Income TAX & Indian Taxation rules for NRIs – Non Resident Indians & OCIs


India is a growing economy, but India is still termed ‘developing’. Investments by non-residents boost our economy, India thus progressing towards the concept of development. A non-resident is a person who is living abroad (temporarily or permanently) and is either a citizen of India (NRI) or a Person of Indian Origin (PIO) or an Overseas Citizen of India (OCI). In order to have investments by all of them, the Government of India, together with the Income Tax (I-T) Department, has formulated various relief and concessional tax rates while also simplifying the process of tax assessment. Non-residents have been given special status under I-T laws having special provisions for non-residents’ (certain) income. Tax is payable on income arising from bonds and/or Indian shares purchased using the NRI Dmat Account in foreign currency or capital gains from transfer, dividends, interest on foreign currency debt and income from Indian mutual funds.

Generally, NRI Income taxes come into various categories, but specifically he has to pay tax in India only if her/his income/salary/allowance etc. is amassed in/from the Indian Territory. This stands true for non-residents also, but there are exceptions to the general rule. The law may, at times, amount money (income) to have been generated in India if it is:

  • Arising from business connection in India
  • From property in India
  • From asset/source in/from India
  • Salary received for services rendered in India
  • From dividend received from shares in Dmat Account, by an Indian company (irrespective of whether the same has been paid outside as well)
  • Arising from interest payable by the government
  • Royalty payable by the government
  • Fees for technical services payable by government

The law may also, sometimes, declare money (income) not to have been generated in India (even if it seems so) if:

  • A non-resident (who is running a news agency/head of a newspaper or magazine) has income from activities confined to the collection of news and views in India for relaying the same outside India
  • Generating from activities pertaining to shooting of any cinematographic film. In this case, non-residents would include – individual who is NOT a citizen of India, firm that does not have any partner who IS a citizen/resident of India, company not having a shareholder who IS an Indian citizen.

Provision for Non-Residents

As cited above, the Government of India, along with the I-T Department has declared various (special) provisions for non-residents. Some of them are Joint Holdings, Special Exemptions in Investments Income, Concessional Tax treatment of certain incomes, and simplified procedure for remittance, amongst many more.

We will now analyse each of the above-mentioned provisions separately. The rules my vary for OCIs – Overseas Citizens of India and PIOs- Person of India origin, for that one might be interested in visiting: www.NriInvestIndia.com

JOINT HOLDINGS

Non-residents can invest in the Indian Share Market, either individually or with an Indian relative and can certainly hold shares in the Demat Account. In case the non-resident prefers the latter, the Reserve Bank of India (RBI) provides for repatriation benefits provided the investment is made by remittances from abroad or funds held in the non-residents’ NRE or FCNR account, or the non-resident made the investment from his own funds and is the first holder of the share, or the partner Indian resident is a close relative of the non-resident, or any other NRI Account in India.

Please note that the tax incentives are ONLY for the non-residents, NOT residents. Remittances/repatriation is allowed for non-residents, and will not be applicable/applied to the resident partner in case of a transfer.

SPECIAL EXEMPTION IN INVESTMENT INCOME

Income is totally exempt IF the income is either received from units purchased from her/his NRE Account or from income generated from abroad, and/or from investments in notified savings certificates provided the certificates are subscribed to in convertible foreign exchange remitted from a foreign country in accordance with Foreign Exchange Regulation Act, and/or from units bought in foreign currency of NRI Bonds 1988 and NRI Bond (Second Series).

Please note that tax exemption in case of units bought of NRI Bonds 1988 and NRI Bond (Second Series) continues even after the holder becomes a resident. This exemption is also available to resident Indians who are either a nominee or survivor or have received such units as gifts.

CONCESSIONAL TAX TREATMENT OF CERTAIN INCOMES

Apart from dividends and long-term capital gains from trading in Indian shares, income arising from any ‘Foreign Exchange Asset 1’ is charged at 20%, while the long term capital gain arising out of transfer of such asset is charged at 10%.

[Foreign Exchange Asset 1 includes shares in Indian companies, debentures issued by a public limited company, deposits in a public limited company, securities of central government and/or any other notified asset acquired, purchased or subscribed to in any convertible foreign exchange in accordance with FERA.]

However, there is no deduction in respect of any expenditure or allowance under any provision of FERA while computing the total income of such persons. Also if tax has been deducted at source, the non-resident need not file any tax returns. The non-resident will enjoy such benefits even after he becomes a resident and until the transfer/conversion of such assets into money. If the non-resident, nonetheless, wishes to be assessed under these provisions, she/he is required to file a declaration in writing along with return of income.

If the non-resident wishes NOT to be governed by these provisions, she/he may declare the same to the assessing officer and provide return of income for that assessment year. After this, her/his income and tax will be computed as per the regular guidelines of FERA.

