Taxable Income of Non-Resident Indian (NRIs)
Taxability of any Non-Resident in India is governed by the provision of Income Tax Act and provisions of DTAA, whichever is more beneficial. A Non-Resident Indian (NRI) pays tax only on “Indian Income” and his foreign income (income earned and received outside India) is totally exempt from income-tax in India.
‘INDIAN INCOME’ means income which accrues/arises (or deemed to accrue or arise) in India or which is received (or deemed to be received in India) though it accrues/arises outside India and is taxable in the hands of non-resident.
“FOREIGN INCOME” means income which accrues or arises (or deemed to accrue or arise) outside India and received (or deemed to be received) outside India
Only Indian income taxable in the case of Non-Resident Indian (NRI)
Following are the taxable incomes of Non-Resident Indians (NRIs): —
- Income accrued or to be accrued.
- Income sourced from India.
- Income received or to be received.
Heads of Income:
Like resident Indians, Non-Resident Indians (NRIs) also required to calculate the taxable income separately under five different heads. These ‘heads of Income’ are: –
- Income from Salary
- Income from house property
- Income from business/Profession
- Income from Capital Gains
- Income from Other sources
Income from Salary:
Income earned from salary in India or income received on your behalf is taxable.
Salary income taxable in India where the same is-
- received in India or deemed to be received in India or someone does on your behalf.
- Accrues or Arises in India or deemed to accrue or arise in India.
Where services are rendered in India, related remuneration to be Taxable in PROVISIONS ILLUSTRATED.
| A salaried employee has worked in India for eight months and received a salary in India, and for the rest of the four months, he was transferred abroad and received Salary there. Calculate the tax liability for income in India and abroad.
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| SOLUTIONS |
| Your residential status for the relevant financial year would depend on the number of days stayed in India. Considering that you have stayed in India for eight months, i.e., 244 days, you would qualify as a resident in India for income-tax purposes. As a resident of India, the entire income earned by you in India or outside India would be taxable in India. Therefore, the salary income earned by you in India as well as outside India would be taxable in India for the relevant financial year. |
- Salary payable by the Government to a citizen of India continues to be taxable in India though services are rendered outside India.
- The income of Diplomats, Ambassadors is exempt from income-tax.
When Salary of Non-Resident is taxable in India:
The Salary of a non-resident can be taxed in the source State (i.e. in India) if the following condition are satisfied: –
- The stay of an individual should be for more than 183 days in the source State during the previous year.
- The salary must not be paid by an employer or on behalf of an employer who is a resident of India.
- The salary must not be borne by a PE or a fixed- base which an employer has in India.
TAXABILITY OF SALARY REMUNERATION
Section 15 of the Act is the relevant charging section for salaries/remuneration in India. This section states that the following income received by a person chargeable to tax in India shall be taxable under the head “Salaries”.
- Salary due from an employer or former employer, whether paid or not;
- Advance salary paid by or on behalf of an employer or former employer and;
- Arrears of salary paid by or on behalf of an employer or former employer.
- The above amounts could be received from an Indian employer or from a foreign employer. Amounts received from an Indian employer for services provided in India would be chargeable to tax in India. However, while examining the taxability of remuneration received from a foreign employer or from an Indian employer by a non-resident, in respect of services performed outside India, one would need to examine the provisions of section 9(1)(ii) and (iii) of the Act and the provisions of the relevant DTAA.
Salary payable for services rendered in India shall be regarded as income earned in India
Income from salary is considered to arise in India if your services are rendered in India. So even though you may be a Non-Resident Indian (NRI), but if your salary is paid towards services provided by you in India, it shall be taxed in India. Section-9 (1) (ii) of the Act, provides that income under the head “salaries” is deemed to accrue or arise in India I. e. If the services under the agreement of employment are or were rendered in India. The main effect of the provisions is to charge Non-residents on salary earned in India even if it is received abroad.
- In the regard Article 15[1] of the Model Conventions lays down the general principle that income from employment (other than pensions) is taxable in the Country where the employment is actually exercised that is, where he is physically present for performing the activities in respect of which such income is paid to the Individual.
- However, Paragraph 2 of Article 15 provides an exemption, whereby, remuneration derived by a resident of a particular country of his residence, provided certain conditions as discussed in the illustration below are fulfilled:
PROVISIONS ILLUSTRATED: –
Mr. ‘A’ an Indian resident, is employed with an Indian company, X Ltd. However, during the course of his employment, he is required to render services in Country A. As per Article 15 of the India UN MC, his remuneration (except pension) would be a table as under: —
- Remuneration received from X ltd. Would be chargeable to tax in the hands of Mr A in India if he is ROR in India in that year;
- However, since Mr A has rendered services for X ltd. In-country D, the remuneration received/acquired while Mr., A was in the Country D. Could be country SD Under the provisions of Domestic law of country DF, subject to the provisions of Paragraph 2 of Article 15;
- Paragraph 2 of Article 15 states that if the following conditions are fulfilled, the above remunerations received in the country D. would be chargeable to tax in India: –
- ‘A’ was present in the country D for a Period of fewer than 183 days in a twelve months period during the relevant fiscal year.
- The remuneration is paid by the Indian company or on behalf of it by any entity which is not a resident of country D; and
- The remuneration is not borne by a permanent establishment of the Indian Company in the country D.
Remuneration Received by Expatriate/ Non- Resident/ foreigners working in India
In Case of Foreign expatriate/ non- residents/foreigners working in India the remuneration received by them, assessable under the head “Salaries “, is deemed to be earned in India if it is payable to him for service rendered India as provided Section 9(1)(ii) of the Act.
The Explanation to section 9 (1) (ii) clarifies that income in the nature of salaries payable for services rendered in India shall be regarded as income earned in India. Further, from the assessment year 2000-01 onwards, income payable for the leave period which is proceeded and succeeded by services rendered in India and forms part of the services contract shall be regarded as income earned in India.
Thus, irrespective of the residential status of the expatriate employee, the amount received by him as salary for services rendered in India shall be liable to tax in India being income accruing or arising in India, regardless of the Place where the salary is actually received.
EXCEPTIONS OF EXPLANATION TO SECTION 9(1) (ii)
- Remuneration of an employee of the foreign enterprise is exempt from income-tax if his stay in India is less than 90 days in aggregate during the financial year [Section 10 (6) (vi)]. This is subject to further relaxation under the provisions of DTAA entered into by India with the respective country.
- Remuneration received by a foreign expatriate as an official of an embassy or High Commission or Consulate or trade representative of a foreign State is exempt on the reciprocal basis [Section 10 (6) (ii)].
- Remuneration from employment on a foreign ship provided the stay of the employee does not exceed 90 days in the financial year [Section 10 6 (viii)]
- Training stipends received from foreign government Section 10 (6) (xi)].
- Remuneration under co-operative technical assistance programme or technical assistance grants agreements [Section 10 (8) & 10 (8B)].
TAXABILITY OF DEFERRED REMUNERATION
The above provisions relating to remuneration do not apply in respect to the taxability of pensions. Article 18 of the UN MC discusses the taxability of “Pensions and Social Security Payments”, and Article 19 (2) discusses the taxability of such amounts where such amounts are received in connection with Government service.
PENSIONS AND SOCIAL SECURITY PAYMENTS ARE TO BE TAXED AS UNDER
Amounts paid to an individual in respect of his past services would be taxable only in the country of his residence [Article 18(1) ]
However, amounts paid under a public scheme, which is part of the social security system of a country, shall be taxable only in such country [Article 18(2i]
In the case of an individual in Government service, the pension paid by or out of funds created by a particular country shall be taxable in that country only. However, such amounts can also be taxed in the other country but only if the individual is a resident and national of such other country. [Article 19 (2) ]
Any income earned outside India but received in India will be subject to tax in India
FOR EXAMPLE —
Mr. ‘X’ is a Non-Resident Indian (NRI). He is working on a foreign ship owned by a US Company. His US employee credits his bank account in India with the salary he earned outside India. The said salary would be taxable in India as the income is received in India.
Once Income is earned and received outside India it is not taxable:
Once the income is earned and received outside India, it is not taxable even if at a later date, the money is sent to India.
FOR EXAMPLE:
Mr. ‘A’s a Non-Resident Indian (NRI). He has earned salary income outside India. He has received a pay cheque outside India in his bank account maintained outside India. TNs income is not taxable in India even if at a later date he sends money to India.
Non-Resident employees coming for employment in India:
The Indian taxation laws are based on the source rule. e. All the incomes which accrue/arise in India will be taxable and subject to fulfilment of certain conditions the exemption has been provided for such income earned in India, under the domestic tax laws and also under the DTAA. Any income received outside India by such Individuals is not taxable in India.
Non-Resident employees leaving India to work outside India:
Any income received by the Non-resident Indians in their foreign bank accounts then such income is not taxable in India. However, salary received in India will be taxable in India on the basis of receipt of such income in India. Also, the exemptions can be claimed under the DPS (Dependent Personal Clause) of the Double Taxation Avoidance Agreement (DTAA) entered in between India and the foreign country, if the individual qualifies as a resident of such country.
Non-Resident Indian (NRIs) can also claim the Tax Credits in respect of the Incomes that have been taxed in both the countries (Home country and Foreign Country) in accordance with the rules mentioned in the Indian Tax Laws and Double Taxation Avoidance Agreement (DTAA). But to claim the tax credit, the taxpayer needs to obtain the Tax Residency Certificate for each of those years tax credit to be claimed by the taxpayer.
