- TEST OF RESIDENCE
An individual will be treated as a Resident in India in any previous year if he / she satisfies any of the following conditions:
- If he / she is in India for a period of 182 days, or more during the previous year or
- If he / she is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
An individual who does not satisfy both the conditions as mentioned above will be treated as Non-Resident in that previous year.
However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.
The Finance Act, 2020, w.e.f. Assessment Year 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose Total Income, other than Income from Foreign Sources, exceeds ₹ 15 lakh during the previous year.
The Finance Act, 2020 has also introduced new Section 6(1A) which is applicable from Assessment Year 2021-22. It provides than an Indian citizen earning Total Income in excess of ₹ 15 lakh (other than income from foreign sources) shall be deemed to be Resident in India if he / she is not liable to pay tax in any country.
- TAX INCIDENCE
Resident & Ordinarily Resident – Global Income is taxable.
Resident but not Ordinarily Resident – Income earned/ received in India; or income which accrues or arises or is deemed to accrue or arise in India or income arising abroad out of business controlled in India is taxable.
Non-resident – Only income earned/received in India and income deemed to accrue or arise in India is taxable.
- DOUBLE TAXATION RELIEF – Section 90/90A
All provisions discussed below are subject to DTAA entered into with various countries or with any specified association in a specified territory outside India. The provision of the relevant tax treaty or domestic law provision whichever is beneficial to the taxpayer would be applicable.
In order to claim treaty benefits the non-resident taxpayer shall be required to provide certificate of his being a resident of country outside India (Tax Residency Certificate) as well as such other documents and information, ‘as may be prescribed’. In furtherance of this provision, Form 10F prescribes the information to be provided by a taxpayer in a prescribed format. However, a taxpayer may not be required to provide the information in Form 10F, or any part thereof, if it is already contained in the Tax Residency Certificate.
- TAX RATES
Chapter XII-A of Income Tax Act prescribe special rate of tax relating to certain incomes of non-residents. These rates are subject to applicable surcharge and health & education cess.
No deduction shall be allowed under Chapter VI-A (such as Sec. 80C, 80D, etc.) in respect of such income which are taxed at special rate.
A non-resident Indian may elect not to be governed by the provisions of Chapter XIIA for any assessment year by furnishing a written declaration to Assessing Officer with his return of income. If he does so, his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act.
- INVESTMENT INCOME OF A NON-RESIDENT
Interest income received by a non-resident from Government or from any other person in India is taxable in India.
Exempt Investment Income
Following types of investment income are exempt:
Interest on NRE account paid or credited to individual non-residents Indian who are permitted by RBI to maintain such account. Section 10(4)(ii) (including person who may be ‘Resident’ in India as per Income Tax law, but are resident outside India under FEMA).
Section 10(15)(ii)(c) – In the case of an individual or a Hindu undivided family, interest on such Relief Bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf.
Interest paid by a scheduled bank on RBI approved foreign currency deposit, FCNR & RFC A/c to non-resident or Not Ordinarily Resident is exempt. [Section 10(15)(iv)(fa)].
Any interest received by a non-resident or a person who is not ordinarily resident in India on a deposit made on or after the 1-4-2005, in an Offshore Banking Unit referred in section 2(u) of the Special Economic Zones Act, 2005 is exempt u/s. 10(15)(viii).
Any income by way of dividend from shares is taxable from AY 2020-21 since exemption under section 10(34) is withdrawn. Such tax is required to be withheld by the company while making payment of dividend, subject to the provisions of the respective Double Taxation Avoidance Agreement (tax treaty), as applicable.
The non-residents may be eligible to take credit for tax withheld by the Indian company on dividends paid to the non-resident, in the country where they are resident, subject to local laws of the resident country/tax treaty.
The special rate of tax on dividend for non-residents is 20% under section 115E(i).
- CAPITAL GAINS OF NON-RESIDENT
A Non-resident can invest up to 5% of the paid-up value of the shares of the listed company through a recognized stock exchange in India on repatriation basis, which is further subject to an overall limit of 10% for investments by all NRIs and Overseas Citizens of India (OCIs) put together, in case the company has investments from more than one NRI/ OCI.
The 10% limit can be increased to 24% through a special resolution passed by the company. Such investment is treated as ‘foreign portfolio investment’ as per the foreign exchange regulations.
On transfer of shares, Non-residents are required to pay tax on capital gains. The rate of tax depends on the period for which the shares were held by the NRI before transfer and whether the shares are listed or unlisted.
Listed shares held for more than 12 months are subject to long-term capital gains tax at special rate of 10% under section 115E(ii) without indexation benefit.
Shares held for up to 12 months give rise to short-term capital gains, which are subject to tax at 15% as per section 111A.
The long term capital gain arising on transfer of unlisted securities or shares of a company not being a company in which the public are substantially interested shall be taxed at 10% without benefit of indexation as per the provisions of section 112(1)(c)
II. Mutual funds
Broadly, the NRIs are allowed to purchase units of mutual funds without restrictions irrespective of the type of Mutual fund i.e. whether equity-oriented or debt-oriented.
Similar to equity, return from investment in mutual funds is primarily in the form of dividends and the provisions of taxation are similar to equity dividends.
Transfer/redemption of units of equity-oriented mutual funds held for a period exceeding 12 months are classified as long-term capital gains which are subject to tax at 10% and those held for up to 12 months are classified as short-term capital gains which are taxable at 15%.
In case of debt-oriented mutual funds, the holding period should be more than 36 months to qualify as long-term capital gains, which are taxable at 20%, whereas those held for up to 36 months are classified as short-term capital gains and are taxable at applicable slab rates.
In addition to the above, NRIs are also permitted to invest in government securities, treasury bills, exchange traded funds, bonds issued by public sector undertakings and infrastructure debt funds, listed non-convertible debentures, redeemable preference shares, debentures, national plan/saving certificates, debt instruments issued by banks etc. either on repatriation basis or non-repatriation basis. The tax implications would vary with the type of instruments.
- COMPUTATION OF CAPITAL GAIN ON SHARES & DEBENTURES OF INDIAN COMPANIES PURCHASED IN FOREIGN CURRENCY
First proviso to section 48 provides that while computing capital gain/loss, if any, on sale of shares or debentures purchased by a non-resident in foreign currency, the sale proceeds, expenditure on transfer and cost of acquisition of such shares or debentures must be converted in the same currency in which the original investment was made. Resultant capital gains/loss then needs to be reconverted into rupee to arrive at taxable capital gain/loss. The benefit of indexation will not be available in such cases.
- FILING OF INCOME TAX RETURN
A Non-resident need not file an income tax return if his total income consists only of investment income or income by way of long-term capital gains or both; and TDS has been deducted from such income as per the provision of Income-tax Act.