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Introduction to Non-Resident Indian
Who is Non-Resident Indian (NRI)?
Non-Resident Indians (NRIs) are people who hold Indian citizenship legally do not live in India. An Indian abroad is popularly known as Non-Resident Indian (NRI) The Non-Resident Indian (NRI) status is legally defined under the Foreign Exchange Management Act, 1999 and the Income Tax Act, 1961 (hereinafter referred to as the Act) for applicability of respective laws. An Indian Citizen, who stays abroad for-
Carrying on business or &
Vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad is a non-resident. In other words, Non-Resident Indian (NRI) is any person of Indian origin who travels overseas for reasons other than the following: –
(a) tourism
(b) medical check-up or procedure
(c) reside in Nepal, Bhutan, Bangladesh, Pakistan
(d) seafaring for an Indian shipping company or
(e) studying overseas qualifies one for Non-Resident Indian (NRI) status.
KEYNOTE: –
i. Persons Posted in U.N. organizations and official deputed abroad by
ii. Central/State Governments and Public Sector undertakings on non-temporary assignments are also treated as non-residents.
Non-resident foreign citizens of Indian Origin are treated on par with non-resident Indian citizen (NRIs).
Indians going abroad for study, seminars, lectures, or research are not Non-Resident Indians (NRIs).
iii. No student can be a Non-Resident Indian (NRI) until he/she finishes his/her studies and starts working abroad.
Who can become Non-Resident Indian(NRI)?
i. An" Indian Citizen " who stays abroad for employment or for carrying on a business or vocation or any other purpose or circumstances including the indefinite period of stay.
ii. Indian citizens working abroad on assignment with foreign Government agencies like UN, IMF, World Bank.
iii. Officials of Indian Government working abroad.
Person of Indian origin (PIO) as defined under section 115C (e).
Which are the Categories of Non-Resident Indians (NRI)?
The following persons can become NRIs: –
An Indian citizen who stays abroad for employment/carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad under circumstances indicating an intention or an uncertain duration of stay abroad is a non-resident. Persons posted in U.N. Organizations and officials reputed abroad by Central/State Governments and Public sector undertaking on temporary assignments are also treated as non-residents. Non-resident Foreign citizens of Indian origin are treated at per with non-resident Indians.
Thus, the following are the main three categories of Non-Resident Indians (NRIs):-
i. Indian citizens who stay abroad for employment or for carrying on any business or vocation or for any other purpose in circumstances indicating an indefinite period of stay abroad (outside India).
ii. Indian citizens working abroad on assignments with foreign government
agencies like United Nation Organization (UNO), including its affiliates International Monetary Fund (IMF), World Bank etc.
iii. Officials of Central and State Government and public sector undertaking deputing aboard on assignments with foreign Governments/agencies, organizations or posted to their own offices, (including Indian diplomat missions) abroad.
What is a Special category?
ln case of individuals covered in the special category, they will be considered to be resident in India if, during the relevant previous year, they stay India for a period of 182 days or more. The person covered in this category are: –
An individual, being a Citizen of India who leaves India in any previous year for the Purpose of employment outside India.
If any person has employment India but he is transferred outside India. In that case, he will be covered under a special category.
FOR EXAMPLE-
Mr.' A 'is employed in Punjab National Bank and is posted at Delhi branch. The employer has transferred him to the London branch, in this case, he will be covered under a special category.
If any person has any business or profession in India and he has left India in Connection with such business or Profession, He will not be covered in a special category.
Mr.' X ' a citizen of India has one business in India and he has left India in connection with such business for the first me on 01. 09. 2014. In this case, his residential status shall be resident and ordinarily resident.
i. Employment shall include even any business or profession also.
An individual, being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship.
ii. In the case of an individual, being a Citizen of India, or a person of Indian Origin, who, being outside India, comes on a visit to India in any previous year.
Non-Resident Status under the Income Tax Act 1961
Under Section 115C (e) of the Income Tax Act, Non-Resident Indian (NRI) is defined as 'An individual being a citizen of India or a person of Indian origin (PIO) who is not a resident'. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India. The Residential Status referred here is as per the provision of section 6 of the Act.
The status of a person as a resident or non-resident depends on his period of stay in India. The period of stay is counted in a number of days for each financial year beginning from 1st April to 31st March (known as a previous year under the Act).
A person is a non-resident Indian if he satisfies understated both the conditions of section 6 of the Act, then he becomes a Non-Resident Indian
a) If he is not in India for 182 days or more during the relevant previous year; and
b) If he is not in India for 60 days or more during the previous year and he is not in India for 365 days or more during the 4 years prior to the previous year.
In the case of an individual on a visit to India or a member of the crew of an Indian ship or a person leaving India for employment outside India, the requirement of stay in India of 60 days in condition (b) above is extended to 182 days.
What are the Advantages to Non-Resident Indians (NRIs) under the Income Tax Act,1961?
i. In the case of a Non-Resident Indian (NRI), only the income received, deemed to be received, accrued or deemed to be accrued in India is taxable in India. Accordingly, income earned by him outside India would not be taxable in India.
ii. NRI's can avail the benefits of the Double Taxation Avoidance Agreements (DTAAs) entered into by India with several countries which attempt to minimize double tax on the same income (i.e. If tax is payable in India by NRIs on their income in India, credit for tax payable in India is available against tax payable in foreign country on such income Also, tax on dividends, royalty, fees for technical services earned in to by NRIs are offered on concessional tax treatment under most DTAAs rather than the rate at which this income would be taxable to a resident Indian.
iii. NRI's receiving interest income from Government or from any other person in respect of money used for business or profession in India or for any source of income in India would be taxable in India. However, interest income on securities or bonds (as specified by the Central Government by notification in the behalf ) held by an NRI ; interest on Non -Resident (External) Rupees before account and interest on notified Saving Certificates issued before 1.06.2002 which was purchased in convertible foreign exchange and held by NRI who is an Indian citizen or a person of Indian origin is exempt from tax.