Where salary is paid to the non-resident by the foreign employer:
Where salary is paid to the non-resident by the foreign employer it will be
(a) If the employee stays in India for more than 183 days or
(b) Such salary is paid to non-resident by the foreign employer who has or fixed base in India for rendering any service in India.
Salary payable by a foreign government to its employees:
Salary payable by a foreign government to its employee (Whether resident or non-resident) working in India-
(a) The employee is an Indian National, or
(b) Such a foreign government or its subdivision or local authority is carrying on any business in India.
Where during relevant assessment year, assessee rendered services in the USA, salary received by him for such services in India from sister concern of US employer would be exempt from Indian taxation under article 16 (1) of Indo-US DTAA:
It was held that the assessee’s residential status as non-resident has been accepted by the Assessing Officer and, therefore, there is no justification on the part of the Commissioner (A) to hold that the assessee was a resident. It has not been disputed that the services in question were rendered by the assessee in the USA and taxed in the USA. The applicability of article 16 (1) of Indo-USA DTAA depends on the country where services are rendered which in this case is undisputedly the USA. The application of article 16 (1) cannot be denied to assessee merely because the salary was paid by an Indian entity in view of the undisputed fact that no service was rendered by an assessee for the impugned period in India.
The Supreme Court in the case of Kedar Nath lute Mfg. Co. Ltd. u. CT (Central)(1971) 82 ITR 363 has held that actual and legal name of the transaction will decide the taxability and not mere book entries or assumptions. In view thereof, the non-resident assessee is not liable for tax in India on the impugned amount.
Income from House Property:
Property is a favourite Indian assets class and one of the main reasons for this is its ability to generate regular cash flows through the tent, when a Non-Resident Indian (NRI) rents out a property in India. A Non-Resident Indian (NRI) can rent out the property that he owns in India. Income-tax on rent Non-Resident Indian (NRI) is taxable under the head “Income from House
property” in the same manner as Resident Indian since this income is earned in India, the tax will be payable by the Non-Resident Indian (NRI) in India.
INCOME TAX ON RENT RECEIVED IN THE COUNTRY OF RESIDENCE OF NON-RESIDENT INDIAN (NRI)
If you are Non-Resident Indian (NRI) and have a property located in India, the rent received by the Non-Resident Indian (NRI) from such property would be taxable in India. However, it may also be taxable in the country of your residence as in most cases, countries levy tax on residents on their global income. Whether It is taxable in your country of residence depends on the tax laws of the country in which you are residing. If that country has Double Taxation Avoidance Agreement (DTAA) with India, tax in such cases would not be levied in your country of residence.
FOR EXAMPLE: –
USA has a Double Taxation Avoidance Agreement (DTAA) with India and therefore the rent earned by Non-Resident Indian (NRI) from property located in India is not taxable in the US.
In such cases, we need to refer to the Double Taxation Avoidance Agreements that India has entered into with various countries. For countries India has not Double Taxation Avoidance Agreement (DTAA) income-tax on rent received would be liable to be paid in India as well as the country of residence.
FOR EXAMPLE: –
The India-US Double Taxation Avoidance Agreement (DTAA) provide that rent from the immovable property will be taxed in the country in which the property is situated. So NRIs who are residents of the US would have to pay tax on rental income in India. While they would still have to declare that income while filing their tax returns in the US, they would get a credit for taxes paid in India. itis prudent to check the tax laws of the country that you are resident of or consult an expert in that country. In other words, the USA has a double taxation avoidance agreement with India and therefore the rent earned by Non-Resident Indian (NRI) from property located in India is not taxable in the USA.
PROVISIONS ILLUSTRATED
| The India-US DTAA, for instance, provides that rent from the immovable property will be taxed in the country in which the property is situated. So, Non-Resident Indians (NRI’s) who are residents of the US would have to pay tax on rental income in India. While they would still have to declare that income while filing their tax returns in the US, they would get a credit for taxes paid in India. |
Computation of income from House property:
Income from House Property is the annual value of House property, which the assessee is the owner. Out of the total rent received by the Non-Resident Indian (NRI), Municipal taxes are first allowed to be reduced. After that from the balance amount – 30% is allowed as a standard deduction and deduction for interest paid on a home loan is allowed. In other words, Non-Resident Indian resident from income from Deductions available from the income from House property such as: –
- Deduction towards tax paid &
- Standard Deduction
- Interest on home loan deduction
Deduction available from the Income from House Property
- STANDARD DEDUCTION [Section 24 (a)]
- A Non-Resident Indian (NRI) is allowed to claim the standard deduction of 30% of the net annual value is deductible irrespective of any expenditure incurred by the taxpayer.
- INTEREST ON BORROWED CAPITAL [Section 24 (b)]
Interest on borrowed capital is permitted as a deduction if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property or
WHEN MORE THAN ONE PROPERTY IS OCCUPIED FOR OWN RESIDENTIAL PURPOSES-
Where the person has occupied more than one house for his own residential purposes, only one house (according to his choice) is treated, as self-occupied all other houses will be deemed to be let out”.
The manner of computation of income-tax on rent received by Non-Resident Indian (NRI) is explained below-
Deemed Rental Income:
According to the Indian Income Tax Act, if a person [resident or Non- Resident Indian (NRI) ] owns more than one house property, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property, only one of them will be deemed as self-occupied. The other one whether you rent it out or not will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property (based on certain valuations prescribed by the Income Tax Rules) and pay the tax thereof.
KEYNOTE-
- One self-occupied House Property or part of such property owned by an individual and used for personal use, but not let out, in the previous year, will not be taxable.
- If the interest on a home loan is more than the rent received, there would be loss arising under head House Property which can be a set-off with incomes under other heads.
- If the loss cannot be a set-off with incomes under other heads, it can be carried forward for a maximum of 8 years and set-off against income rising in future years.
- The rent proceeds will have to be credited to the NRO Account of the Non-Resident Indian (NRI). It cannot be credited to the NRE account unless the person crediting the account is also a Non-Resident Indian (NRI) and is getting it debited from his NRE account.
- No RBI permission is required by the Non-Resident Indian (NRI) at the time of giving any residential or commercial property on rent.
Income from Business & Profession:
Any income earned by a Non-Resident Indian (NRI) from a business controlled or set-up in India is taxable to the Non-Resident Indian (NRI).
INCOME FROM BUSINESS CONNECTION IN INDIA
By business connection, it usually means a person is acting on behalf of the Non-Resident Indian (NRI) and is doing contracts for business, or maintain stock of goods, or may secure orders in India.
In such a case the income from these operations carried out in India shall be deemed to accrue or arise in India.
Commission paid to an Indian agent of a non-resident in India is taxable in India as business income-Disallowance of commission in hands of payer under section 40(a)(i)
It was held that commission paid to an Indian agent of a non-resident (NR) was taxable in India as business income. Consequentially, such payment shall be subject to withholding tax under section 195 of the Income-tax Act, 1961 and non-compliance of the same was liable for disallowance of such payments under section 40 (a) (I) of the Act.
HIGH COURT’S RULING
High Court noted that Circular No. 786 was not applicable since the commission was received by the Indian agent of T Limited (instead of a foreign agent of Indian exporters) in India and there was nothing on record to show that the Indian agent transmitted it to Hong Kong. It was also noted that since, disallowance in the present case had been affected in terms of sub-clause (I) of section 40 (a) of the Act relating to NR, accordingly, the argument raised by the taxpayer that section 40 (a)(ia) of the Act had been inserted with effect from 01 April 2004 and the same would not be applicable to the relevant assessment year did not hold good, and further, this ground was not raised by the taxpayer before the High Court and CIT(A).
Not liable to tax in India:
Foreign agents of Indian exporters-not liable to tax in India:
Where a foreign agent of an Indian exporter operates in his own country and his commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India, such an agent will not be liable to tax in India on his commission.
It was held that the commission amounts which were earned by the non-resident for services rendered outside India cannot be deemed to be income which has either accrued or arisen in India. It was also held that the non-resident agent did not carry on any business operations in the taxable territories as contemplated by Explanation to Section 9(1)(I) of the Act.
Non-resident purchasing goods in India – not liable to tax in India:
Non-resident will not be liable to tax in India on any income attributable to operation confined to purchase of goods in India for export, even though the non-resident has an office or an agency in India for the purpose.
Income from Capital Gains:
Any capital gain on transfer of capital asset which is situated in India shall be taxable in India. Capital gain on investments in India in shares securities shall also be taxable in India.
Selling property in India by Non-Resident Indians (NRIs):
A Non-Resident Indian (NRI) can only sell residential or commercial Property in India to a person residing in India or to an NRI or a PIO (Person of Indian Origin). He can also transfer residential or commercial property to an Authorized dealer or housing finance institution in India through the mortgage.
A Non-Resident Indian (NRI) cannot transfer by way of mortgage his residential and commercial property in India to a party abroad. Prior approval of the Reserve Bank of India (RBI) is required for this purpose. He can sell his agricultural land, farmhouse or plantation property in India only to a person who is a resident of India and is an Indian citizen.
In other words, Non-Resident Indian (NRIs) who have sold house property which is situated in India have to pay tax on the Capital Gains. The tax that payable on the gain depends on whether it is a short-term or a long-term capital gain. When a house property is sold, after a period of 3 years from the date it was owned, there is a long-term capital gain. In case it held for 3 years or less there is a short-term capital gain. In case the property has been inherited, date of purchase of the original owner for calculating whether it is a long-term or short-term capital gain. In such a case the cost of the property shall be the cost to the previous owner.
