Current Income Tax & Investment Taxation for Non Resident Indians

The recent economic boom being witnessed by India has resulted in the return of many non-residents. Upon return, non-residents need to pay certain amount as tax (as applicable). While the tax rules for non-residents are relatively simpler, we do get queries regarding the same. Hence this section is for all those of you having any query. We have tried to cover various aspects, but if you still have any doubt, please feel free to contact us.

To begin with, the status of a NRI for Income Tax purposes in India is given to those non-residents who are either a citizen of India or a Person of Indian Origin (PIO). A PIO is one whose parents or grand parents were born in undivided India.

A person who has been in India for sixty days or more, or for a total of 365 days or more in the preceding four financial years, qualifies for the status of ‘Resident’ Indian, but considering the fact that non-residents, while visiting their family/relatives in India may end up staying for a longer period, the sixty days time has been relaxed to 182 days. Please note that non-residents can continue to enjoy their NRI status if their stay in India is more than 60 days but less than 182 days, irrespective of whether their stay in India in the past four years adds up to 365 days or more, or not.

We are often asked if money earned outside India is taxable in India. As per rule, only that money can be taxed in India that is accrued from India. Money generated outside Indian Territory cannot be taxed in India. However any income earned on money brought into India subsequently will be subject to tax.

In addition, even after settling in India and losing one’s NRI status, the person may not be taxed in India IF:

  1. He has been in India for 729 days in the preceding seven financial years OR
  2. He has qualified as a NRI for nine out of ten preceding financial years.

In the same way if a non-resident’s stay in India exceeds 182 days, with the non-resident consequently losing his NRI status, her/his income will still not be taxable if any of the above mentioned two conditions are fulfilled. Her/his tax status will become that of a ‘Not Ordinarily Resident’.

Also, if either of the aforesaid criteria is fulfilled, wealth tax is also not applicable on assets held outside India.

The Indian Government has entered into DTAA (Double Taxation Advance Agreements) with various countries facilitating its non-residents lower tax rates and exemptions in addition to those available in the domestic tax clause.

If you are a NRI you can avail of a lot of benefits. To state a few:

  • Investments in Government Securities and/or Indian Companies in Foreign Exchange (FOREX) is taxable at lower rates
  • Special tax treatment given to shares purchased in any Indian Company and/or debentures in any Indian Public Company, and/or deposits with any public company and/or any security of the Central Government purchased in FOREX
  • 20% interest income taxable from the above mentioned investments
  • Long term capital gains on sale taxable at 10%
  • Sale of these investments is tax exempt if the sale proceeds are reinvested in the same medium within six months
  • If the sale proceeds reinvested partially, then proportionate tax exemption available
  • If tax withheld at source on the aforementioned schemes, no tax payable
  • If you do not wish to be governed by the special provisions mentioned in domestic tax law, you can give in writing the same along with your income returns

Have you acquired, in foreign currency, shares/debentures of an Indian company and are now pondering over elimination of foreign exchange fluctuation in computing capital gains? Well, you can stop thinking, as there is a special method for this.

In accordance with the prevailing rate of exchange, the purchase/sale prices are converted to FOREX. Capital gains, determined in FOREX, are converted to Indian Rupees as per the rate of exchange on the day of sale. However the benefit of indexation on account of inflation is not available in these cases.

We would like to mention here that while income earned on NRE Account is tax free, that earned on NRO Account is subject to tax deductions. If you plan to return to India, please do not forget to intimidate your Bank who will then convert your Account giving them ‘Resident’ status, and income henceforth earned will be taxable.

Lastly, you will need a Permanent Account Number before entering into any kind of financial deals (even if it limited to payment of tax) in India.

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