iv. NRI CAN BRING GOLD, SILVER
NRIs can bring 10kgs of gold (on payment of duty) & 100kgs. on silver (on payment of duty) once in six months on his visit to India. The customs duty on imports of gold and silver is 2% and 6% respectively, of the value. Duty on gold and silver imported by NRIs in hand baggage is 300/- per 10 gms and 1,500/- per kg respectively.
v. INTERNATIONAL CREDIT CARDS
Authorised Dealer banks have been permitted to issue International Credit Cards to NRIs/PIO, without prior approval of Reserve Bank. Such transactions may be settled by inward remittance or out of balances held in the cardholder's FCNR (B)/NRE/NRO Accounts.
vi. TAX CONCESSIONS
NRIs can enjoy several tax concessions in India on his assets in India.
vii. ADVANCE RULINGS
NRIs can seek an Advance ruling from Advance Ruling Authority on taxability (income-tax) of transactions. While computing his income-tax liability, if any position on the tax law is not clear. NRIs can approach the Authority for Advance Rulings (AAR) to decide on that tax matter. The ruling of the Authority for Advance Rulings (AAR) are binding on the tax authorities and the applicant Non-Resident Indian (NRI).
viii. RESERVED SEATS
There are specially reserved seats for children of NRIs for Engineering/Medical/MBA courses in certain Institutions in India provided the fees are paid in foreign exchange.
What is FEMA? Non-Resident Indian (NRI)- Under the Foreign Exchange Management Act, 1999 (FEMA).
As per the Foreign Exchange Management Act, 1999, a Non-Resident Indian (NRI) has been defined as an Indian Citizen who stays abroad for the purpose of employment or for carrying who stay abroad for the purpose of employment or for carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad.
The definition also includes: –
Indian citizens who are deputed abroad on assignments of the foreign government agencies or world organizations such as the United Nations Organization, the International Monitory Fund, and the World Bank, etc.
Officials of the Central and State Governments and Public Sector units on deputation abroad on temporary assignments or posted to their offices, including the Indian diplomatic missions abroad.
Which Income of NRIs is Taxable?
The Following incomes of Non-Resident Indians (NRIs) are only taxable in India—
Income accrued in India
Income Received in India.
Income which has its source of India;
Non-Resident & not Ordinating Resident is Taxable, In India, if Income Earned
Received or deemed to be received in India.
Accrues or arises in India.
Deemed to accrue or arise in India.
Residential Status [Section 6]
Assessee are either (a) resident in India or (b) non-resident in India. As far as resident individuals and Hindu undivided Families are concerned, they can be further divided into two categories, viz, (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. All other assessee (viz., a firm, an association of persons, a company and every other person) can simply be either a
resident or a non-resident.
The determination of Residential status of a person is very important for the purpose of Income-tax. of the taxpayer but on his residential States. The residential status is determined on the basis of physical presence for every year separately as per the provision of the Act. The residential status of a Taxpayer can be divided into the following categories: –
Determination of Residential Status (Section 6)
An Individual may be: –
Resident and ordinarily resident in India.
Resident but not ordinary resident in India.
Non-resident in India.
Whether a particular income of India or not will depend on the residential status of the person and the person and the types of Income i.e. in order to determine tax incidence, there is a need to determine tax Residential Status, in fact, explains the relationship of the assessee with the country and helps in determining the residential status and also the Income. Residential status in fact explains the relationship of the assessee with the country and helps in determining the scope of total Income.
Residential status of an individual [Section 6(1)]
(A)Resident and ordinary resident
BASIC CONDITIONS FOR RESIDENT UNDER SECTION 6(1)
The residential status of an individual is to be determined on the basis of period of stay of the taxpayer in India and is computed separately for each year. If an individual satisfies any one of the following condition, he is said to be Resident in India for that financial year. The conditions are
(a) He must be in India for a period of 182 days or more during the previous year [Section 6(1)(a)]; or
He must be in India for a period of 60 days or more during that previous year and has been in India for 365 days or more during the four years prior to (immediately preceding) the previous year. [Sections 6(1)(c)]
If an individual does not satisfy with any of the basic conditions mentioned above, he will be considered to be non-resident as per section 2 (30).
PROVISIONS ILLUSTRATED-
a project through his Indian company. He returned to India on 31. 12. 2015. For the financial year 2017-18,
Mr. "A " was in India for 151 days. He does not qualify as a Resident Indian point (a) of the above definition. Now we need to checkpoint (b). Mr. "A" was in India for more than 365 days in the last four financial years. Therefore, for the financial year 2015-16, Mr. "A" will be treated as a Resident Indian.
The net effect of section 6 (1) of the Act, read with the Explanation, is that
An individual who had left India for employment outside India should be treated as resident only if he was ILI India during the relevant period/year for 182 days or more. In other words, if an individual had spent less than 182 days in India during the previous year and was outside India for the purpose. of employment, then, regardless of his being in India for 365 days or more during the four preceding previous years, he cannot be treated as a resident of India. If the applicant was not present in India for more than 365 days in the four preceding years, then section 6 (1) (a) would apply, and it requires stay of 182 days or more in India to be treated as a resident.On 01. 06. 2015, Mr. "A" was sent to the USA on
EXCEPTIONS OF RESIDENTIAL STATUS
The following are exceptions to the rule of classification of Residential status : –
A person leaves India for employment: In case of an individual, who is a citizen of India and who leaves India in any financial year for the purpose of employment outside India, the additional conditions stated below shall not be applicable and only the basic condition of 182 days or more would be applicable.
(ii) In case of an individual who is a Citizen of India or is a person o Indian origin and who being outside India comes on a visit to Indian in any financial year, the additional conditions stated below shall not be applicable and only the basic condition of 182 days or more would be applicable.
(iii) A person leaves India as a crew of an Indian ship.