Non-Resident Indian (NRI) earning investing in India:
Non-Resident Indian (NRIs) can invest in Indian stock markets under the Portfolio Investment Scheme (PIS) of the Reserve Bank of India (RBI).
EQUITY INVESTMENT-
Non-Resident Indians (NRIs) can invest in direct equities through the Portfolio Investment Scheme (PIS) or equity funds. Each transaction through a Portfolio Investment Scheme (PIS) account is reported to the RBI. A Non-Resident Indian (NRI) cannot transact in India except through a stockbroker. He Cannot trade shares in India on a non-delivery basis, that is, they can neither do day trading nor short sell in India. If they buy a stock today, they can only sell it after two days. Short-selling is selling stocks that one does not own is an expectation that their prices will drop, and buy them back at lower prices. He has to open a DEMAT account and trading account with a SEBI registered brokerage firm.
CONDITION FOR DIRECT EQUITY INVESTMENTS-
It cannot exceed 10% of the paid-up capital of private companies and 20% for public sector companies. These investments should be routed through portfolio investment Scheme regulated by the Reserve Bank of India (RBI). wherein NRE or NRO bank accounts are opened with Reserve Bank of India (RBI) Authorised Indian Bank. A Portfolio Investment Scheme (PIS) account helps the Reserve Bank of India (RBI) ensure that the NRI holdings in an Indian company do not cross that limit.
PORTFOLIO INVESTMENT SCHEME (PIS)-
Portfolio Investment Scheme (PIS) is a scheme of Reserve Bank of India(RBI) under which Non-Resident Indians (NRIs) can purchase/sell shares/convertible debentures of Indian companies on stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply. To a designated branch of a bank, which deals in portfolio Investment. All sale/purchase transactions are to be routed through the designated branch.
NON-RESIDENT INDIAN (NRI) CANNOT TRANSFER SHARES PURCHASED) ER PORTFOLIO INVESTMENT SCHEME (PIS) TO OTHERS UNDER PRIVATE ARRANGEMENT
Shares purchased under the Portfolio Investment Scheme (PIS) on stock exchange shall be sold on stock exchange only. Such shares cannot be transferred by way of sale under private arrangement or by way of gift [except by Non- Resident Indians (NRIs) to their relatives as defined in section 6 of Companies Act, 1956 or to a charitable trust duly registered under the laws in India] to a person resident in India or outside India without prior approval of the Reserve Bank.
Tax Liabilities of Non-Resident Indian (NRI)-Equities:
- Long-Term Capital Gains are tax-free up to Rs. 1, 00, 000.
- Short-Term Capital Gains are taxed @ 15 %
- In the case of long-term capital gains arising on shares and debentures
(unlisted), they are not allowed the benefit of indexing the cost of acquisition.
Capital gain arising out of sales of Equity shares or unit of equity oriented mutual fund by a Non-Resident.
When an NRI invests in the stock market of India, he is subject to capital gain tax on the profit earned through trading done in India. Classification under Long Term and Short Term depends upon the period for which the shares/mutual funds are held. There are two types of capital gains applicable in India
-
SHORT TERM CAPITAL GAINS [SECTION 111A]
Short term capital gains are the gain that arises on the sale of shares/mutual funds when the shares/mutual funds are sold before the expiry of 1 year from the date of purchase of such shares/mutual funds.
SHORT TERM CAPITAL GAIN ARISING OUT OF SALES OF EQUITY SHARES OR UNIT OF EQUITY ORIENTED MUTUAL FUND BY A NON-RESU]ENT. [SECTION 111A]
Any income chargeable under the head “Capital gains”, arising from me transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust which fulfils following two conditions
- the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter W of the Finance (No. 2) Act,2004 comes into force and
- Such transaction is chargeable to securities transaction tax under that Chapter,
- LONG-TERM CAPITAL GAIN
Long term capital gain is the gain arising on the transfer of shares/mutual funds after a period of 1 year from the date of purchase provided Securities Transaction Tax has been paid on the same.
Long term capital gain [Section 112A]:
- With effect from the assessment year 2019-20, long term capital gains arising from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10 per cent of such capital gains exceeding Rs. 1, 00, 000. A concession rate of 10% will be subject to the following conditions:-
- in case of equity share, STT has been paid on both acquisition and transfer of such capital asset
- in case of a unit of equity oriented Mutual Fund, STT has been paid on transfer of such capital asset
- long term capital gains will be computed without giving the effect of indexation
- No benefit of deduction under chapter-VIA against such capital gain
- Cost of acquisitions in respect of the long term capital asset acquired by the assessee before the 01.02.2018 shall be the higher of the actual cost of acquisition or fair market value (I. e. Highest quoted the market price on the 31.01.2018)
The tax rate applicable is as follows:
TDS on sale of shares/mutual funds by NRI:
When an NRI trades shares/mutual funds he is subject to the TDS provision under section 195 .the NRI receives the payment after deduction of tax Normally, the TDS on payment to NRI is deducted on the entire sale Mutual Fund transaction-the TDS is required to be deducted from the Capital Gains only.
Special provisions for Shares/Mutual Funds purchased in Foreign Currency:
(Provision applicable only for NRI who has purchased shares in foreign currency)
“This was introduced to protect the investor from tax on a devaluation of Rupee.
SPECIAL PROVISION FOR CALCULATION OF CAPITAL GAIN
In the case where an NRI purchases shares/mutual funds in foreign currency, the following provisions are applicable to calculate capital gains.
Conditions:-
- The shares/mutual funds should have been purchased in foreign CURRENCY ONLY BUY NRI.
- In case the shares/mutual funds have been purchased in INR but sold after the person become NRI-these special provisions would not be applicable and the normal provisions would be applicable.
- The Capital gain is computed in the same currency in which shares/mutual funds were acquired.
STEP: –
- Convert Sale Price in Indian currency into foreign currency average * exchange rate on the date of transfer.
- Convert Purchase price in Indian currency into foreign currency average * exchange rate on the date of purchase.
- Convert expenditure on sale incurred in Indian currency into foreign currency at an average exchange rate on the date of transfer.
- Calculate the capital gain in a foreign currency using the formula,
Capital Gain = Sale Price-Purchase Price-Expenses incurred
- Convert the capital gain calculated in step iv into Indian currency at the buying rate on the date of transfer
* Average exchange rate is the average of telegraphic transfer buying rate and telegraphic transfer selling rate of exchange adopted by the State Bank of India for purchasing or selling such currency.
Applicable tax rates for capital gains under the Act:
Tax liability in the hands of non-residents on capital gains is determined by Section ILLA, Section 112 and the rates in force as prescribed under the Finance Act. Surcharge and Education Cess, as applicable, are added to these rates.
Short-term gains are taxable in like manner for residents and non-residents. The below table summarizes the rates of tax applicable for short-term gains:-
‘Rates in force’ as per part 1 to the First Schedule of the relevant assessment year’s Finance Act:
It should be noted that under section 111A, marginal relief is not available for non-resident individuals or HUFs. Further, beneficial slab rates applicable for senior citizen or very senior citizen as per the rates in force are not available for non-residents.
Long-term Capital Gains:
Section 112 (1) (c) read with proviso to Section 112 (1) and Section 10 (38) provides the tax rates applicable for long-term gains earned by a non-resident.
Marginal relief available for resident individuals and HUFs is not available for non-residents.
Long-term capital gains are taxed @ 20% and short-term gains shall be taxed at the applicable income-tax slab rates for the NRI based on the total income which is taxable in India for the Non-Resident Indian (NRI).
Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer [Section 115AD]:
UP TO ASSESSMENT YEAR 2018-19
As per section 115AD of the Act inter alia, provide that where the total income of a Foreign Institutional Investor (FII) includes income by way of long-term capital gains arising from the transfer of certain securities, such capital gains shall be chargeable to tax at the rate of 10%.
However, long term capital gains arising from the transfer of long term capital asset being equity shares of a company or a unit of equity oriented fund or a unit of business trusts is exempt from income-tax under section 10 (38) of the Act.
WITH EFFECT FROM ASSESSMENT YEAR 2019-20
The Foreign Institutional Investor (FIIs) will be liable to tax on long term capital gains arising from the transfer of long term capital asset being equity shares of a company or a unit of equity oriented fund or a unit of business trusts only in respect of the amount of such gains exceeding Rs. 1,00,000.
No tax will be deducted at source in case of payment of long-term capital gains by Foreign Institutional Investors (FIIs):
There will be no deduction of tax at source from payment of long-term capital gains to a Foreign Institutional Investor in view of the provisions section 196D (2) of the Act.
Treatment of the gains accrued up to 31. 01. 2018 in the case of FIIs:
In case of FIIS also, there will be no tax on gains accrued up to 31.01.2018.
Tax treatment of transfer of share or unit Between 01.02. 2018 and 31.03.2018 in the case of FIIs:-
In the case of FlIs, the transfer made Between 01.02. 2018 and 31.03.18 will be eligible for exemption under section 10 (38) of the Act.
Tax treatment of transfer made on or after 01. 04. 2018 in case of FIIs:
In case of FlIS also, the long-term capital gains exceeding Rs 1 Lakh arising from the transfer of these asset made on after 1st April 2018 will be taxed at 10 percent. However, there will be no tax on gains accrued up to 31st January 2018
CBDT’s Notification dated 22.1.14
In exercise of the powers conferred by clause (a) of the Explanation to Section 115AD of the Income-tax Act, 1961 (43 of 1961), the Central Government Hereby specifies Foreign portfolio Investors registered under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, as Foreign Institutional Investor for the purposes of the said section.
