Taxation of Non Residents


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Income Tax Provisions for Non Residents In India

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Taxation of Non Residents

  1. 1. Provisions related to Non Residents
  2. 2. NRI As Per FEMA :  An Indian Citizen who stays abroad for- a) Employment/ carrying on business or b) Vacation outside India or c) Stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad, is a Non Resident.  Persons posted in U.N. organization and officials deputed by central and state government and public sector undertakings on temporary assignments are also treated as Non Residents.  Non Resident foreign citizens of Indian Origin are also treated at par with Non Resident Indian Citizens.
  3. 3.  Person of Indian Origin:  For opening and maintenance of Bank A/c and investment in shares and securities in India – A Foreign citizen (other than citizen of Pakistan or Bangladesh) is deemed to be of Indian Origin, if i. He, at any time, held an Indian Passport ii. He or either of his parents or any of his grandparents were citizen of India by virtue of Constitution of India or Citizenship Act, 1956 iii. A spouse (not being a citizen of Pakistan or Bangladesh) of an Indian Citizen/ Indian Origin is also treated as a Person of Indian Origin provided the Bank Accounts are opened or investments in shares and securities in India are made by such persons jointly with their NRI spouses.  For Investment in Immovable Properties: A foreign citizen (other than a citizen of Pakistan, Bangladesh, Afganistan, Bhutan, Sri Lanka or Nepal), is deemed to be of Indian Origin, a) He held an Indian Passport at any time, OR b) He or his father or his paternal grandfather was a citizen of India by virtue of Indian Constitution or the Citizenship Act, 1955
  4. 4. Residential Status under the Income Tax Act: 1. Resident: • An Individual is resident if any of the following conditions are satisfied – i. He stayed in India for 182 days or more during the previous year, or ii. He stayed in India for 365 days or more during the four preceding years + stays in India for at least 60* days during the previous year. * 182 days in case of an Indian Citizen or a person of Indian Origin coming on a visit to India or an Indian Citizen going abroad for an employment or a crew member of an Indian Ship. • HUF, Firm, AOP is resident in India except in cases where whole of the control & management of its affairs is situated outside India during the previous year.
  5. 5.  A company is resident in India if: it is an Indian Company, or during the previous year, the control & management is wholly situated outside India. 2. Non Resident- Person who is not resident during he previous year is Non Resident. 3. Resident but not Ordinarily Resident- An individual or an HUF is treated to be Not ordinarily Resident in India in any previous year if he or the manager of the HUF – • Has been a Non Resident for 9 out of 10 previous years preceding the previous year, or • Has been in India for a period of 729 days or less in seven preceding years.
  6. 6. Exempt Income (Section 10) • Sec. 10(4) : Interest on Bonds or Securities as notified by the Govt. , Premium on redemption and Interest Income on NRE Account paid or credited. • Sec. 10(4B) : Interest Income from notified Govt. securities; i.e. NSC (VI/VII issue) purchased in foreign exchange before 1-6-2002, by a NR who is an Indian Citizen or a PIO. • Sec. 10(15)(i) : Income by way of Interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates, other certificates issued by Govt. and deposits notified by Govt. • Sec. 10(15)(iid) : Interest on notified bonds, purchased in foreign currency on non repatriable basis by Non Resident Indian. * However Interest on premature encashment is taxable in the year of encashment.  Sec. 10(15)(iv)(fa) : Interest on FCNR and RFC deposits paid by a scheduled bank to NR or NOR.
  7. 7.  Sec. 10(34) : Income by way of dividend from domestic company.  Sec. 10(35) : Income from units of mutual funds specified u/s 10(23D) or units from administrator of UTI or units of UTI.  Sec. 10(36) : Income from transfer of *Long term capital asset. * Conditions :  Purchase and sale through a recognized stock exchange or issued through public issue by company.  Purchased on or after 1st March, 2003 and before 1st March, 2004.  Forming part of BSE - 500 as on 1st March, 2003  Held for a period of 12 months, is exempt. Further CBDT has issued a circular clarifying that the shares allotted under the divestment process by GOI shall qualify for this section and hence can be claimed as exempt. • Sec. 10(38) : Income by way of Long Term Capital Gain. * On sale of securities affected on a recognized stock exchange, which are chargeable to STT are exempt.
  8. 8. Business Income of Non-Resident  Sec. 44B : Profits from Shipping Business- 7.5% of the aggregate of the amount paid or payable on a/c of carriage of passengers, live stock, mail, or goods shipped at any port in India and amount recd. and deemed to be recd. In India for carriage of such goods etc. from any port outside India.  Sec. 44BB : Income from business of exploration etc. of mineral oil- NR engaged in the business of providing services and facilities in connection with, or supplying plant & machinery on hire, used or to be used in prospecting for, or extraction or production of, mineral oils, the profits & gains shall be computed @ 10% of the amount paid or payable for such purpose. *Accounts to be maintained u/s 44AA & Audit u/s required to be conducted if profits claimed below above limit.  Sec. 44 BBA : Operation of Aircraft- 5% of the aggregate of the amount paid or payable for carriage of passengers.. etc.