Additional conditions under section 6 (6)
As per section 6 (6), a person shall be Not Ordinarily Resident in India if he satisfies any one of the following conditions : –
He must be a non-resident in India (in the manner computed above) in 9 out of the 10 years immediately preceding the financial year, or
He must be outside India during a period of 729 days or less in 7previous years immediately preceding the financial year.
If anyone of the above conditions is satisfied, the person is said to be resident but not ordinarily resident in India. However, if none of the conditions is satisfied, the person is said to be Resident and Ordinary Resident in India.
(B) Resident but not Ordinarily Resident (RNOR) [Section 6(6)]
A Non-Resident Indian (NRI) who has returned to India is covered under the provisions of Section 6 (6) of the Income Tax Act, 1961. He is given a special status of Resident but not ordinarily resident if he satisfies any one of the following conditions-
(a) An individual who has been a non-resident in India in 9 out of 10 previous years prior to the previous year under consideration, or
(b) His stay in India during the 7 previous years prior to the previous year under consideration in all to, 729 days or less.
For income tax purposes in India, normally a person would be either a Resident (of India) or a Non-Resident Indian (NRI). However, the Indian Income-Tax Act has specified this transitional status of Resident but Not Ordinarily Resident (RNOR). You can be a 'Resident Indian' or a 'Non-Resident Indian'. Or
you can also be a 'Resident but not Ordinarily Resident (RNOR)'. This is essentially a transitional status between being a Non-Resident Indian (NRI) and becoming a full-fledged Resident.
Resident but not Ordinarily Resident (RNOR) can continue to get the tax benefits that you were getting as a Non-Resident Indian (NRI). That means you, foreign income I. e. Any interest or dividends they may be getting from you, investments abroad will continue to remain tax-free even after you have become an Indian resident.
An individual, who is non-resident for 9 consecutive years, shall remain Resident but not Ordinarily Resident (RNOR) for 2 subsequent years and as such his foreign income is not taxable in India while his status is that of Resident but not Ordinarily Resident (RNOR).
A person who is returning to India after 9 years of stay outside India (and who was non-resident for each of the 9 years under the Income Tax Act 1961) shall remain Resident but not Ordinarily Resident (RNOR) for a period of two years only.
PURPOSE OF RESIDENT BUT NOT ORDINARY RESIDENT STATUS
The Resident but not Ordinary Resident (RNOR) is a special status accorded order to provide some benefits to returning Non-Resident Indians (NRIs). For Indian income-tax purposes, a Resident but not Ordinarily Resident (RNOR) is treated at par with Non-Resident Indian (NRI). That means, a Resident but not Ordinarily Resident (RNOR) needs to pay tax in India only on his Indian income.
(C) Non-resident [Section 2 (30)]
An individual is said to be non-resident in India if he is not a resident. In India. Under section 2 (30) of the Act, an assessee who does not fulfill any of the two basic condition given in section 6 (1) would be regarded as "Non-resident" assessee during the relevant previous year for all purposes of the Act. In the case of non-resident, additional conditions are not relevant.
TEXT OF SECTION 2 (30)
"non-resident" means a person who is not a 'resident', and for the purposes of sections 91 93 and 168, includes a person who is not ordinarily resident within the meaning of section 6 (6) of the Act.
According to section 2 (30), Non-resident means a person who is not a resident in India. However, in the following cases, it also includes a person who is not ordinarily resident in India-
(a) SECTION 92: Computation of income from international transaction having regard to arm's length price
(b) SECTION 93: Avoidance of income-tax by transactions resulting in a transfer of income to non-residents
(c) SECTION 168: Executors
PROVISION ILLUSTRATED
Mr. "X" left India for the first time on 15. 05. 2015. During the financial year 2017-18, he came to India once on May 25 for a period of 63 days. Determine his residential status for the assessment year 2018-19.
Since Mr. "X" comes to India only for 63 days in the previous year 2017-18, he does not satisfy any of the basic conditions laid down in section 6 (1). He is, therefore non-resident in India for the assessment year 2018-19.
RESIDENTIAL STATUS OF INDIVIDUAL
The residential status of an individual will be determined as under: –
Assessee Basic Condition Additional Condition
Resident He Must satisfy at least one of the basic conditions Not required
Not Ordinarily Resident He must satisfy at least one of the basic conditions. He must satisfy either one or both the additional conditions given under section 6(6).
Non – Resident Should not satisfy any of the basic conditions. Not Required.
For the purpose of assessment, each category of status is mutually exclusive.
Non-Resident Indian under Foreign Exchange Management Act, 1999
Under the Foreign Exchange Management Act, 1999, Non-resident Indian are : –
An Indian citizen who stays in preceding financial year or
An Indian citizen who goes out of India or who stays abroad for employment or carrying on business or on the vocation or for any other purposes, in circumstances indicating an uncertain period of stay abroad, or
(iii) Government servants deputed abroad on assignment or posted to their offices including Indian Diplomatic Mission abroad, 'or
(iv) Indian citizen working abroad on assignment with foreign government regional/international Agencies like the UNO, WHO, IMF, World Bank etc.
Stay need to be at one place
A person must stay within Indian Territory and where he stays is not important. It is not necessary that the stay be only at one place and can be anywhere in India.
The object of stay is not Important
It is immaterial whether he stays in India for business purposes or on a personal purpose or visits India as a tourist. In computing the period of stay for the purpose of residential status, it is not necessary that the stay should be for a continuous period. 'What is to be seen is been the total number of days of stay in India during that financial year.
For the purpose of computing the period of 182 days for the determination of residential status, it is not necessary that the stay should be for a continuous period. the day he enters (arrival) India and the day he leaves(departure) India should both. Be treated as stay in India, However, in borderline cases where stay in India is very close to 182 days his stay in India has to be calculated on an hourly basis and a total of 24 hours will be taken as one day.