TDS on sale of property:
When a Non-Resident Indian (NRI) sells property, the buyer is liable to deduct TDS @ 20%. In case the property has been sold before 3 years from the date of purchase a TDS of 30% shall be applicable.
Transaction not regarded as transfer [Section 47 (viiab)]:
With effect from the assessment year 2019-20, the transaction in the following assets, by a non-resident on a recognized stock exchange located in any International Financial Services Centre (IFSC) shall not be regarded as transfer, if the consideration is paid or payable in foreign currency-
- bond or Global Depository Receipt as referred to in section 115AC(1) or
- rupee denominated bond of an Indian company or
- derivative.
Exemptions on Long-Term Capital Gain from the sale of house property in India: –
Non-Resident Indians (NRIs) are allowed to claim following exemptions on the long-term capital gain from the sale of house property India.
(a). EXEMPTION UNDER SECTION 54
Exemption under section 54 is available when there is a long-term capital gain on sale of house property of the NRI. The house property may be self-occupied or let out. Please note you do not have to invest the entire sale receipt, but the number of capital gains. Of course, your purchase price of the new property may be higher than the number of capital gains, however, your exemption shall be limited to the total capital gain on the sale. Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed
within 3 years from the date of sale. In the Finance Act, 2014, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Also starting the assessment year 2015-16 (or financial year 2014-15) it is mandatory that this new house property must be situated in India. The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption.
This exemption can be taken back if you sell this new property within 3 years of its purchase
If you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a Public Sector Undertaking (PSU) bank or other banks as per the
Capital Gain Account Scheme, 1988.
(b) EXEMPTION UNDER SECTION 54F
Exemption under section 54F is available when there is a long-term capital gain on the sale of any capital asset other than a residential house property. To claim this exemption, investment is made in one residential house property within one year before the date of transfer or 2 years after the date of transfer or construct one house property within 3 years after the date of transfer of the capital asset. This new house property must be situated in India and should not be sold
within 3 years of its purchase or construction.
Also, the Non-Resident Indian (NRI) should not own house property and nor should the Non-Resident Indian (NRI) purchase within a
period of 2 years or construct within a period of 3 years any other Residential house here the entire sale receipts required to be invested if the entire sale receipt is invested then the capital gains are fully exempt otherwise the exemption is allowed proportionately.
(c) EXEMPTION UNDER SECTION 54EC
Your long-term capital gains by investing Bonds issued by the National Highway
Authority of India (NHAI) or Rural Electrification Corporation (REC) has been specified for this purpose. These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property. You cannot claim this investment under any other deduction. You are allowed a period of 6 months to invest in this bonds-though to be able to claim this exemption, you will have to invest before the return filing date. You are allowed to invest a maximum of Rs. 50, 00, 000/-in a financial year in these bonds.
Repatriation
(a) If the property was purchased while you were a resident of India, then the sale proceeds must be credited to the NRO account. You can repatriate up to USD 1 million per the calendar year from your NRO Account (including all other capital transactions), provided you have paid all taxes due.
(b) If the property was purchased while you were a non-resident the amount to be repatriated will follow these limits
- If you purchased property by taking a home loan, then repatriation cannot exceed the amount of loan repayment that has been done using foreign inward remittances or debit to NRE/FCNR Accounts.
- If you purchased using funds lying in your Non-Resident External (NRE) Account, then the repatriation cannot exceed the foreign exchange equivalent, as on date of purchase, of the amount paid through NRE Account.
- If you purchased the property using the balance in your NRO account, then the sale proceeds must be credited to your NRO account and you can repatriate to the extent of USD 1 million (including all other capital account transactions).
- If you purchased using funds Resident (FCNR) Account, then the repatriation cannot exceed the amount paid through this account
- If you purchased by remitting foreign exchange to India through
normal banking channels, then the repatriation cannot exceed the amount that you remitted.
- In all these cases, the balance sale proceeds can be credited to the NRO account and you will be able to repatriate up to USD 1 million per the calendar year (including all other capital account transactions).
- In all cases, repatriation is restricted to the sale of two residential properties.
Capital gain-Non-Residents transferring shares of Indian Company:
For a non-resident assessee, capital gains from transfer of shares/debentures in an Indian company-shall are computed as under: –
KEYNOTE-
(I) The benefit of deduction of indexed cost of acquisition is not available in the aforesaid case.
(ii) The aforesaid procedure is applicable even in the case of a long-term capital gain or short-term capital gain
No deductions from Gross Total Income under Chapter-VIA [Section 115D]
No deduction is allowed under Chapter VIA against investment income or income by way of long-term capital gains of foreign exchange assets.
However, in the case where the gross total income includes long-term capital gains or/and investment income, then the gross total income shall be reduced by the amount of such income and remaining part of gross total income will be entitled to deduction under Chapter VIA. [Section-115D]
NO BENEFIT OF INDEXATION ALLOWED [Section 115D]
The benefit of Indexed Cost of Acquisition/Improvement under section 48 shall not be allowed in computing income by way of a long-term capital gain on transfer of foreign assets.
Non-Resident Indians (NRIs) cannot adjust their taxable capital gains against basic exemption limit:
Non-Resident Indians (NRIs) cannot adjust their taxable capital gains against the basic exemption limit (I. e. Rs. 2, 50, 000/-for assessment year 2017-18. If a Non-Resident Indian (NRI) earn Rs. 5,00,000/- capital gains and no other income, the full amount is taxed at the applicable rate. He cannot adjust this income against the basic exemption limit of Rs. 2,50,000/-.
Conversion of an Indian branch of a foreign company into subsidiary Indian [Section 115JG]:
(1) Where a foreign company is engaged in the business of banking in India through its branch situated in India and such branch is converted into a subsidiary company thereof, being an Indian company (hereafter referred to as an Indian Subsidiary company) in accordance with the scheme framed by the Reserve Bank Of India, then, notwithstanding anything contained in the Act and subject to the condition as may be notified by the Central Government in this behalf,-(I) the capital gain arising from such conversion shall not be chargeable to tax in the assessment year relevant to the previous year in which such conversion takes place (ii) the provisions of this Act relating to treatment of unabsorbed depreciation, set off or carry forward and set off of losses, tax credit in respect of tax paid on deemed income relating to certain companies and the computation of income in the case of the foreign company and Indian subsidiary company shall apply with such exceptions, modifications and adaptations as may be specified in that notification.
(2) In case of failure to comply with any of the conditions specified in the scheme or in the notification issued under sub-section (1), all the provisions of this Act shall apply to the foreign company and the said Indian subsidiary company without any benefit, exemption or relief under sub-section (1).
(3) Where, in a previous year, any benefit, exemption or relief has been claimed and granted to the foreign company or the Indian subsidiary company in company in accordance with the provisions of sub-section (1) and, subsequently, there is failure to comply with any of the condition specified in the scheme or in the notification issued under subsection (1), then-(I) such benefit, exemption or relief shall be deemed to have been wrongly allowed (ii) the Assessing Officer may, notwithstanding anything contained in this Act, re-compute the total income of the assessee for the said previous year and make the necessary amendment and (iii) the provisions of section 154 shall, so far as may be, apply thereto and the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year in which the failure to comply with the condition referred to in sub-section (1) takes place.
(4) Every notification issued under this section shall be laid before each House of Parliament.
Mode of payments by Non-Resident Indians (NRIs) for shares purchased on the stock exchange:
Payment for purchase of shares and/or debentures on repatriation basis has to be made by way of inward remittance of foreign exchange through normal banking channels or out of funds held in NRE/FCNR (B) account maintained in India. If the shares are purchased on non-repatriation basis, the Non-Resident Indians (NRIs) can also utilize their funds in NRO account in addition to the above.
How Non-Resident Indians (NRIs)/PIO can remit sale proceeds?
In case of NRI/PIO, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/FCNR (B)/NRO account credited only to NRO accounts.
Non-Resident Indian (NRI) investing in mutual funds
A Non-Resident Indian (NRI) investing in mutual funds from his Non-Residential External (NRE) account. His gains from mutual funds have been credited directly to this account. He is supposed to pay taxes on his gains as under : –
MUTUAL FUND:-
When the units in Equity Oriented Mutual Fund are sold (redeemed) after holding for more than a year, gains on such units redemption is tax-free.
when the units in Debt oriented Mutual Fund are sold after holding for more than a year, gains on such units redemption is taxable as Long-term capital gains. Long-term capital gains on-debt-oriented funds are subject to tax @ 20% of capital gains after allowing indexation benefit or at 10% flat rate without
indexation benefit, whichever is less.
When the units in Equity oriented Mutual Fund are sold (redeemed) within one year of being held by the investor, it becomes short-term gain or loss. The Short-Term Capital Gains are taxed ® 15% on the gain.
When the units in Debt Oriented Mutual fund are sold (redeemed) within one year of being held by the investor, it is taxed under slab rates applicable to an individual.
TAX LIABILITIES OF NON-RESIDENT INDIAN(NRI): MUTUAL FUNDS
- Long-Term Capital Gains on equity funds is exempt.
- Short-Term Capital Gains on equity funds is taxed @ 15%.
- Long-Term Capital Gain on Debt funds (10% without indexation and 20% with indexation) whichever is lower.
- Short-Term Capital Gains on debt funds, according to the slab rate.
DIVIDENDS:-
- Dividends declared by equity-oriented funds (I. e. Mutual funds with more than 65% of assets in equities) are tax-free in the hands of NRI investor.
