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Taxation of Non-residents

  1. Who is a ‘resident’ for tax purposes? (Section 6)

  1. INDIVIDUAL

  1. An individual is considered as a ‘resident’ if he is

  1. in India for 182 days or more in a previous year

OR

  1. in India for 365 days or more in 4 years immediately preceding a previous year and 60 days or more in a previous year

    Exception:

    A citizen of India, who leaves India in any year for employment outside India or as a member of the crew of an Indian ship; or a citizen of India or a person of Indian origin, who is abroad and comes on a visit to India, in the previous year, is treated as a resident in that year, if he has been in India for 182 days or more. The second condition in b) above, is not functional in such cases.

  1. An individual is considered as ‘not ordinarily resident’ for the year, if he is

  1. a non-resident for 9 out of 10 previous years preceding the year

OR

  1. has been in India for a period of 729 days or less in the seven preceding previous years.

  1. An individual is considered as ‘non-resident’ if he does not satisfy either of the conditions mentioned in 1) above.

Note: In case of presence in India for part of a day, in the calculation of days/physical presence, the broken period should be taken on hourly basis (Walkie vs IRC (1952) 1 AER 92. And in case of non-availability of data, the date of arrival and date of departure shall be taken into account for the purpose of calculation of number of days. (Advance Ruling P. No. 7 of 1995).

  1. HUF/FIRM/AOP is said to be ‘resident’ in any previous year if it is wholly or partially controlled or managed from India; i.e., it would be a ‘non-resident’ if control or management is wholly outside India.
     

  2. COMPANY

Company is said to be ‘resident’ in India in previous year if

  • It is an Indian Company OR

  • Management and Control is situated wholly in India

  1. Taxability of Income (Section 5)

    Resident

    World income liable for tax in India

    Non-resident

    Income which accrues or arises or deemed to accrue or arise in India and

    Income received or deemed to be received in India is liable to be taxed in India

    Resident but Not ordinary resident

    Income received or deemed to be received in India and Income accruing or arising or deemed to accrue or arise in India and

    Income accruing or arising outside India from business controlled in India or profession set up in India will be liable to be taxed in India.

  1. Exempt Income (Section 10)

    Section

    Particulars

    Remarks

    10(4)

    Interest on Bonds or securities as notified by the Government, premium on redemption and Interest income on NRE Account paid or credited

    Exempt

    10(4B)

    Interest income from notified government securities; i.e., NSC (VI/VII Issue) purchased in foreign exchange before 1-6-2002, by a NR who is an Indian citizen or a PIO

    Exempt

    10(15)(i)

    Income by way of interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates, other certificates issued by Government and deposits notified by Government

    Exempt

    10(15)(iid)

    Interest on notified bonds, purchased in foreign currency on non-repatriable basis by Non-resident Indian

    However interest on premature encashment is taxable in the year of encashment.

    10(15)(iv)(fa)

    Interest on FCNR and RFC Deposits paid by a scheduled bank to a NR or NOR

    Exempt

    10(34)

    Income by way of dividend from domestic companies

    Exempt

    10(35)

    Income received in respect of units of Mutual fund specified u/s 10(23D) or units from Administrator of Unit Trust of India or units from Unit Trust of India

    Exempt

    10(36)

    Income from transfer of Long-term Capital asset

    Conditions

    • purchase and sale through a recognized Stock Exchange

    or issued through public issue by company

    • purchased on or after 1st March, 2003 and before 1st
    March, 2004

    • forming part of BSE - 500 as on 1st March, 2003,

    • held for a period of 12 months

    is exempt. Further CBDT has issued a circular clarifying that the shares allotted under the divestment process by the Government of India shall qualify for this section and hence can be claimed as exempt.

    10(38)

    Income by way of Long-term Capital Gains

    On Sale of securities affected on a recognized stock
    exchange, which are chargeable to the Securities Transaction Tax, are exempt.

  1. Business Income of Non-resident (Section 44)

    Section

    Particulars

    Remarks

    44B

    Profits derived from shipping business

    Profits and gains of non resident from the business of operation of ships shall be computed at the rate of 7.5% of the aggregate of the amount paid or payable on account of carriage of passengers, livestock mail or goods shipped at any port in India and amount received or deemed to be received in India on account of carriage of passengers, livestock mail or goods shipped at any port outside India.

    Note: Amount received on account of Demurrage charges/Handling charges or any other amount of similar nature shall also be included for the purpose of calculating business profits @ 7.5%.

    44BB

    Income from business of In case of exploration, etc. of mineral oils

    NR engaged in the business of providing services and facilities in connection with, or supplying plant and machinery on hire, used or to be used in prospecting for, or extraction or production of, mineral oils, the profits and gains shall be computed @ 10% of amount paid or payable for such purpose.