FOR EXAMPLE: –
Mr. 'A' came to India for the first time on 01, 10. 2017 and left India on31. 03. 2018, in this case his stay in India shall be considered to be resident in India [31 + 30 + 31 + 31 + 28 + 31 = 182 days]
The period during which passport of the assessee was wrongfully impounded will not be considered for determining the period of stay.
FACTS OF THE CASE
The assessee was a non-resident for the period 1985 to 2006 and visited operation on account of alleged involvement in brokering defence deals and his Passport was impounded by government agencies rendering him unable to travel abroad. He filed his return as a non-resident for the assessment Years 2007-08 and 2008-09. However, based on his stay details India, the Assessing accordingly, the Assessing Officer made additions to the taxpayer's income which was confirmed later by the CIT(A).
Aggrieved with the order of the CIT(A) as the appeal was preferred with the Income-tax Appellate Tribunal (the Tribunal) which ruled in favour of the assessee concluding the days of wrongful, impounding of passports which constituted a forced stay in India, should be excluded. Aggrieved by the decision of the tribunal, the tax department appealed before the High court.
The High Court also opined that the taxpayer was compelled by external circumstances beyond his control to stay in India. It was further observed that the option to be in India was a Matter of the assessee's discretion and that his presence in India against his will must not be counted adverse to his chosen course or interest. Accordingly, it was held that while determining the residential status of an individual under section 6(1)(a) of the Act, 1961, any involuntary period of stay can be excluded.
Stay in territorial waters
If any person has stayed in India territorial waters, it will be considered to stay in India. Territorial waters extend up to 12 nautical miles from the baseline on the coast of India and include any bay, gulf, harbour, creek to the tidal or tidal river (1 nautical mile = 1.1515 miles = 1.852 Kms).
The sovereignty of India extends to the territorial waters and to the seabed and subsoil underlying and the air space over the waters.
Previous Year is a period of 12 months from 1st April to 31st March. The number of days stays in India is to be counted during this period.
Both the Day of Arrival into India and the Day of Departure from India are counted as the days of stay in India (I. e. 2 days stay in India).
Dates stamped on Passport are normally considered as proof of dates of departure from and arrival in India.
Ensure that date stamped on the passport is legible.
Citizenship of a country and Residential Status
Citizenship of a country and residential status are separate concepts. A person may be an Indian national/Citizen, but may not be a resident in India. On the other hand, a person may be a foreign national/citizen but may be a resident in India.
TAX EXEMPTION FOR NON-RESIDENT INDIANs (NRIs)
Which are the Sources of Incomes for Non-Resident Indians can Exempt Tax?
Following various incomes of Non-Resident Indians (NRIs) shall not form part of the income liable to tax under the Act: –
[1] Interest on notified bonds and premium on redemption of notified bonds[Section 10 (4) (I) ]
The amount of interest payable to a non-resident on such securities or bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf, including income by way of premium on the redemption of such bonds, shall be exempt fully from Income-tax.
ESSENTIAL CONDITIONS
(I) Any income by way of interest on such securities or bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf, including income by way of premium on the redemption of such bonds.
(ii) Bonds or securities must be specified by the Central Government by notification in Official Gazette on or before 1st June 2002. In other words, the exemption under section 10 (4) (I) shall not be allowed on interest on bonds or securities issued on or after 01-06-2002.
Bond is a debt instrument which provides finance to large companies, financial institutions and government in the form of a loan. It differs from a typical debenture as the Bonds are secured and do not contain any risk in relation to the repayment of the principal the amount and any outstanding interest. Convertible Debentures may form part of the share but Bonds are pure loans and do not affect capital structure.
(2) Income by way of interest from Non-Resident External Account and FCNR accounts [Section 10 (4) (ii)]
In the case of an individual, any income by way of interest on money standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999, the entire amount shall be exempt from income-tax.
(3) Interest on notified saving certificates [Section 10 (4B) ]
In case of an individual, being a citizen of India or a Person of Indian origin, who is non-resident, any income from interest on such savings certificates issues by the central Government, as Government may specify in this by notification, in the official Gazette, shall be exempt.
ESSENTIAL CONDITION
This exemption shall be allowed only if the individual has subscribed to such certificates in foreign currency or other foreign exchange remitted from a country outside India. In accordance with the provisions of the foreign exchange remitted from a country outside India in accordance
with the provisions of the FEMA, 1999 and any rules made thereunder.
Subscribed by an individual. Being a citizen of India or a person of Indian origin, who is a non-resident, any income from interest on such savings certificates issued by the Central Government as that Government may, by notification in the Official Gazette, specify in this behalf-
Notified Saving Certificates (like NSC VI & VII) should be issued before 01. 06. 2002:
PROVIDED that the individual has subscribed to such certificates in convertible foreign exchange remitted from a country outside India in accordance with the provisions of the Foreign Exchange Management Act, 1999 (42 of 1999), and any rules made thereunder.
Explanation: For the purposes of this clause,-
# 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;
# "Convertible Foreign Exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999), and any rules made thereunder.
(4) Remuneration of certain diplomatic Staff of foreign states [Section 10 (6) (ii)]
The entire amount is exempt with respect to an individual who is not a citizen of India if the following conditions are fulfilled:-
ESSENTIAL CONDITIONS :
The remuneration received by him as an official, by whatever name called, of an embassy, high commission, legation, commission consulate or the trade representation of a foreign State, or as a member of the staff of any of these officials, for service in such capacity.
The remuneration received by him as a trade commissioner or other official representative in India of the Government of a foreign State (not holding office as such in an honorary capacity), or as a member of the staff of any of those officials, shall be exempt only if the remuneration of the corresponding officials or, as the case may be, members of the staff, if any of the Government resident for similar purposes in the country concerned enjoys a similar exemption in that country.
Such Members if the Staff are Subjects of the country represented and are not engaged in any business or profession or employment in India otherwise than as members of such staff.
(5) Remuneration received as an employee of a foreign enterprise for services rendered by him during his stay in India [ Section 10 (6) (vi)]
The Entire amount of remuneration received by him as an enterprise for services rendered by him stay in India, provided the following conditions are fulfilled.