Any long-term capital gain arising from the transfer of a foreign asset whose net consideration has been invested or deposited within six months from the transfer date is dealt with as stated below:

  • If the cost of the new asset is NOT less than the net consideration the entire capital gain will not be taxable
  • If the cost of the new asset IS less than the net consideration the proportionate amount [capital gain x (cost of new asset / net consideration of transfer)] will be tax-free.

SIMPLIFIED REMITTANCE PROCEDURE

To simply the remittance procedure, non-residents can remit such proceeds or credit the same to their NRE Accounts provided tax (chargeable at 10%) arising on long-term capital gains has been deducted at source, that is by the bank concerned.

** For more information on NRI Taxation in India please visit: http://www.nriinvestindia.com/tax-services.html

14 thoughts on “Income TAX & Indian Taxation rules for NRIs – Non Resident Indians & OCIs

  1. Your blog is interesting!

    Keep up the good work!

  2. Dear Sir,

    I am USA Citizens and having OCI Status.NRI
    I have sold my house in India for 70 Lacs to Indian Citizens in the yearAPRIL 2008 and Invested my all long term capital gain Rs.14 Lacs after applicable deduction from total cost to purchase house of 45 Lacs in the year Agust 2008.

    I Like to know that Have I to file Income Tax Return itr2 for the year 2008-2009.,AY2009 – 2010
    on or before July 31, 2009 ?

    Can I Extention to file return by October 31, 2009 as I have to submit all documents to file ?
    Thanks
    RD

  3. Dear sir
    I’m working in South Koria.

    I have opened my NRE account in IOB bank having branch in India and south korea. My company has opened my salary account in korean local bank and depositing my salary by last week end of every month.

    I’m transfering the some amount from salary account to NRE accounts every 2 months. My salary is in korean won and I’m making transfer in USD thro’ my bank salary account.

    I want to know, suppose I went back to India for vacation at that time if I withdraw some money from IOB India branch (from mumbai/pune)thro’ ATM or by cheque either Rs or USD, will that withdrawal is taxable for me?
    Am I suppose to pay tax on such transaction of money?
    Or can I transfer some amount from NRE account to my Indian bank saving account like SBI/Any other schedule bank in India? Does that transaction attract any kind of tax in India?

    Please advice me.
    Waiting for your reply on my mail.

    Thanks
    Rahul

  4. Iam nri indian settled in dubai. I purchased on flat at mumbai from my nri account. and registered during august 2008.
    now iam getting about 65 lacs for the same.
    my question is that what will be tax levied.
    secondly if i want to purchase another property then wahat will be tax.
    thirdly if i want to buy idbdi bonds to avoid
    tax then how much amount i have to invest.
    and best way to pay less tax.
    suresh
    email; sureshingorani@yahoo.com

  5. I am a N R I of Canada visiting India less than six months in fiancial year .I am paying my income tax in india as N R I. i am 79 years old.I am getting some amount as living support from Canada Govt. I am submitting my tax return regularly to the govt there. Plz advise me if I have to pay any tax in I ndia of the amount I am getting in Canada. Thanks

  6. Dear sir,

    I have recently joined a company out side India. I left India in the month of Nov. 11 , i will be staying here more than a year or so, My question is whether i am liable to pay any tax at india , as from Nov. to March it completes only 5 Months of my service, the salary is deposited in my NRE account with SBI.

    Pl guide,

    Thanks,
    Sameer

  7. I am an NRI having a NRE account in India. I plan to return to India in April this year permanently. For how long is the Principal and Interest of my NRE account exempted from Income Tax.

  8. I am a Person Living in Central Europe and working here for last 5 Years . My first question am I considered as NRI already . if YES recently I got a house which my father was giving me by WILL . He died 2010. But I am unable to look after the house . I married european girl . So I wish to settled here . Now my question if I sell my father’s house I will get nearly 3 Cr . Though I have no idea how much will be the Govt Price per Sqft . So I guess if I receive some money as capital gain will I need to pay the huge Income tax for it ? Is there anyway how i can save this Money from huge Tax burden ? Also my second question can i transfer that money to europe or will be there some Problem to transfer it here.

  9. An Indian Origin, acquire Permanent Residence (Green Card of USA) and subsequently acquiring USA Citizenship and also OCI-Audult Card holder, who was holding a Savings Bank Account in a Nationalised Bank in India before he acquired Green Card of USA and he continued his Savings Bank Account In Indian Nationalised BanK even after acquiring USA Citizenship and OCI-Audult Card holder, because he has income in India from Government Pension and Indian Bank Interest. He has no other income from foreign Country (USA) and not any investment in India from foreing income, whether he is required to open NRE or NRO Bank Account in Indian Natinalised Bank, if he donot open any NRE or NRO account in India in Bank whether he has to face any legal problems in Indiua(?) he is regularly filing his annual Income Tax Return and paying Income Tax for the income in India from Government Pension and Banke interest. Pl. advise.

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