    Note: An assessee can claim profits lower than prescribed above, for which he would be required to maintain books of accounts as required by section 44AA and the accounts shall have to be audited under section 44AB. The AO shall make an assessment u/s 143 (3) and determine the tax payable or refundable as the case may be.

    44BBA

    Operation of Aircraft

    Income of NR from such business shall be computed at 5% of the amount paid or payable on account of carriage of passenger, livestock, mail, or goods from any place in India and amount received or deemed to be received in India by or on behalf of the assessee on account of such services from any place outside India.

    44BBB

    Foreign Companies engaged in business of civil construction

    Income of a foreign company engaged in the business of civil construction or the business of erection of plant and machinery or testing or commissioning thereof in respect of a turnkey power project approved by the Central Government in this behalf, shall be computed @ 10% of the amount paid or payable for such purpose.

    Note: An assessee can claim profits lower than prescribed above, for which he would be required to maintain books of accounts as required by section 44AA and the accounts shall have to be audited under section 44AB. The AO shall make an assessment u/s 143 (3) and determine the tax payable or refundable as the case may be.

    44C

    Deduction of head office expenditure

    In case of NR, allowance for expenditure of Head office shall be restricted to least of the amount equal to 5% of adjusted total income or so much of expenditure as is attributable to business or profession in India

    44DA

    Royalty or Fees for technical services received from government or Indian concern by a non-resident (not being a Company) or a foreign company in pursuance of an agreement entered into after 31-3-2003

    Where royalty or fees for technical Services are paid is effectively connected with a permanent establishment in India or a fixed place of profession in India, then it shall be computed under the head "Profit and Gains of business or profession" in accordance with provisions of this Act. However no deduction shall be allowed:

    i) in respect of expenditure not incurred wholly and exclusively for the business of such PE or fixed place of profession in India, or

    ii) in respect of any amount paid to head office or its other office except reimbursement of actual expenses.

    Note:- it shall have to keep and maintain books of account as per section 44AA and get his account audited by an accountant as per explanation sub section (2) of section 288 and furnish the audit report in form 3CE duly signed & verified by such accountant.

  1. Special rates of tax for non-residents

Sections 115A to 115AD covers the tax rates for investment income/royalty income of different non-resident entities.

Section

Particulars of Income

Tax rates/TDS

115A(1)(a) (i)

Income by way of Dividend (other than S.115–O),

(ii) Interest received from Government or any Indian concern for money borrowed in foreign
currency [other than Interest on infrastructure debt fund notified u/s 10(47)], and

(iii) IIncome on units of Mutual Fund specified u/s 10(23D) or of UTI purchased in foreign currency

20%

115A(1)(a) (iia)

Interest from infrastructure debt fund notified u/s 10(47)

5%

115AB

Income from units of Mutual Funds u/s 10(23D) / UTI purchased in foreign exchange by Overseas Financial Organisations registered with SEBI or Long-term Capital Gains arising on sale/repurchase of such units

10%

115AC (1)

Interest on notified bonds of Indian Companies or bonds of public sector company, purchased in foreign currency

10%

 

(2) Dividend on Global Depository Receipts (GDR) (other than S.115–O)

10%

 

(3) Long-term Capital Gains on transfer of such bonds or GDR

10%

115 AD

Income of Foreign Institutional Investor (FII)

(1) Income (other than dividend u/s 115-O) in respect of securities (other than units
referred u/s 115AB)

20%

 

(2) Short-term Capital Gains

30%/15%*

 

(3) Long-term Capital Gains

10%/NIL **

115A(1)(b)

Income by way of Royalty or Fees for Technical Services received [other than income
specified u/s 44DA(1)] by a non-resident (not being a company) or a foreign company from
Government or Indian Concern under agreement entered after 31st May, 1976 and where it is entered into with Indian Concern, it is approved by Government or it relates to matter included in Industrial policy

 

 

— for royalty/fees for Technical Services payment under agreement entered on or before 31st May, 1997

30%

 

— for royalty fees for Technical Services payment under agreement entered on or after 31st May, 1997 but before 1st June, 2005

20%

 

— for royalty fees for Technical Services payment under agreement entered on or after 1st June, 2005

10%

 

(*) Where securities transaction tax (STT) has been paid tax would be charged at 15%

 

 

(**) Where securities transaction tax (STT) has been paid the long-term capital gains would be exempt

 

In case where the gross total income consists of only income referred above, no deduction shall be allowed under chapter VIA or under sections 28 to 44C and 57 in computing the taxable income under sections 115 A, 115AB, 115AC, 115AD. Further, no return is required to be furnished u/s 139(1) where the total income of the assessee includes only the income covered u/s 115A(1)(a) and the TDS under provision of Chapter XVII B has been deducted therefrom.