- Dividends declared by debt oriented Mutual fund (with less than 65% of assets in equities) are tax-free in the hands of the NRI investor. However, a dividend distribution tax (which varies for individual and corporate investors) is to be paid by the mutual fund on the dividends declared by them.
- Dividends received from foreign companies are taxable in the hands of a shareholder as the foreign companies are not liable to Dividends distribution tax.
Capital gains on transfer of foreign exchange assets not to be charged in certain cases (Section 115F):
Where, in the case of an assessee being a non-resident Indian, any long-term capital gains arising from the transfer of a foreign exchange asset and the assessee has, within a period of six months after the date of such transfer, invested the whole or any part of the net consideration in any specified asset, or in any savings certificates referred to in section 10 (4B), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-
(a) If the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45
(b) If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset be charged under section 45.
FOREIGN EXCHANGE ASSET [SECTION 115C (f)]
Section 115C defined “foreign exchange asset” to be any specified asset, which was acquired by the assessee using convertible foreign exchange and the said specified asset as per sub-section (f) of the same section included shares with an Indian company.
Specified asset, means any of the following assets, namely
- shares in an Indian company
- debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956)
- deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956)
- any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944)
- such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.
CAPITAL GAINS EXEMPTION ON TRANSFER OF FOREIGN EXCHANGE ASSETS [SECTION 115F]
Long-term capital gains mean income chargeable under the head capital gain relating to a foreign exchange asset, which is not a short-term capital asset. Thus, if a non-resident holds a foreign exchange asset for at least 36 months or hold shares or any other securities listed in a recognized stock exchange in India Or units of a Mutual Fund or Zero Coupon Bonds for at least 12 months, the capital gain earned by him will be regarded as “long-term capital gains”.
In case of a Non-Resident Indian (NRI), and Long-Term Capital Gain arising from the transfer of a foreign exchange asset, an original asset can be claimed an exemption on the satisfaction of the following conditions:-
CONDITIONS:-
(I) The taxpayer is a Non-Resident Indian (NRI)
I. e. An individual being a citizen of India. or a person of Indian origin who is non-resident a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents was born in undivided India.
(ii) He has transferred a specified asset
I. e. shares in an Indian company, debenture of an Indian public limited company, deposit with an Indian public limited company or Central government secures engine asset) which has been
acquired or purchased with, or subscribed to in, convertible foreign exchange.
(iii) Such an asset is a long-term capital asset.
(iv) Within 6 months of the transfer of the original asset, the taxpayer has invested the whole or any part of net consideration (I. e. consideration-expenses on transfer) in any of the following assets (new assets): –
(a) shares in an Indian company
(b) debentures of an Indian Public Limited Company
(c) deposit with an Indian Public Limited Company(including a banking company)
(d) Central Government securities or
(e) National Savings Certificate VI and VII Issues.
AMOUNT OF EXEMPTION:-
If all the above conditions are satisfied, the exemption is available as follows-
If the cost of the new asset is not less than the net consideration in respect of the original asset transferred, the entire capital gain arising from the transfer is exempt from tax.
If the cost of the new asset is less than the net consideration in respect of the original asset transferred, the exemption from long-term capital gain is granted proportionately on the basis of investment of net consideration in the new asset.
- e. Amount invested in the new asset X long-term capital gain/amount of net consideration as a result of the transfer of the original asset.
CONSEQUENCES IF THE NET ASSET IS TRANSFERRED WITHIN 3 YEARS
In case the new asset acquired by the assessee is transferred or converted into money within a period of three years from the date of its acquisition,
the amount of capital gain exempted by virtue of the provisions given above shall be deemed to be income by way of the long-term capital gain of the previous year in which such new asset is transferred or converted into money.
Transfer of Government securities outside India between two. Non-Residents are tax-free:
Any transfer of Government bonds/debentures which are listed on foreign exchange by one non-resident to another non-resident will be a tax-free transaction under section 47 (viib).
PROVISIONS ILLUSTRATED
Suppose Mr. ‘A’ [a Non-Resident Indian (NRI)] held a specified asset having the original cost of Rs. 50,000, which is sold for a consideration of Rs. 2,00,000 and the expenditure incurred wholly and exclusively in connection with the transfer is Rs. 10,000. Compute the taxable capital gain if-(I) the entire net consideration of Rs. 1,90,000 is invested/deposited in specified assets is only Rs. 1,00,000.
The income of Non-Citizen and Non-Resident sports persons [section 115BBA]:
BACKGROUND
There occurred practical difficulties in enforcing the provisions of the Act with regard to the payments made to non-resident sportsmen or sports bodies. In comparison to the Indian taxation laws, countries like the United Kingdom, Australia and New Zealand provide a tax benefit to visiting non-resident sportsmen or sports bodies, either by not taxing their income or by taxing it at lower rates.
As a measure of reciprocity and rationalization, with effect from 01-04-1990, section 115BBA of the Act was introduced to grant the benefit of a low rate of tax to non-resident sportsmen and sports associations/institutions, in respect of certain gross incomes.
TAX DEDUCTION AT SOURCE – PAYMENTS TO NON-RESIDENT SPORTSMEN OR SPORTS ASSOCIATIONS (SECTION 194E)
Where any income referred to in section 115BBA is payable to a non-resident sportsman (including an athlete) or an entertainer who is not a citizen of India or a non-resident sports association or institution, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode/whichever is earlier, deduct income-tax thereon at the age of twenty percent.
RATE OF TAX
Any guaranteed money paid to foreign sports teams/boards/associations/institutions and payments to individual payers (not being a citizen of India) on account of the sports activities taking place in India are liable to tax at a flat rate of 20%.
This rate of 20% will also be applicable in respect of income derived by non-resident sportsmen (not being a citizen of India) from their other activities like participating in advertisements and writing in newspapers, magazines or journals.
In case of beneficial treatment under a tax treaty, where applicable, the rates specified under the respective clauses of the treaty will apply
Section 115BBA provides the special basic rate of 20% surcharge & Education Cess) on prescribed income accruing to Sportsman/Entertainer/Sports Association. No deduction for any expenditure and allowance is allowed to such assessee under section 115BBA. In nutshell, the provision of section 115BBA is explained as under: –
Thus, the provision covers income received by way of participation in any game or sport, advertising or contribution of an article in any newspaper etc. The income of such sportsmen is taxed at the rate of 20% of the gross receipts. With effect from the assessment year 2013-14 and subsequent assessment years, the same regime is also available to a non-resident sports association or institution for guarantee money payable to such institution in relation to any game or sport played in India.
FILING OF RETURN OF INCOME
The non-resident would not be required to file a return of income in India if
(a) his total income consists of only income chargeable under section 115BBA and
(b) the tax has been deducted at source from such income.
Interest Income:
SCOPE OF TAXABLE INTEREST INCOME
As per Section 5, interest income shall be taxable in India in case of an ordinarily resident if:
(I) It is received or deemed to be received in India in such year by or on behalf of such person.
(ii) It accrues or arises or is deemed to accrue or arise in India during such year
(iii) It accrues or arises outside India during such year In case of a person not ordinarily resident in India, the income which accrues or arises to him outside India shall not be included unless it is derived from a business controlled or a profession set up in India.
In the case of non-resident, the following interest income is taxable in India:-
(I) It is received or deemed to be received in India in such year by or on behalf of such person.
(ii) It accrues or arises or is deemed to accrue or arise in India during such year.
As per Section 9, the interest income shall be deemed to accrue or arise in India when it is payable by-
(a) The Government or,
(b) A person who is a resident, except where the interest is payable in respect of any debt incurred, or money’s borrowed and used, for the purposes of-
(I) A business or profession carried out by a person resident outside India or,
(ii) Making or earning any income from any source located outside India or,
(c) A person who is a non-resident, except where the interest is payable in respect of any debt incurred, or money’s borrowed and used, for the purposes of a business or profession carried out by a person resident in India.
As per the Finance Act 2015, with effect from 01.04.2016, the following Explanation is inserted:-
For the purpose of the clause (c)-
- It is hereby declared that in the case of a non-resident being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery
shall apply accordingly.
- “permanent establishment” shall have the meaning assigned to it in clause (iiia) of section 92F. As per the Explanation to the above clause, it is clarified that in case of a person engaged in the business of banking, when any interest is payable by the permanent establishment of a non-resident in India to the head office or to any other permanent establishment or to any non -resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax. It is clarified that the permanent establishment in India shall be deemed to be a person separate and independent. Permanent establishment as per section 92F means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
Thus, the payment by a permanent establishment in India of a non-resident to head office shall be deemed to accrue or arise in India and shall be chargeable to tax in India.
INTERNATIONAL TAXATION PERSPECTIVE ON INTEREST INCOME
Generally, the interest income is taxable in the resides. However, there may arise double taxation in the case when the recipient is taxed in the State where the income arises
- e. In source country and also in the taxability. It states that interest may be taxed in the state of residence, but also in the country where he resides. DTAA between two countries provides the basis for taxability it states that interest may be taxed in the State of residence, but also leaves to the State of source the right to impose a tax if its laws so provide, it. being implicit in this right that the state of source is free to give up all taxation on interest paid to non-residents. All the 3 model conventions I. e. OECD Model, UN Model and US Model are in the same parlance.
Rate of Tax:
The Interest income that Non-Resident Indians (NRIs) earn on his NRO account will be taxed at the maximum marginal rate of tax (I. e. 30. 9%).
