 115H: The above provisions of Chapter XII-A shall apply even if NRI becomes a Resident:

If the NRI becomes a resident he can file a declaration with the return of income of AY in which he becomes a resident stating that he wants to continue to be governed by the provisions of chapter XII-A. This chapter shall apply until the transfer or conversion of FOREX assets into money.

Sec115I: The provisions of Chapter XII-A are optional for the NRI:

The NRI can pay tax on LTCG and Interest income at normal tax rates instead of 10% and 20%.

Deductions and Exemptions allowed to NRI:

Deductions under Chapter VI-A.

Deductions available and not available to NRI under Sec 80C.

Under sec 80C NRI can claim deductions in respect of the following up to ₹1.5 Lakhs.

Deduction Availability
Life Insurance premium paid in respect of NRI, his spouse and children

Premium should not exceed 10% of the Policy amount (sum assured)

Yes
Tuition Fee paid for full-time education in India (maximum 2 children) Yes
Repayment of Loan taken from Banks and Financial Institutions for purchase or construction of House Property Yes
Contribution towards Unit Linked Insurance Plan (ULIP) Yes
Investment in Equity Linked Savings Schemes (ELSS) Yes
Investment in PPF (New A/c. as Non-resident cannot be opened. PPF A/c. opened when NRI was a resident shall be allowed to be maintained) No
Investment in National Saving Certificates (NSC) No
Senior Citizen Saving Scheme No
Post Office 5 Year Time Deposit schemes No
Deposit in Sukanya Samridhi Scheme (for the benefit of the girl child) No

 Below are the Other Deductions that are allowed to NRI:

  • Sec 80D– medical insurance premium paid for the health of NRI, spouse, parents and dependent children up to ₹25 Thousand and up to ₹50 Thousand in case medical insurance policy is taken on the life of senior citizen shall be allowed.
  • Sec 80E – Interest paid on higher education loan of self, spouse or children. Deduction in respect of interest shall be allowed for a period of 8 consecutive years beginning from the year in which NRI starts paying interest.
  • Sec 80G – NRI’s can claim a deduction in respect of certain eligible donations made for a social cause.
  • Sec 80TTA- NRI’s can claim a deduction to the extent of ₹10 Thousand in respect of interest on savings account with an Indian bank, Co-op Banks or Post Office.

Deduction which is not allowed to NRI:

Sec 80CCG – Investment in Listed Equity shares or Listed units of Equity oriented Fund under the Rajiv Gandhi Equity Savings Scheme.

Sec 80DD Deduction in respect of medical treatment and maintenance of handicapped dependent relative.

Sec 80DDB – Deduction in respect of the medical treatment of specified disease for Self or dependent.

Sec 80U Deduction for the handicapped assessee.

Exemptions:

Particular LTCG on Sale of Residential House Property (sec 54) LTCG on sale of any Long Term Capital Asset other than Residential House Property (Sec 54F) LTCG on the Sale of Long Term Capital Asset and the sale proceeds are invested in certain bonds (Sec 54EC)
Nature of Asset LTCA being a Residential House Property Any LTCA not being Residential House Property LTCA being Land, Building or both
New Asset to be purchased or constructed One residential House Property in India One residential House Property in India Bonds redeemable after 5 years issued by National Highway Authority of India, Rural Electrification Corp Ltd., Power Finance Corp. Ltd., Indian Railway Finance Corp. Ltd. (the maximum amount that can be invested – ₹50 Lakhs within the prescribed time limit
Time Limit for Purchase of New Asset Within 1year before or 2 years after the date of transfer or constructed within 3 years after the date of transfer Within 1 year before or 2 years after the date of transfer or constructed within 3 years after the date of transfer Within 6 months from the date of transfer of original asset
Amount of Exemption Capital Gains or Cost of New Asset/(Amount deposited in Indian Bank if Asset not purchased) whichever is lower Cost of New Asset XCapital Gains

Net Sales Consideration

Capital Gains or Cost of New Asset whichever is lower
Transfer of New Asset If the new asset is transferred within a period of 3 years from the date of purchase or construction, then the exemption earlier allowed shall be withdrawn in the year of transfer i.e. the cost of acquisition of new asset shall be reduced by the exempted capital gains If the new asset is transferred within a period of 3 years from the date of purchase or construction, then the exempted capital gain shall be taxable as LTCG in the year of transfer of the new asset If the new asset is transferred or converted into money within 5 years from the date of acquisition, then the exempted capital gain shall be taxable as LTCG in the year of transfer or conversion of the new asset

Although TDS is deducted @20% in case of LTCG on sale of House property, the NRI can claim the refund of the TDS (refund arising on account of exemption available on the sale of house property) in the return of income filed by him.