Note: Short-term Capital Gains taxed @15% u/s 111A as well as Long-term Capital Gains shall not be eligible for deduction u/c VIA

  1. Special provision for NRI — Chapter XIIA (Ss. 115 C to 115-I)

Chapter XIIA covers the taxability of the any income earned by a Non-resident Indian (NRI) from foreign exchange asset. However, a NRI may elect not to be governed by the provision of this chapter and to be assessed under the normal provisions of the Act by giving a declaration to that effect along with his return of income. Accordingly, the chapter shall not apply to him for the said assessment year.

  1. Definitions

NRI — an individual being a citizen of India or a PIO, who is not a ‘resident’.

PIO — a person is deemed to be of Indian origin if he or either of his parents or any of the grandparents was born in undivided India.

Investment income — income earned from ‘foreign exchange asset’ other than dividend referred to in section 115-O

Foreign Exchange Asset — ‘specified asset’ acquired by NRI out of convertible foreign exchange

Specified asset means any of the following assets, namely: —

  1. Shares in an Indian company (public or private);

  2. Debentures issued by an Indian company, which is not a private, company

  3. Deposits with an Indian company, which is not a private company

  4. Any security of the Central Government (NSC VI/VIII issue)

  5. Any other assets as specified by the Central Government (no asset notified till date)

  1. The taxability of investment income is as follows (Ss. 115D and 115E)

  1. Any income from investment or income from long- term capital gains from assets other than specified assets — 20%

  2. Income by way of long-term capital gains — 10%

  3. No deduction permissible under Chapter VIA

  4. No deduction for any expenditure in computing investment income

  5. No indexation benefit

It is not necessary to file return of income (S. 115G) where the total income includes only the above two types of income whereon tax has been duly deducted. However where a NRI has other income; i.e., income other than foreign exchange asset, NRI is required to file his Return of Income and it shall be assessed under the normal provision of the Act.

  1. Exemption from Long-term Capital Gains Tax u/s 115F

Capital gains arising on transfer of foreign exchange asset shall be exempt in case the

  • NET CONSIDERATION is reinvested

  • within a period of six months

  • in any other specified asset (as mentioned above) or in specified saving certificates

However where the new asset is transferred or converted to money within a period of three years from the date of its acquisition, the capital gains claimed exempt u/s 115F shall be taxable under the head "Capital Gains" along with the Gains arising on transfer of the new asset purchased.

  1. Applicability of Chapter XIIA after becoming resident

NRI can continue to be assessed under Chapter XIIA with respect of income from specified assets. He may furnish a declaration along with his return of income filed u/s 139 to the Assessing Officer that the provision of this Chapter may continue to apply to him with respect to the said investment income. Accordingly, he shall be assessed under the said provision for specified income till the conversion of such asset into money or other asset.

  1. Special provision for calculation of capital gains of shares & debentures

Proviso 1 to Section 48 explains the method of calculation of capital gains on transfer of shares/debentures of Indian company (private or public) in case of non-residents. The same shall be computed by conversion of sales consideration, cost of acquisition and transfer expenses into the same foreign currency which was utilized for purchase of such shares/debentures. The capital gains so arrived are reconverted into Indian rupees as per the rates specified below:

Particulars

Exchange rate to be applied

Sales consideration

Average exchange rate on date of transfer

Cost of acquisition

Average exchange rate on date of purchase

Expenditure on sale

Average exchange rate on date of transfer

Capital Gains

Buying rate on date of transfer

The exchange rates to be considered above shall be the telegraphic transfer buying/selling rates as adopted by State Bank of India for purchasing or selling such currency.

Since the non-residents can avail of the benefit of exchange rate fluctuation, no indexation benefit is available in this case.

  1. Taxability of various investment options in India

    Investment Scheme

    Taxability of Income

    Principal/Redemption proceeds

    Public Provident Fund

    Tax Free

    Tax free

    Mutual Funds

    Dividend from equity oriented MF is tax free Dividend income from Debt oriented Mutual Fund is also tax free

    Maturity/redemption proceed minus cost of investment is taxed as Short-term capital gains where held for less than 12 months.

    Long-term Capital Gains is Exempt in case of equity oriented Mutual Funds

    Equity shares

    Dividend Income is tax free

    Sales consideration minus cost of Investment is taxed as Short-term capital gains where held for less than 12 months Long-term Gains Exempt (subject to 10(36), and 10(38))

    Bank Deposits

    Interest on deposit is taxable

    Principal is not taxable

    Immovable property

    Rent Income taxable subject to section 24

    Sale consideration less cost of acquisition taxable @ 30% as short-term capital gains where the property is held for not more than 36 months

    Sales consideration less indexed cost of acquisition taxable @ 20% as long term capital gain (subject to sections 54-54F) where the property is held for more than 36 months

  1. Applicability of DTAA

Where the non-resident is covered under any DTAA, the rates of tax applicable for specified income shall be lower of the rates prescribed under the Act or the DTAA. DTAA with country, where such non-resident is a tax resident will be applicable.


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