(I) Taxability of income from dividends or interest in the case of Non-Residents [Section 115A]:
As per section 115A dividends or interest in the case of non-resident “other than a company or a foreign company is liable to tax as under : –
Type of interest:
(a) Income by way of interest from Indian company referred to in section
194LC
Section 194LC refers to income by way of interest payable by the specified company or a business trust-
(I) in respect of monies borrowed by it in foreign currency, from a source outside India
(a) under a loan agreement at any time on or after 01. 07. 2012 but before 01. 07. 2020 or
(b) by way of issue of long-term infrastructure bonds at any time on or after 01. 07. 2012 but before 01. 10. 2014 or
(c) by way of issue of any long-term bond including long-term infrastructure bonds at any time on or after 01. 10. 2014 but before 01. 07. 2020.
(ii). in respect of monies borrowed by it from a source outside India byway of issue of rupee-denominated bond before 01. 07. 2020 and
(iii) to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or the bond and its repayment.
Income by way of interest on certain bonds and Government securities [Section 194LD]:
Section 194LD refers to the interest payable by any person to a person being a Foreign Institutional Investor or a Qualified Foreign investor: –
The income by way of interest shall be the interest payable on or after 1.06.2013 but before 01. 07. 2020 in respect of investment made by the payee in.
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a rupee-denominated bond of an Indian company, |
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a Government security |
PROVIDED that the rate of interest in respect of bond referred to in clause shall not exceed the rate as may be notified by the Central Government in this behalf
Tax on such interest is payable by Foreign Institutional Investor or a Foreign Investor at a special rate of 5%.
Investment Income:
The income derived by non-resident Indian from a foreign exchange asset is called “Investment Income”.
“INVESTMENT INCOME” means income derived from foreign exchange on which ” “is assets’, (other than dividends which Tax on Distributed Dividends payable under section 115-0 by the company declaring or dividends declared or paying dividends) that is to say, any specified asset which the non-resident Indian has acquired or purchased with or subscribed to in, convertible foreign exchange.
FOREIGN EXCHANGE ASSET means any specified asset which the assessee has acquired or purchased with or subscribed to in, convertible foreign
exchange.
SPECIFIED ASSETS
The expression specified assets mean any of the following assets [section 115C(f)]: –
- Shares in an Indian Company (public or private)
- Debentures issued by an Indian company (listed) other than a private company as defined in the Companies Act, 2013
- Deposits with an Indian company other than a private company as defined in the Companies Act, 2013
- Any Security of the Central Government as defined in section 2 (2) of the Public Debt Act, 1944 and
- Any other such assets which the Central Government may by notification in the Official Gazette specify in this behalf. (No asset Has been notified as yet)
When a Non-Resident Indian (NRI) invests in certain Indian assets, he is taxed at 20%. If the special investment income is the only income the Non-Resident Indian (NRI) has during the financial year, and TDS has been deducted on that, then such a Non-Resident Indian (NRI) is not required to file an income-tax return.
CALCULATION OF INVESTMENT INCOME
In computing the investment income of a Non-Resident Indian (NRI), no deduction will be allowed in respect of any expenditure or allowance under any provision of the Income Tax Act.
Further, where the Gross Total Income of the non-resident Indian consists only of “investment income” no deduction will be allowed to him under Chapter
However, if the Gross Total Income includes other income besides· Investment Income’, the gross total income will be reduced by the amount of such investment income and the Non -Resident Indian (NRI) will be entitled to deduction under chapter v1-A as if the gross total income as reduced were his gross total income.
Computation of investment income of non-resident Indian [Section 115D]:
Section 115D deals with the computation of total income of non-residents. As per section 115D (1) in computing the investment income of non-resident Indian, no deduction is to be allowed under any provision of the Act in respect of any expenditure or allowance. Section 115(2) specifically provides that the deductions allowable under Chapter VI-A are not to be allowed to a non-resident Indian assessee with reference to his investment income and/or long-term capital gains.
First proviso to section 48 applicable:
The first proviso to section 48 regarding conversion of sale consideration and cost into foreign currency shall be applicable while computing capital gain deductions and debenture.
Second proviso to section 48 not applicable:
The second proviso to section 48 regarding indexation of cost in case of long-term capital gain shall not apply for computing long-term capital gain on such specified assets.
TEXT OF SECTION 115D
(1) No deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non-resident Indian.
(2) Where in the case of an assessee being a non-resident Indian:-
A. the gross total income consists only of investment income or income by way of the long-term capital gain or both, no deduction shall be allowed to the assessee under Chapter VI-A and nothing contained in the provisions of the second proviso to section 48 shall apply to income chargeable under the head “Capital gain”.
B. the gross total income includes any income referred to in clause (a), the gross total income shall be reduced by the amount of such income and the deductions under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.
Special rates of income-tax on the investment income of Non-Resident Indian (NRI) [Section 115-E]:
As per Section 115E of the Income-tax Act, 1961 where the total income of an assessee, being a non-resident Indian, includes-
(a)any income from investment or income from long-term capital gains of 3)11 asset other than a specified asset
(b)income by way of long-term capital gains, the tax payable by him shall be the aggregate of-
- the amount of income-tax calculated on the income in respect of investment income referred to in section 115E(a), if any, included in the total income, at the rate of 20%
- the amount of income-tax calculated on the income by way of long-term capital gains referred to in section 115E (b), if any, included in the total income, at the rate of 10% and
- the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in section 115(a) and 115 (b).
In other words, the investment income of a Non-Resident Indian (NRI), that is, the income derived from a foreign exchange asset, shall be taxed at a flat rate of 20%.
TAX ON INVESTMENT INCOME AND LONG-TERM CAPITAL GAINS [Section 115E]
Investment Income
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20% + Surcharge (if applicable) + Education Cess
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Long-Term Capital Gain on Foreign Exchange Assets
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10% + Surcharge (if applicable) + Education Cess
Any other Income
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Normal rates of tax as applicable to Residents (Including benefits of Basic exemption limit, Indexation and deduction under Chapter VI-A)
Tax on investment income and long-term capital gains Section 115E:
TEXT OF SECTION 115E
“TAX ON INVESTMENT INCOME AND LONG-TERM CAPITAL GAINS
Where the total income of an assessee, being a non-resident Indian, includes-
(a) any income from investment or income from long-term capital gains of an asset other than a specified asset;
(b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of–
1) the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty percent.
(2) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income at the rate of ten per cent and
(3) the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b)”
Non-residents- Capital gains- Benefit of concessional rate of tax would not be available on short term capital gains arising from the sale of shares:
Assessee, a non-resident, earned short-term capital gain on sale of bonus shares. He paid tax at the concessional rate of 20%, claiming the benefit of section 115E, on the basis that the original shares were purchased in convertible foreign exchange. The Assessing Officer held that the concessional rate of tax was not available for short term capital gains. The High Court held that if the phrase “investment income” is interpreted to include all kinds of income defined in section 2 (24), then the phrase” income by way of long-term capital gain” would become redundant. Income derived from shares would normally include shares since in the case of latter income arising on sale of assets dividend income and not income from the sale of rights over the shares are extinguished. Thus, income arising on sale of assets as leading to short term capital gains would not be investment income derived from foreign exchange asset and thus benefit of section 115E would not be available to short term capital gains. (the Assessment year 1992-93)
[CIT u. Sham L. Chellaram (2015) 373 ITR 292: 275 CTR 245: 116 DTR 118 (Bom)]
Chapter XII-A not to apply if the assessee so chooses [Section 115-l]:
A Non-Resident Indian is by default governed by the provision of Chapter XII-A. However, Chapter XII-A is optional. The assessee may opt to be governed by normal provisions of the Income Tax Act, 1961 if he wishes to. Moreover, this choice is available for every year on a year-to-year basis.
Shipping Business of Non-residents [Section 172]
Section 172 is applicable if the following conditions are satisfied-
(a) the taxpayer is a non-resident
(b) he ownership or ship is chartered by the non-resident taxpayer
(c) the ship carries passengers, livestock, mail or goods shipped at a port in India: and
(d) the non-resident taxpayer may (or may not) have an agent/representative in India.
If all the aforesaid conditions are satisfied, 7.5 percent of the amount paid (or payable) on account of such carriage (including demurrage charge or handling charge or similar amount) to the non-resident taxpayer shall be deemed to be the income of the taxpayer.
For this purpose, the master of the ship shall submit a return of income before the departure of the ship from the Indian port (such return may be submitted within 30 days of the departure of the ship, if the Assessing Officer is satisfied that it will be difficult to submit the return before departure and if satisfactory arrangement for payment of tax has been made). Unless the tax has been paid (or satisfactory arrangements have been made for payment thereof), a port clearance shall not be granted by the Collector of Customs.
Under the above-noted provisions of section 172, 7.5 percent of the amount of freight, fare, etc., is deemed as income of the non-resident taxpayer and tax is payable at the rate applicable to a foreign company.
Income is, thus, taxable in the same year in which freight, fare, etc., are collected and not in the immediately following assessment year.
Interest received from a non-resident-Deemed to accrue or arise in India:
Interest received from a non-resident is deemed to accrue or arise in India it is in respect of any debt incurred or money borrowed and used for a business or profession carried on in India.
Mode of payments by Non-Resident Indians (NRIs) for shares purchased on the stock exchange:
Payment for purchase of shares and/or debentures on repatriation basis has to be made by way of inward remittance of foreign exchange through normal banking channels or out of funds held in NRE/FCNR (B) account maintained in India. If the shares are purchased on non-repatriation basis, the Non-Resident Indians (NRIs) can also utilize their funds in NRO account in addition to the above.