ESSENTIAL CONDITIONS:
The recipient should not be a citizen of India;
The foreign enterprise is not engaged in any trade or business; any India;
The stay of the assessee in India does not exceed in the aggregate a period of 90 days in such previous year; and
Such remuneration so paid is not liable to be deducted from the income of the employer chargeable under the Income-Tax Act, 1961.
[6] Salary in connection with services on a foreign ship [ section 10(6) (viii)]
Any income chargeable under the head "Salaries" Received by or due to any such Individual being a Non- Resident, as remuneration for service rendered in connection with his employment on a foreign ship shall be exempt.
The recipient should be a foreign citizen and Non-resident in India.
Stay in India should not exceed in the aggregate of a period of 90 days in the previous year.
Taxability of salaries of non-resident seafarers credited to NRE accounts maintained with Indian banks:
The CBDT has issued Circular No. 13/2017, dated 11. 04. 2017 in which it has clarified the law regarding liability to income-tax in India for a non-resident seafarer receiving remuneration in NRE (Non-Resident External) account maintained with an Indian Bank.
Board's Circular No. 13/2017
No: 500/07/2017-FT & TR-V
Central Board of Direct Taxes
Foreign Tax & Tax Research -11
FT & TR-V Division
New Delhi, dated 11.04.2017
Subject: Clarification regarding liability to income-tax in India for a non-resident seafarer receiving remuneration in NRE (Non-Resident External) account maintained with an Indian Bank.
Representations have been received in the Board that income by way of salary, received by non-resident seafarers, for services rendered outside India on-board foreign ships, are being subjected to tax in India for the reason that the salary has been received by the seafarer into the NRE bank account maintained in India by the seafarer.
The matter has been examined in the Board. Section 5(2}(a) of the Income-tax Act provides that only such income of a non-resident shall be subjected to tax in India that is either received or is deemed to be received in India. It is hereby clarified that salary accrued to a non-resident seafarer for services rendered outside India on a foreign ship shall not be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer.
Circular No. 17/2017
Foreign Tax & Tax Research – II
Subject: Corrigendum to Circular No 13/2017 dated 11.04.2017 on the Clarification regarding liability to income-tax in India for a non-resident seafarer receiving salary in NRE (Non-Resident External) account maintained with an Indian Bank.
In Line 4 of Paragraph No. 2 of the captioned circular, the word "foreign ship" may be read as "foreign going ship (with Indian flag or foreign flag)".
[7] Under Training in India employee of foreign State [Section 10 (6) (xi)]
Remuneration received by an individual who is not a citizen of India as an employee of the Government of foreign State during his stay in India in connection with his training in any establishment/office undertaking owned by Government.
The entire amount of remuneration received by an employee of foreign government during his stay in India for his training in India shall be exempted as under: –
The remuneration received by him as an employee of the Government of a foreign State during his stay in India in connection with his training in any establishment or office of or in any undertaking owned by,–
the Government or
any Government company or
any registered society.
The recipient should be a foreign citizen.
Training is with Govt. company or corporation or approved institution.
[8] Tax payable on certain income (not being salary, royalty or fee for technical service) of and on behalf of a non-resident or a foreign company by the Government or the Indian concern in pursuance of an agreement entered into before 01. 06. 2002 [Section 10 (6B)]
[9] Tax payable on income received by a foreign government or a foreign enterprise on leasing aircraft, under an agreement entered after 31. 03. 1997 but before 01. 04. 1999 or entered into after 31. 03. 2007[Section 10 (6BB)]
In case any income is received by a foreign government or a foreign enterprise from an Indian company which is engaged in the operation of aircraft and such income is by way of consideration of acquiring an aircraft or an engine of aircraft (other than payment for providing spares or services in connection with the operation of leased aircraft) on lease under an agreement entered into after 31-3-1997 but before 01. 04. 1999 or entered into after 31.03.2007 and approved by the Central Government in this behalf, and the tax on such income is payable by such Indian company under the terms of the agreement, the tax so paid shall be fully exempted.
This benefit shall be available only to that foreign enterprise which is non-resident.
[10] Income of foreign companies providing technical services in projects connected with the security of India.
[11] Income of a Consultant [Section 10 (8A)].
Any remuneration or fee received by a consultant from an international organization who derives its fund under technical assistance grant agreement between such organisation and the foreign Government, and any other income accruing or arising to him outside India (which is not deemed to accrue or arise in India) and which is subject to income-tax or social security tax in foreign country shall be fully exempted. The agreement of the service of the consultant must
be approved by the competent authority.
The consultant means-
(i) an individual who is-(a) not a citizen of India or (b) if citizen but is not ordinarily resident in India; or
(ii) any person who is non-resident and is rendering technical services in India in connection with any technical assistance programme or project.
[12] Income of Employees of Consultant [Section 10 (8B) ]
In case of an individual who is assigned duties in India under the technical assistance programme:–
1. The remuneration received by him directly or indirectly from any consultant as referred u/s 10 (8A) above, and
2. Any other income accruing or arising to him outside India (which is not deemed to accrue or arise in India) and which is subject to income-tax or social security tax in a foreign country, shall be fully exempted provided-
(I) such individual is not a citizen of India, or
(ii) if citizen but is not ordinarily resident, and
(iii) the contract of service is approved by the competent authority.
[13] Income of any member of the family of individuals working in India under co-operative technical assistance programmes [Section 10 (9)]
As per section 10 (9), the income of any member of the family of any such individual as is referred to in section 10(8)/(8A)/(8B) accompanying him to India, which accrues or arises outside India and is not deemed to accrue or arise in India, in respect of which such member is required to pay any income or social security tax to the Government of that foreign State or country of origin of such member, as the case may be, is exempt from tax.
[14] Income by way of interest, etc., on bonds, securities-specification of bonds, securities, etc., issued by Central Government [Section 10 (15) (I)]
Income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, saving certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the official Gazette, specify in this behalf is exempt subject to such conditions & limits as may be notified in the notification.