  9. 9.  Sec. 44BBB : Foreign Companies engaged in the business of civil construction- Foreign Company engaged in the business of civil construction or the business of erection of plant & machinery or testing or commissioning thereof in respect of a turnkey power project approved by CG, shall be computed @ 10% of the amount paid or payable. * Accounts to be maintained u/s 44AA & Audit u/s required to be conducted if profits claimed below above limit.  Sec. 44C : Deduction of head office expenses- In case of NR, allowance for expenditure of head office shall be restricted to actual attributable expenditure in India or 5% of the adjusted total Income whichever is less.  Sec. 44DA : Royalty or fees for Technical Services recd. from Govt. or Indian concern by a Non-Resident(not being a company) or a foreign company in pursuance of an agreement entered into after 31-3-2003- Where royalty or fees for technical services paid is effectively connected with PE in India or a fixed place of profession in India, then it shall be computed under the head PGBP.
  10. 10.  However no deduction shall be allowed :  In respect of expenditure not incurred wholly & exclusively for the business of such PE or fixed place of profession in India, or  In respect of any amount paid to head office or its other except reimbursement of actual expenses. *it shall have to maintain BOA u/s 44AA and gets accounts audited u/s 44AB.
  11. 11. Tax rates for Investment Income/Royalty Income of different Non-Resident Entities- Section Particulars of Income Tax Rates/ TDS Sec. 115(1)(a)(i) i. Income by way of Dividend, ii. Interest recd. From Govt. or any other Indian Concern for money borrowed in foreign currency, & iii. Income on units of mutual fund u/s 10(23D) or of UTI purchased in foreign currency. 20% Sec. 115(1)(a)(iia) Interest from Infrastructure debt funds notified u/s 10(47) 5% Sec. 115AB Income from units of mutual funds specified u/s 10(23D)/UTI purchased in foreign exchange by Overseas Financial Organization registered with SEBI or LTCG arising on sale/repurchase of these units. 10% Sec. 115AC(1) i. Interest on notified bonds of Indian Companies or bonds of public sector company, purchased in foreign currency. 10%
  12. 12. ii. Dividend on Global Depository Receipts(GDRs) iii. LTCG on transfer of such bonds & GDRs 10% Sec. 115AD Income of Foreign Institutional Investor (FII): 1) Income in respect of securities(other than units referred in 115AB) 2) Short Term Capital Gains 3) Long Term Capital Gains 20% 30%/15%* 10%/NIL** Sec. 115A(1)(b) Income by way of Royalty or fees for Technical services received [other than 44DA(1)] by non resident(not a co.) or foreign company from govt. or Indian concern under agreements entered after 31st May 1976 and where it is entered into with Indian concern, it is approved by Govt. or it relates to matter included in Industrial Policy- For royalty/FFTS payment under agreement entered on or before 31st May 1997 For agreements after 31st May 1997 but before 1st June 2005 For agreements after 1st June 2005 30% 20% 10% *Where STT has been paid tax would be charged 15% **Where STT has been paid, LTCG would be exempt.
  13. 13. Important Points to Remember  In case where the GTI consists of only income referred above, no deduction shall be allowed under chapter VIA or under section 28 to 44C and 57 in computing taxable income u/s 115A, 115AB, 115AC, 115AD.  Further no return is required to be furnished u/s 139(1) where total income of the assessee includes only the income covered u/s 115A(1)(a) and the TDS under the provisions of chapter XVII B has been deducted there from.
  14. 14. Special Provisions regarding NRI – Chapter XIIA Chapter XIIA covers taxability of any income earned by a Non Resident Indian(NRI) from foreign exchange asset. However, a NRI may elect not to be governed by the provisions of this chapter and to be assessed under the normal prov. of the Act. By giving a declaration along with the Return of Income. Accordingly the chapter will not apply to him for that assessment year.  Definitions : NRI- an Individual being a citizen of India or a PIO, who is not a Resident. PIO- a person is deemed to be of Indian Origin if he or either of his parents or any of his grandparents were born in Undivided India. Investment Income- Income earned from “foreign exchange asset” acquired by NRI out of foreign currency.
  15. 15. Foreign Exchange Assets - includes any of the following:  Shares in an Indian Company  Debentures issued by an Indian Company, which is not a private company  Deposits with an Indian Company, not being a private company.  Any security of the Central Govt.(NSC VIII issue etc.)  Any other asset notified by Central Govt. Taxability of Investment Income is as follows-  Income from Investment or Income from long term capital gains from assets other than Specified Assets - 20%  Income by way of Long Term Capital Gains - 10%  No deduction permissible under chapter VI A  No deduction of any expenditure in computing Investment Income  No Indexation Benefit * It is not necessary to file ROI where the TI includes only above two types of Income whereon tax has been duly deducted. However where NRI has other income, he is required to file ROI as per normal prov. of the Act.
  16. 16.  Exemption from Long Term Capital Gains Tax u/s 115F – Capital Gains arising on transfer of foreign exchange asset shall be exempt in case the ;  NET CONSIDERATION is reinvested.  Within a period of 6 months  In any other specified asset (as mentioned above) or in specified saving certificate.  However where the new asset is transferred or converted to money within a period of three years from the date of its acquisition, the capital gains claimed exempt u/s 115F shall be taxable under the head „Capital Gains‟ along with the gains arising on the transfer of the new asset.  Applicability of Chapter XII A after becoming resident : NRI can continue to be assessed under chapter XII A with respect to income from specified assets. He may furnish a declaration along with his return of Income filed u/s 139 to AO that prov. of this chapter may continue to apply to him with respect to such investment income. Thus he shall be so assessed till conversion of such asset into money or other asset.