How Non-Resident Indians (NRIs)/PlO can remit Sale proceeds?
ln case of NRI/PIO, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/FCNR (B)/NRO accounts of the NRI/PIO, whereas sale proceeds of non-repatriable investment can be credited only to NRO accounts.
Special provision for computation of total income of non-residents:
The taxation of non-resident Indian is not the same as taxation of residents.
There are special provisions in the Income Tax Act which govern the taxation of non-resident Indian. In addition to the provisions in the Act, there exists a number of double taxation avoidance treaties which also govern special taxation procedures which are to be applied to the non-residents.
(I) Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer [Section 115AC]:
TEXT OF SECTION 115AC
(1) Where the total income of an assessee, being a non-resident, includes-
(a) income by way of interest on bonds of an Indian company issued in accordance with such scheme as the Central Government made by notification in the Official Gazette, specify in this behalf, or on bonds of a public sector company sold by the Government, and purchased by him in foreign currency; or
(b) income by way of dividends, other than dividends referred to in section 115-0, on Global Depository Receipts-
- issued in accordance with such scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf, against the initial issue of shares of an Indian company and purchased by him in foreign currency through an approved intermediary or
- issued against the shares of a public sector company sold by the Government and purchased by him in foreign currency through an approved intermediary or
- issued or reissued in accordance with such scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf, against the existing shares of an Indian company purchased by him in foreign currency through an approved intermediary or
(c ) income by way of long-term capital gains arising from the transfer of bonds referred to in section 115AC (1) (a) or, as the case may be Global Depository Receipts referred to in section 115AC(1)(b), the income-tax payable shall be the aggregate of-
(I) the amount of income-tax calculated on the income way of interest or dividends, other than dividends referred to in section 115-O, as the case may be, in respect of bonds referred to in section 115AC (1)(a) or Global Depository Receipts referred to in section 115AC (1)(b), if any, included in the total income, at the rate of ten per cent;
(ii)the amount of income-tax calculated on The income by way of long-term capital gain referred to in section 115AC (1) (c), if any, at the rate of ten per cent; and
(iii) the amount of income-tax with which the non-resident would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a), (b) and (c).
(2) Where the gross total income of the non-resident-
(a) consist only of income by way of interest or dividends, other than dividends referred to in section 115-O in respect of bonds referred to in section 115AC (1) (a) or, as the case may be, Global Depository Receipts referred to in section 115AC (1) (b), no deduction shall be allowed to him under section 28 to 44C or under section 57 (I) or (iii)or under Chapter VI-A
(b) includes any income referred to in section 115AC (1) (a) or (b) or (c), the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced, were the gross total income of the assessee.
(3) Nothing contained in the first and second provisos to section 48 shall apply for the computation of long -term capital gains arising out of the transfer of the long-term capital asset, being bonds or Global Depository Receipts referred to in section 115AC (1) (c).
(4) It shall not be necessary for a non-resident to furnish under section 139 (1) a return of his income if-
(a) his total income in respect of which he is assessable under this Act during the previous year consisted only of income referred to in section 115AC (1) (a) and (b) and
(b) the tax deductible at source under the provision of Chapter XVII-B has been deducted from such income.
(5) Where the assessee acquired Global Depository Receipts or bonds in an amalgamated or resulting company by virtue of his holding Global Depository Receipts or bonds in the amalgamating or demerged company, as the case may be, in accordance with the provisions of section 115AC (1), the provisions of that sub-section shall apply to such Global Depository Receipts or bonds.
Explanation For the purposes of this section, –
(a)”approved intermediary” means an intermediary who is approved in accordance with such scheme as may be notified by the Central Government in the Official Gazette
(b)”Global Depository Receipts” shall have the same meaning as in clause (a) of the Explanation to section 115ACA.
GLOBAL DEPOSITORY RECEIPTS (GDRs)
Indian companies are permitted to issue its Rupee denominated shares to persons outside India for the purpose of issuing Global Depository Receipts (GDRs). GDRs are negotiable certificates issued by depository banks which represent ownership of a given number of a company’s shares which can be listed and traded independently from the underlying shares. FDR’s facilitate purchase, holding and sale of foreign securities by global investors. GDRs are issued by the overseas depository bank (ODB) while the underlying shares remain in fiduciary ownership of ODB, whereas such shares are Ph. Physically held by the Domestic Custodian Bank.
TAXABILITY OF GLOBAL DEPOSITORY RECEIPTS (GDRs)
The taxability of income from GDRs is governed by section 115AC of the Act. When a GDR is sold in a foreign stock exchange or at any place outside India in a transaction between two non-residents, there is no liability to capital gain tax in India.
If any capital gains arising on the transfer of the aforesaid shares in India to the non-resident investor, he is liable to income tax under the provisions of the Act. If the aforesaid shares are held by the non-resident investor for a period of More than twelve months from the date of advice of their redemption by the Overseas Depository Bank, the capital gain arising on the sale thereof retreated as long-term capital gains and are currently not subject to any income-tax under the provisions of section 115AC of the Act. If such shares are held for a Period of fewer than twelve months from the date of redemption advice, the capital gains arising on the sale thereof are treated as short-term capital gains.
NO DEDUCTION OF ANY EXPENSES OR ALLOWANCE: –
Where the gross total income of the non-resident consists only of income by way of interest in respect of bonds, no deduction under sections 28 to 44C section 57 (iii) shall be allowed such interest income.
BOTH PROVISOS TO SECTION 48 SHALL NOT APPLY: –
Where the gross total income includes income by way of long-term capital gain, neither proviso 1, nor proviso 2 to section 48 shall apply for the computation of such long-term capital gain.
NO DEDUCTION UNDER CHAPTER VIA: –
No deduction under Chapter VIA (sections 80C to 80U) shall be allowed from such income by way of interest. Deduction under Chapter VI-A is otherwise not available from long-term capital gain included in Gross Total Income.
(ii) Tax on income from Global in Foreign Currency or capital gains arising from their transfer [Section 115ACA]:
When an employee of the foreign subsidiary of an Indian company who has earned Global Depository Receipts (GDRs) of the Indian company under ESOPs, becomes a resident in India and earns Dividend on those GDRs or earn long-term capital gains on sale section 115ACA.
TEXT OF SECTION 115ACA
“(1) Where the total income of an assessee, being an individual, who is a resident and an employee of an Indian company engaged in specific knowledge-based industry or service, or an employee of its subsidiary engaged in specified knowledge-based industry or service (hereafter in this section referred to as the resident employee), includes-
(a) income by way of dividends, other than dividends referred to in section 115-0, on Global Depository Receipts of an Indian company engaged in specified knowledge-based industry or service, issued in accordance with such employees stock option scheme as the Central Government may, by notification in the Official Gazette, speedy in this behalf and purchased by him in foreign currency or
(b) income by way of long-term capital gains arising from the transfer of Global Depository Receipts referred to in clause (a), the income tax payable shall be the aggregate of
(I) the amount of income-tax calculated on the income by way of dividends other than dividends referred to in section 115-O, in respect of Global Depository Receipts referred to in clause (a), if any, included in the total income at the rate of ten per cent
(ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, at the rate of ten per cent and
(iii) the amount of income-tax with which the resident employee would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b).
Explanation: For the purposes of this subsection, –
(a) “specified knowledge-based industry or service” means-
(I) information technology software;
(ii) information technology service;
(iii) entertainment service;
(iv) pharmaceutical industry;
(v) biotechnology industry and
(vi) any other industry or service, as may be specified by the Central Government, by notification in the Official Gazette
(b)”subsidiary” shall have the meaning assigned to it in section 4 of the Companies Act, 1956 (1 of 1956 and includes subsidiary incorporated outside India.
(2) Where the gross total income of the resident employee-
- consists only of income by way of dividends, other than dividends referred to in section 115-O, in respect of Global Depository Receipts referred to in clause (a) of sub-section (1), no deduction shall be allowed to him under any other provision of this Act.
(b) includes any income referred to in clause (a) or clause (b) of sub-section (1), the gross total income shall be reduced by the amount of such income and the deduction under any provision of this Act shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.
(3) Nothing contained in the first and second proviso to section 48 shall apply for the computation of long-term capital gains arising out of the transfer long term capital asset, being Global depository Receipt referred to in clause (b) of sub-section (1).
Explanation: For the purposes of this section
(a). “Global Depository Receipts” means any instrument in the form of a depository receipt or certificate (by whatever name called) created by the Overseas Depository Bank outside India and issued to investors against the issue of-
(1) ordinary shares of issuing company, being a company listed on a recog1Uzed stock exchange in India or
(2)ordinary shares or foreign currency convertible bonds is issuing company;
(b) “information technology service” means any service which results from the use of any information technology software over a system of information technology products for realising value addition;
(c)“information technology software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form and capable of being manipulated or providing interactivity to a user by means of an automatic data processing machine falling under heading information technology products but does not include non-information technology products.
(d)“Overseas Depository Bank” means a bank authorised by the issuing company to issue Global Depository Receipts against the issue of Foreign Currency Convertible Bonds or ordinary shares of the issuing company.
(iii) Non-Resident Indians (NRIs) investment in the Indian stock market:
NRIs can use many of the investment avenues available in India either of their own selves or for building up capital for their loved ones. Since the income earned on the stocks arises in India, it is subject to tax in India.
NRI’S CAN BUY IN INDIAN STOCK MARKET: –
(I) Dated Government securities (other than bearer security ) bills.
(ii) Units of domestic mutual funds.
(iii) Bonds issued by a Public Sector Undertaking (PSII) in India.