TDS applicable to NRI:

TDS is deducted on any income earned by the NRI in India. TDS shall be deducted even if the income is below the taxable limit of ₹2.5 Lakhs. NRI can claim the refund of this TDS in the Return of Income filed by him. Below is a list of income earned by the NRI in India and the TDS rates applicable for the same.

Nature of Income TDS Rate
Rent earned from Property in India 30%
Sale of Property located in India LTCG (Property held for more than 2 years) – 20% STCG (Property held for less than 2 years) – 30%
Interest earned on NRO A/c. 30%
Interest on infrastructure debt bonds 5%
Interest from Govt. or an Indian concern on money borrowed in Foreign Currency 20%
Dividend paid by Indian Co. Exempt (if DDT paid by the company)
Royalty and Fees for Technical Services received from the Govt. or any Indian Concern in pursuance of an agreement which is approved by the Govt 10% or as per DTAA whichever is beneficial to the NRI
Sale of Equity shares (STT paid on purchase and sale) LTCG- 10% on LTCG in excess of ₹1Lakh

STCG- 15%

Sale of Equity Oriented Mutual Funds (STT paid on transfer of units) LTCG- 10% on LTCG in excess of ₹1Lakh

STCG- 15%

Long Term Capital Gain under sec 115E 10%
Interest income under sec 115E 20%
Any other income not covered in the above heads 30%

Note: Surcharge and Cess shall be added to the rate of TDS.

Applicability of Advance Tax:

If the liability of Advance tax is ₹10 Thousand or more, then NRI is required to pay Advance Tax. Failure to pay Advance Tax shall attract interest payment under sec 234B and 234C.

The benefit of the Double Taxation Avoidance Agreement:

Double Taxation means the same income is taxed twice. If there is a Double Taxation Avoidance Agreement between India and the country of residence of the NRI then the income of NRI shall be taxed in one country and exempted in other countries. If there is no DTAA between India and country of residence then the income of NRI shall be taxed in both the countries and the country of residence shall allow the credit of the tax paid in the country of source of Income.

Suppose Mr. A an NRI earns Royalty or Fees for Technical Services in India. Such an Income shall be taxable in India because it is earned in India and at the same time it shall be taxed in the country of residence of Mr. A. If India has entered in to a Double Taxation Avoidance Agreement with the country of residence of Mr. A, then TDS of 10% or the DTAA rate whichever is favorable to the NRI shall be applicable. To claim the benefit of DTAA the NRI will have to furnish the Tax Residency Certificate issued by the authorities in the country of residence of the NRI.

Filing of Return:

  •  As per sec 115G if the Total Income of NRI includes only LTCG and Interest Income under the special provisions of sec 115D then Return of Income is not required to be filed by the NRI.
  • If the Total Income of the NRI includes income other than LTCG and Interest Income from foreign exchange assets and it exceeds ₹2.5 Lakhs then Return of Income is required to be filed by the NRI.

Date of filing the Return:

The return should be filed by NRI by 31st July of the Assessment Year.

Penalty for failure of filing statement of compliance:

INR 100/day for each day the non-compliance continues.

Income tax on time

Advance Ruling – NRI:

Many of NRIs are not aware of the Advance Ruling provision that is more popular among the corporates. Its come is the picture when in the case of disputes arises between 2 parties or high-value transactions. Moreover, it helps in Planning Tax Liability in Advance and to avoid certain tax-related disputes.

In other words, if any matter arises before NRI while transacting with Resident, then NRI can resort to ADVANCE RULING.

Accordingly, NRI can apply to ADVANCE RULING relating to tax issue matters.

NRI setting up a business in India? 

Establishment of business in India may lead to various Tax and Legal issues, And among them, transfer pricing is one of the major tax laws for handling such conflicts in-laws.

As NRI are not well concerned with the complexity arise while setting up of business in an Indian country as well as Resident Country.

The crux of Indian transfer pricing rules:

Transfer pricing refers to the Mechanism to regulate the Specified domestic Transaction and International Transactions.

Fund Transfer  between NRE Account to another NRE Account:

Amount can be transferred from one Non-resident external account to another NRE account with no more Tax issues.

The amount can be transferred from NRE account to NRO account of the same party or another and even Amount can be transferred from NRE account to normal savings deposit account of another resident Indian.

Conclusion:

The above points covered with respect to NRI taxation need to be adhered to by NRI as the benefit of deductions, exemptions and DTAA shall help them in better tax planning.

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