NOTIFIED BONDS AND SCHEME UNDER SECTION 10 (15) (I)
Some notified bonds and schemes under section 10 (15) (I), are-
12-year National Savings Annuity certificates;
Treasury Savings Deposit Certificates (10 years);
Post Office Cash Certificates (5 years);
National plan certificates (10 years);
National plan Savings Certificates (12 years);
Post office National savings Certificates (12 years/7years);
Post Office Savings Bank Accounts;
Public Account of nature referred to in item (6) in the Table below rule 4 of the Post Office Savings Account Rules, 1981 (limited to 5, 000/-);
Post Office Cumulative Time Deposits Rules, 1981;
Scheme of Fixed Deposits governed by the Government Savings Certificates (Fixed Deposit) Rules, 1968;
Scheme of Fixed Deposits governed by the Post Office (Fixed Deposits) Rules, 1968; and
Relief Bonds, 2002 and 2003.
Over and above these notified bonds, interest from deposits in Non-Resident Non-Repatriable Rupee Deposit Scheme is notified for exemption only for non-residents, Resurgent India Bonds issued by State Bank of India is also notified under section 10 (15) (i). Many of the above bonds are not now available but income from those bonds, which are still not matured, will be exempt, even if acquired by purchase.
Post Office Savings Bank Account to an extent of the interest of 3, 500/- Rs in the case of an individual account and ? 7, 000/-in the case of joint account shall be exempt from income-tax.
[15] Interest on notified bonds purchased in foreign exchange [Section 10 [15] [iid])
Entire interest on notified bonds purchased in foreign currency on a non-repatriable basis by Non-Resident Indian (NRI) is exempt from Income Tax. However, interest on premature encashment is taxable in the year of encashment.
Notified bonds are purchased by Non-Resident Indian (NRI) in foreign
Bonds should be notified before 1st June 2002.
principal/interest is non-repatriable.
Bonds should be encashed only on maturity.* PROVIDED FURTHER that where an individual, who is a non-resident Indian in any previous year in which the bonds are acquired, becomes a resident in India in any subsequent year, the provisions of this sub-clause shall continue to apply in relation to
such individual:
NOTIFIED BONDS :
Interest on NRI Bonds 1988.
NRI Bonds (Second Series) issued by State Bank of India (SBI) purchased
in foreign exchange.
[16] Interest to foreign Banks on any deposits made by State bank of India (SBI) purchased in foreign exchange.
[17] Interest payable by Government/ Financial Institutions, etc. on money borrowed by it or debts owned by it before 01.06.2001 to sources outside India.
[18] Interest received from scheduled bank on deposits in foreign currency [section 10 (15) (iv) (fa)]
Entire interest payable by a scheduled bank to a non-resident or to a person who is not ordinarily resident within the meaning of section 6 (6) on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India (RBI) shall be fully exempted.
Acceptance of such deposits should be approved by the Reserve Bank of India.
LIABILITY OF TDS-INCOME FROM EXEMPT NRI DEPOSITS
Payment to non-residents is liable to tax deduction at source only if there is chargeable income. It was, therefore, decided in CIT v. Manager, State Bank of India (2010) 323 ITR 93 (Raj) that the bank was justified in not deducting tax on interest paid on deposits, where such interest is exempt under section 10 (15) (iv) (f)(a).
[19] Interest received on a deposit made in an offshore Banking unit [Section10 (15) (viii) ]
Any income by way of interest received by a non-resident or a person who is not ordinarily resident, in India on a deposit made on or after 01. 04. 2005, in an offshore Banking unit, referred to in section 2 (u) of the Special Economic Zones Act, 2005 shall be fully exempted.
[20] Applicability of Section 197A(1D) and Section 10 (15) (viii) Of the Income-tax Act, 1961 to interest paid by IFSC Banking Units (IBUs)-Clarification regarding [Circular No. 26/2016 F. No. 275/26/201 6-IT (B), dated 4-7-2016]
Section 197A of the Income-tax Act 1961 provides the circumstances in which deduction of tax at source is not required to be made under Chapter XVII of the Act. Sub-section (ID) of this section provides that deduction is not required to be made by an Offshore Banking Unit on interest paid on the deposit made on or after 1.4.2005 by a non-resident or a person not ordinarily resident in India, or on borrowing on or after 1.4.2005 from such persons. Clause (vii) of sub-section (15) of section 10 provides that such interest will not be included in the total income. Offshore Banking Unit is defined in clause (u) of section 2 of the Special Economic Zones Act, 2005 as a branch of a bank located in a Special Economic Zone, which has obtained the permission under clause (a) of sub-section (1) of section 23 of the Banking Regulation Act, 1949.
2. Representations have been received by the Central Board of Direct Taxes for clarifying the applicability of Section197A (ID) and Section 10 (15) (viii) of the Income-tax Act, 1961 in respect of interest received from IFSC Banking Units (IBUs) set up in the Special Economic Zones. The matter has been examined, and it is observed that IBUs are branches of Indian Banks or Foreign Banks having presence in India, which are established in accordance with the RBI Scheme dated 1. 4. 2015, in the International Finance Service Centers that are set up within the Special Economic Zones, as per Section 18 of the Special Economic Zones Act 2005. Thus, the IBUs fulfil the necessary criteria for being considered Offshore Banking units as defined in clause (u) of section 2 of the Special Economic Zones Act, 2005.
3. In view of the above the Board hereby clarifies that in accordance with the provisions of Section 19TA (ID) of the Income-tax Act 1961, tax is not required to be deducted on interest paid by such IBUs, on the deposit made on after 1.4.2005 by a non-resident or a person who is not ordinarily resident India, or on borrowings made on or after 01.04.2005 from such persons.
[21] Receipt of income on Mutual Fund units [Section 10(33)]
Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 referred to in Schedule-I to the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 and where the transfer of such asset takes place on or after 01. 04. 2002 shall be fully exempted.