(iv) shares in public sector Enterprises being disinvested by the Government of India.
(v) Exchange Traded Funds (ETFs).
EQUITY SHARES: –
NRIs may invest in the Indian stock market freely. However, this cannot be done in the usual way the NRI would have traded when he was a Resident. In other words, NRIs are allowed to invest in Indian stock market under the portfolio Investment Scheme-through the secondary market. Accordingly, as an NRI, he will have to approach an Authorised Dealer (Bank) for applying for a Portfolio Investment Scheme (PINS) account.
REGULATIONS REGARDING NRI TRADING/INVESTMENTS IN SHARES: –
- Daily Square Off is no allowed for NRI i.e. intraday trades are not allowed for NRI clients.
- Clients can trade only on Delivery basis.
- All contract notes of either buy or sell have to Be reported to Authorised Dealer (PIS Banker) within 24 hours to transactions. This Is done by the broker, I. e., Kotak Securities Ltd.
- Every sale transactions will be credited to client Banks account Net of tax. Hence for every sale transaction capital gains will be calculated by a CA. As per current laws for long-term capital gains, the tax rate is nil and for a short-term capital gain, the tax rate is 15.45%.
STEPS THAT AN NRI HAS TO FOLLOW FOR EQUITY TRADING: –
Following are the steps that an NRI has to follow for equity trading-
PORTFOLIO INVESTMENT SCHEME (PINS)
An NRI has to designate a branch of an Authorised Dealer (AD) for routing purchase and sale of shares only through the branch so designated. Specific PoA may be granted in favour of the bank, to carry out the formalities in respect of
(I) Applying to RBI for approval, if necessary,
(ii) Buying and selling shares and debentures,
(iii) Subscribing to a new issue of shares and debentures,
(iv) Collecting dividend and interest,
(V) holding share /debenture in safe custody
(vi) Renunciation of right entitlement, and
(vii) Arrange for repatriation if the investment is repairable.
RBI does impose certain caps on NRI investment. However, that need not bother an NRI investor. Whenever he or she desires to buy shares of any company, the bank will provide NRIs who can use many of the investment avenues available in India either for their own selves or for building up capital be their loved ones.
LIMIT FOR INVESTING IN SHARES PURCHASED BY NRIs UNDER THE PIS- RBI GUIDELINES: –
NRIs can invest through designated Authorised dealers of repatriation and non-repatriation basis under the PIS route up to 5% of the Paid. Up capital/paid-up value of each share of debenture of listed Indian companies. other words, an NRI can purchase up to a maximum of 5% of the aggregate paid-up capital of the company (equity as well as preference capital) or the aggregate paid-up value of each series of convertible debentures, as the case may be. The purpose of this ceiling, investment under the Portfolio Investment Scheme on repatriation, as well as the non-repatriation basis, will be clubbed together.
There is an overall ceiling of 10% of paid-up equity share capital of the company/paid-up value of each series of convertible debentures for purchase by all NRIs/OCBs put together. The overall ceiling of 10% can be raised to 24% if the Indian company concerned passes a special resolution to that effect in its general body meeting.
While limits of individual holdings by NRIs are monitored by the respective designated bank branch, RBI monitors holding limits by NRIs in aggregate. The Once the aggregate holding of NRIs builds up/about to build up to the maximum prescribed ceiling, RBI puts the concerned stock under the Restricted List/Watch List which is published by RBI from time to time.
Companies have different investment ceilings depending on sectors. Once The ceiling is breached the stock is blocked by RBI for NRI trading. This script is re-opened for trading once the holding percentage of NRIs drops down.
JOINT HOLDINGS: –
The shares can be held in joint names. There is no restriction on the residential status of the other joint holders (maximum 2) but in the case of death of the first holder, the second holder will lose the repatriation right if any, if he is a Resident. This will be so even if he becomes a non-resident sole holder at a later date.
REPATRIATION OF REFUNDS: –
Repatriation of sale proceeds of NRI investment in India is allowed if the original purchase was made on repatriation basis and source of investment were from NRE/FCNR Account or by means of remittance from abroad. Further sale proceeds under the PINS are repayable after payment of taxes due if any. If the original purchase was made from NRO Account then the sale proceeds are not repatriable. RBI authorized Authorised Dealers to repatriate surplus funds remitted for purchase of shares in the following cases:
- Refund of funds received towards allotment of shares.
- Surplus funds received for the purchase of rights shares.
- Remittance on account of surplus funds received for the purchase of shares or on account of cancellation of trade, under two-way fungibility of ADRs/GDRs.
RESERVE BANK MONITORS THE INVESTMENT POSITION OF NRIs/FIIs INLISTED INDIAN COMPANIES: –
Reserve bank monitors the investment position of NRIs/FlIs in listed Indian companies, reported by designated banks, on a daily basis. When the total holdings of NRIs/FlIs under the Scheme reaches the limit of 2 percent below the sectoral/cap, Reserve Bank will issue a notice (caution list) to all designated branches of designated banks cautioning that any further purchases of shares of the particular Indian company will require prior approval of the Reserve Bank. Once the shareholding by NRIs/FlIs reaches the overall ceiling/sectoral cap/statutory limit, the Reserve Bank places the company in the Ban List. Once a company is placed in the Ban List, no NRI can purchase the shares of the company under the Portfolio Investment Scheme. List of caution/banned RBI scrip is available at http: / /www.rbi.org.in/scripts/Bs_fiiuser.aspx
SPECULATION BARRED
The NRI should take delivery of the shares purchased and give the delivery of shares sold. In other selling is not allowed. In other words, speculation in terms of margin trading or short selling is not India.
(iv) Non-Resident Indians (NRIs) as a consultant to Indian companies:
The income received in India by Non-Resident Indians (NRIs) is taxable.
TAX IMPLICATIONS FOR IND IAN CONSULTANTS WORKING FOR US CLIENTS
Mr. “A” is a 40 years old ENT Doctor. After spending 9 long years in the US, he moved back to India in 2013 and now lives in Pune, India. In 2015, he started working on a contractual basis as a consultant with a US-basedUS-based clinic and his payment is wired to his bank account in India.
Mr. “X”, a freelancer for a publication in India. He lives in San Francisco, California, and writes on technological developments for a digital magazine in India. His pay too gets wired to the US from India.
WHO SHOULD PAY TAX IN INDIA
Every person who is a resident of India must pay taxes in India on his or her global income. A resident of India is defined as a person who has been in India for a period of 182 days or more in the financial year or who has been in India for 60 days or more in a financial year and 365 days or more in the 4 years before that financial year (Section 6).
Since Mr. “A” has been in India for the entire time during since 2013, by this definition, it is clear that he is a resident of India and must file his tax return of income in India for the year 2015-16.
A non-resident, that is, a person who is not a resident by a resident by the above criteria must pay taxes in India on any income that is earned from a source in India (section 9). By that definition, since Mr. “A” earns income from a source in India he must pay tax on that income in India.
WHO SHOULD PAY TAX IN THE US
According to the US tax code, any person who is a resident of the US must pay taxes in the US. The IRS defines resident as one who meets either of the folios win two tests ——
(I) GREEN CARD TEST
If at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws, you are considered to have met the Green Card test.
(II) SUBSTANTIAL PRESENCE TEST
To meet the substantial presence test, you must have been physically present in the United States on at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before.
- To satisfy the 183 days requirement, count all of the days you were present in the current year, and one-third of the days you were present in the first year before the current year and one-sixth of the days you were present in the second year before the current year.
Since Mr. “X” has lived in the US for the whole of 2015, he must file his taxes in the US.
A non-resident alien, that is, a person who is not a citizen or resident of the US but has a US source income on which tax has not been fully withheld at source, must file his taxes in the US. By that definition, Mr. “A” must file his taxes in the US since his source of income is in the US.
DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA):
The provision of the Double Taxation Avoidance Agreement (DTAA) will override the provisions of the Income-tax Rules of both countries. The DTAA is a treaty that India has signed with the US and several other countries to ensure that its residents and citizens do not end up paying tax in two countries on the same income. “For the purpose of the two cases above, since they are on contract basis and not on employment we need to refer to Article 15 of the India-US Article 15 deals with Independent Personal Service that include independent scientific. Itinerary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, ”lawyers, engineer, architects, dentists and accountants.
In such cases, if a person is a resident of one country and earning income from a source in another country, then that income would be taxed only in the country of his or her residence.
What this means is that in the case of Mr. “A”, he owes taxes only in India and he can tell his US payer not to withhold taxes in the US. In order to do that, he must submit Form W8BEN to his US payer. Form W8BEN is a declaration that he is a tax paying resident of India.
Resident Indian on overseas deputation by Indian company:
The income is taxable since the payment arises in India. This applies to salary as well as allowances. Again, technicians are permitted to avail of 75% tax deduction benefits under section 8o RRA within 6 months of the end of the financial year. 25% of the income is charged at the marginal rate.
Income from abroad not to be taxed in India:
The following income from abroad will not be taxed in India: –
(a) Any interest or dividends from foreign securities
(b) Any capital gains from the sale of foreign assets including property
(c) Any withdrawals made from foreign retirement funds such as 401K plans for the US-based Non-Resident Indians (NRIs)-Interest on Foreign Currency Non-Resident (FCNR) bank account held in India (until maturity)
(d) Interest on Resident Foreign Currency (RFC) account.
EXCEPTION:
Income received and accrued outside India from a business controlled or set up in India is taxable in India, even for a Resident but not Ordinarily Resident (RNOR).
