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Income Tax Provisions related to Taxation of Non-Resident Indians


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This is a presentation covering various sections of the Income Tax Act 1961, pertaining to Non - Residents. The presentation offers varying degree of coverage for the sections covered, and was presented before the Ghatkopar Study Circle of The Institute of Chartered Accountants of India - WIRC.

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Income Tax Provisions related to Taxation of Non-Resident Indians

  1. 1. TAXATION OF NRI’S - CA Prachi Parekh Ghatkopar Study Circle 18TH January 2014
  2. 2. THE BASICS…  Non-Resident –  Person who is NOT a resident [Sec 2(30)] For the purpose of sections 92, 93 & 168 (Executors), also includes a person who is Not Ordinarily Resident. (one who does not fulfil additional conditions of Sec 6(6)) 
  3. 3. THE BASICS…   o  o Tie- Breaker Rule Article 4: Tie Breaker rule, to be checked if a person is resident in both countries: Permanent home, centre of vital interests, habitual abode, national of State in question. Dependent Personnel Services Article 16, 19 – Sec 9(1) Salary to Indian Govt. employees Liason Office - Not considered a Permanent Establishment.
  4. 4. THE BASICS…  Section 9: BUSINESS CONNECTION We’ll dwell upon it later…
  5. 5. WITHHOLDING TAX & NRI’S    o    Section 194E: On payments made to NR sportsmen / Entertainer / Sports Institution (income referred to in sec 115BBA) @ 20% Section 195: On payments made to NR/ foreign companies being any sum chargeable to tax under Income Tax Act @ rates in force Rates specified in part II of First Schedule of Finance Act / DTAA rates, whichever is beneficial
  6. 6. NON DEDUCTION OF TDS & DISALLOWANCE:      Disallowance u/s 40(a)(i) Any sum payable outside India, or in India to NR / Foreign Company Payable between Apr- Feb: TDS to be deducted & paid by end of Previous Year Payable in March: TDS to be deducted & paid upto due date u/s 200 (30th April) Subsequently paid : Allowed in the year of payment
  7. 7. PROCEDURE FOR REFUND OF TDS TO DEDUCTOR     Contract with NR cancelled after credit to his account / partial remittance No further remittance & remitted amount is refunded by NR (net of tax) As NR would not claim refund of TDS, deductor can do the same (Circular 7/2007 dated 23.10.2007) Circular also to apply in cases where TDS has been wrongly made at higher rate.
  8. 8. NET OF TAX PAYMENTS: SECTION 195A    Grossing up to be done in cases where the payer agrees to bear the amount of Tax Since tax borne by Payer represents income of the payee. Provisions of this section are subject to other provisions of the Act. Eg. 10(6A)- tax payable by payer on royalty / technical fees exempt in hands of payee.
  9. 9. KARTOOTON KA KARNAMA: SECTION 285  NR having liason office in India  Set up as per RBI / FEMA Guidelines  To deliver statement of activities done during P.Y  Within 60 days from end of P.Y  With Jurisdictional A.O.
  10. 10. SOME RELATED SECTIONS TO BE NOTED:  Section 44D: Provision for calculating income by way of Royalties etc. in case of Foreign Companies’  Section 44DA: Provision for calculating income by way of Royalties etc. in case of Non- Residents  Presumptive Tax Sections related to Non-Residents 44B / 44BB / 44BBA /44BBB  Head Office Expenditure: Section 44C
  11. 11. SECTION 48:  First Proviso, applicable to NR (not covered by section 115AC & 115AD @ time of Sale of CA)  Asset could be Short Term / Long Term  Capital Gain : computed in foreign currency  Provision applicable on CG arising from reinvestment
  12. 12. CHAPTER XII-A: NON RESIDENTS’ KA KHAAS  Taxability of Non-residents to be governed by this Chapter  Provisions applicable only to NR’s, and only in respect of specified incomes  Income of NR not covered by this Chapter will be taxed as per Normal Rates of Tax  Worth Noting that these provisions are OPTIONAL
  13. 13. SECTION 115C: NOTE THESE DEFINITIONS  Non-Resident  Foreign Exchange Asset  Investment Income  Long Term Capital Gain
  14. 14. SECTION 115D: COMPUTATION  Investment Income & LTCG - No Deduction allowed in respect of expenses incurred - No Chapter VI-A deductions allowed - Basic Exemption Limit not allowed to be adjusted - In respect of LTCG: expenses on transfer will be allowed, but benefit of indexation not allowed.
  15. 15. SECTION 115E: RATES OF TAX  Investment Income : 20%  LTCG : 10%  Surcharge & Education Cess as applicable.  If income of NR includes any other income, other than the two above, It will be charged to tax at normal rates of tax as applicable to residents. 
  16. 16. SECTION 115F: EXEMPTION ON LTCG  Net Sale proceeds on transfer of Forex Asset, to be utilized within 6 months from date of transfer: Purchase of another Forex Asset  NSC Certificates  Exemption to be withdrawn if the newly acquired asset is transferred / converted into money within 3 years from the date of acquisition LTCG taxable as LTCG in year of violation.  
  17. 17. SECTION 115G: ROI KI ZARURAT NAHI…  Except Investment Income & LTCG, NR has no other taxable income  Tax on such income has been correctly deducted at source.
  18. 18. SECTION 115I: OPTION AVAILABLE TO NR  For NR Assessee, by default, provisions of this Chapter are applicable  If normal provisions are found to be more beneficial, assessee can opt for the same  This can be done by filing return of income for the relevant A.Y.  Option can be changed on year to year basis.
  19. 19. SECTION 115H: NON RESIDENT BAN GAYA RESIDENT??  Once assessee becomes resident, by default normal provisions shall apply.  Special provisions of this chapter can be availed if beneficial  Option available only till the assessee holds such forex asset, except shares of Indian Company  ROI to be filed for availing these provisions along with an application addressed to AO
  20. 20. CHAPTER XII: SPECIAL RATES OF TAX    Refer Chart in the Notes: Section 115A: Royalty / FTS (Other than those in section 44DA(1) – 25% w.e.f AY 2014-15 - Amended to make the rate of tax uniform, earlier the rate depended on time of agreement. Section 115AD: FII: Interest on Certain Bonds & Govt. Securities: Rate of Tax @ 5%
  21. 21. POINTS TO BE NOTED: SPECIAL RATES OF TAX  Thin line of Difference: Overseas Financial Organisation or Offshore Funds & Foreign Institutional Investor (FII) Purpose: Investment  FII- Entry pursuant to SEBI Approval  OFO: Entry is on collaboration with public financial institution / public sector company / mutual fund post SEBI approval 
  22. 22. SECTION 9: BUSINESS CONNECTION       NR – income accrued / deemed to accrue through Business Connection In India Business Connection: Not exhaustively defined Element of continuity & not length of time Business of NR – Activity done within Indian territory Part of / Main Business / activity incidental to main business Also covers activity through a dependent agent
  23. 23. SECTION 9: BUSINESS CONNECTION  Not established if Non resident carries on Business through an Independent Nature  Illustrative instances: maintaining branch office / agency / receivership/ forming local subsidiary company to sell products of parent NR  Business Connection includes
  24. 24.