QUANTUM OF EXEMPTION
All dividends are tax-free in the hands of non-residents and no TDS is applicable on the same.
ESSENTIAL CONDNON
Acceptance as per Section 10(33) of the Income Tax Act, 1961 Income received in respect of units of a mutual fund specified under Section 10 (23D) is exempt from income-tax in India and the mutual funds are subject to pay distribution tax in debt oriented schemes.
[22] Dividend to be exempt in the hands of the shareholders [Section 10 (34) ]
Any income by way of dividend referred to in section 115-O That is, Dividend, not being covered by section 2 (22) (e), from a domestic company is not chargeable to tax from the Assessment Year 2004-05.
Income by the way of dividend is exempt from tax in the hands of shareholders.
[23] Income received from mutual fund units specified under section 10 (23D) [Section 10 (35) ]
Any income by way of: —
Income received from units of a mutual fund specified under section 10 (23D) [ a mutual fund securities and Exchange Board of India Act, 1992 or regulations made thereunder ]; or
Income received in respect of Units from the Administrator of the Special undertaking; or
Income received in respect of units form the specified company.
Shall be fully exempted in the hands of the recipient of such income from Income-tax in India and mutual funds are subject to pay distribution tax in debt oriented schemes.
Hence all dividends are tax-free in the hands of hands of Non-resident Investors and no. TDS is applicable on the same.
Income arising from the transfer of units of the Administrator of the specified undertaking or of the specified company or of a mutual fund, as the case may be, is not exempt under this provision.
"ADMINISTRATOR" means the Administrator as referred to in section 2 (a) of the Unit Trust of India (Transfer of Undertaking and RepeaI Act), 2002.
"SPECIFIED COMPANY" means a company as referred Join section 2 (h) of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.
[24] Income arising from the transfer of a long-term capital asset (Equity shares in a company or unit of an equity oriented fund) [section 10 (38)]
Entire Long-Term Capital Gains arising from the transfer of equity shares or units of equity oriented und or a unit of a business trust is exempt if such transaction is chargeable to the securities transaction tax.
Long-term Capital gain must arise on the transfer of equity shares of a listed company or units of equity oriented mutual funds (a mutual fund wherein investible funds are invested in domestic companies for more than 65% of the total proceeds of such fund).
Such a transaction is chargeable to Securities Transaction Tax.KEYNOTEWith effect from the assessment year 2016-17, the exemption shall also be available for an income arising from the transfer of any units of a Business Trust which were
acquired in consideration of a transfer referred to in section 47 (xvii) and in respect of which security transaction tax has been paid.
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.
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
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.
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.
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.
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 &
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.
(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: –
(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.
Short-Term Capital Gain
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:-
(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).
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]:
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:-
(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.
1 a rupee-denominated bond of an Indian company,
2 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
20% + Surcharge (if applicable) + Education Cess
Long-Term Capital Gain on Foreign Exchange Assets
Any other Income
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.
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.
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).
Deduction Available for Non-resident Indians (NRIs)
Deduction Available for Non- Resident Indians (NRIs)
There are several tax saving options available for Non-Resident Indians (NRIs). Non-Resident Indians are allowed the following deductions under the Income Tax Act, 1961.
[1] Deduction in respect of Life Insurance Premium [section 80c]
QUANTUM OF DEDUCTION
Maximum 1,50,000/- (with effect from the assessment year 2015-16).
Non-Resident Indians (NRIs) do not have the same tax-saving options under section 80C of the Income Tax Act, 1961 like resident Indians.
Non-Resident Indians (NRIs) are not allowed to invest in all of the instruments where there is a Section 80 C benefit. Non-Resident Indians (NRIs) are not allowed to invest freshly into schemes like the National Savings Certificate (NSC) and Public Provident Fund (PPF) while existing accounts can continue. He may invest in the name of a spouse or child if they are Indian residents.
Prior to 2003, Non-Resident Indians (NRIs) were not even allowed to make a contribution into existing PPF accounts, that is, accounts opened before they became Non-Resident Indians (NRIs). However, in 2003, a notification [MOF (DEA) No. GSR-585 (E), dated 25. 07. 2003] was issued permitting Non-Resident Indian (NRIs) to continue investing in existing PPF accounts till maturity. A Non-Resident Indian (NRI) can continue to invest in an existing account, that is an account opened prior to becoming a Non-Resident Indian (NRI), A Non-Resident Indian (NRI) can use funds in the NRE account or the NRO account to make investments in the PPF account.
LIST OF INSTRUMENTS THAT NON-RESIDENT INDIANS (NRIs) CAN INVEST
1. Life Insurance Premium paid: –
This deduction can be claimed where the policy has been purchased in the NRI's name or in the name of their spouse or any child's name (child may be dependent/ independent, minor/major, or married unmarried). To claim deduction under section 80C, the premium must be less than 10 percent of the sum assured.
2. Tuition fee payment: –
Non-Resident Indians (NRIs) can claim tuition fees paid to any school college, university or other educational institution situated within India for the purpose of full-time education of their children (maximum 2). This includes payments for play school, pre-nursery and necessary. School fees of children paid for studying in India (only tuition fees qualify for a tax rebate and not term fees and transportation charges).
School fees of children paid for studying in India (only tuition fees qualify for a tax rebate and not term fees and transportation charges).
3. Principal repayments on loan for the purchase of house property: –
Non-Resident Indians (NMs) can claim a deduction for repayment of loan taken for buying or constructing residential house property. Also allowed for stamp duty, registration fees and other expenses for purpose of transfer of such property to the Nun-Resident Indian (NRI).
4. Unit Linked Insurance Plans (ULIPs): –
Investment in ULIPS are also allowed as a deduction under Section 80C, This includes a contribution to the Unit Linked Insurance plan of LIC Mutual Fund e. g. Dhanraksha 1989 and contribution to Other Unit Linked Insurance Plan of UTI.
