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
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