5. Equity Linked Saving Schemes
6. Non-Resident Ordinary (NRO) Tax Saver Fixed Deposit offered by Banks.
[2] Deduction in respect of contribution of the pension scheme of Central Government [Section 80CCD]
A Non-Resident Indian (only Individual) between the age of 18 and 60 years, as on the date of submission of his/her application and complying with the extant KYC norms can open a National Pension Scheme (NPS) account.
QUANTUM DEDUCTION
The maximum amount to be invested in the National Pension Scheme (NPS) is Rs. 1,50,000
with effect from the assessment year 2016-17, an additional deduction in respect of any amount paid, of up to Rs. 50,000/- for contributions made by any individual assessee under National Pension Scheme (NPS) shall be available under the section 80CCD(1B) over and above the limit of Rs. 1,50,000/-. Therefore, the total collection that can be claimed under section 80C + Section 80CCD = Rs. 2,00,000/-.
[3] Deduction In respect of health insurance Premia [section 80 D]
The benefit of Tax deduction under section 80D is available for Non-Resident Indians also.
Aggregate allowable is 25,000/-: This deduction is available up to 25, 000/- for insurance of self, spouse and dependent children (15,000/- up to the assessment year 2015-16). For health insurance premiums on the health of the taxpayer, on the health of the spouse and on the health of dependent children.
Deduction under Section 80D Non-Resident Indian (NRIs) can claim a deduction for premium for health insurance of themselves and family or parents in India.
The deduction is allowed to non-resident only if the following conditions are satisfied: –
The deduction is permissible under this section, only to an individual or Hindu Undivided Family whether resident or non-resident.
The deduction is allowed when the payment is made to General Insurance Corporation of India (GIC) or any other approved insurer towards medical insurance premium 1xl on the health of the assessee or his family or the health of parent (in the case of HUF any member of his family). It is popularly known as Mediclaim Scheme.
The payment should be made by him any mode of payment other than cash. However, payment on account of preventive health check-up can be made by any mode (including cash).
Non-Resident Indian (NRI) senior citizens would not qualify for 80D health insurance tax benefit.
The amount is paid out of his income chargeable to tax.
[4] Deduction in respect of interest on a loan is taken for higher education [section 80E]
Section 80E allows Non-Resident Indians (NRIs) to claim a deduction of interest paid on an education loan. This loan may have been taken for higher education for the Non-Resident Indian (NRI), or NRIs spouse or children or for a student for whom the Non-Resident Indian (NRI) is a legal guardian. There is no limit on the amount which can be claimed as a deduction under this section. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier. No deduction is allowed on the principal repayment of the loan.
[5] Donations made to certain specified charitable institutions [Section 80G]
The following is the list of funds or organizations eligible for 80G, deduction: –
A. 100% deduction without any qualifying limit on donation to funds and institutions for social purpose of national importance: –
Prime Minister's National Relief Fund.
National Defense Fund set up by the Central Government.
Prime Minister's Armenia Earthquake Relief Fund.
The Africa (Public Contribution – India) Fund.
The National Foundation for Communal Harmony.
Approved university or educational Institution of national eminence.
The Chief Minister's Earthquake Relief Fund, Maharashtra.
Donations made to Zila Saksharta Samitis.
The National Blood Transfusion Council or a State Blood Transfusion Council.
The Army Central Welfare Fund or the Indian Naval Benevolent Fund or The Air Force Central Welfare Fund.
The Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund.
National Sports Fund set up by the Central Government.
National Cultural fund set up by the Central Government.
National Illness Assistance Fund.
Fund for Technology Development and Application, set up by the Central Government.
National Trust for welfare & persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities.
The Andhra Pradesh Chief Minister's Cyclone Relief Fund, 1996.
National Children's Fund.
"Swachh Bharat Kosh" by any donor (w.e.f. the Assessment year 2015-16)
"Clean Ganga Fund" by domestic donors (w.e.f. the Assessment year 2015-16).
National Fund for control of Drug Abuse (w.e.f. the Assessment year 2016-17).
Council or a State blood
50% deduction without any qualifying limit on donation to-
Jawaharlal Nehru Memorial Fund
Prime Minister's Drought Relief Fund
Indira Gandhi Memorial Trust
The Rajiv Gandhi Foundation
100% deduction subject to qualifying limit on donation to:
The government or a local authority for any charitable purpose other than promoting family planning.
Any authority of India that is engaged in housing development, development of cities, towns and villages or both.
Any notified temple, mosque, gurdwara, church, & other person sum paid by the assessee, being a company-donations to Indian Olympic Association or to any other association or institution established in India and notified by the Central Government for-
1. The development of infrastructure for sports and games.
2. The sponsorship of sports and games in India.
50% deduction subject to qualifying limit on donation to-
The government or any local authority for any charitable purposes other than for promoting family planning.
Any authority of India that is engaged in housing development, development of cities, towns and villages or for both.
Any notified temple, mosque, gurdwara, church & other place notified by the Central Government to be of historic, archaeological or artistic importance, for renovation or repair of such place.
To any corporation established by the Central or any State government specified under section 10 (26BB) for promoting the interest of the members of a minority community.
Deduction under this section is allowed to all assessee, whether assessee Individual or non-company, Whether having income under the head, "profits and gains of business or profession" or not.
The donation should be made only to specified funds/institutions.
No deduction shall be allowed under this section in respect of donation of any sum exceeding 110,000/- under such sum is paid by any mode other than cash [section 80G (5D) with effect from 01. 04. 2013].
The donation should be of a sum of money. Donations in kind do not qualify for deduction [Explanation-5 of Section 80-G].[Rana Verma (Shri H. H.) v. CIT (1991) ]87 ITR 308 (SC)]
The aggregate donations must be 250 or More.
Where a deduction is allowed in respect of any donation for any assessment year, no other deduction shall be allowed in respect of such sum for the same or any other assessment year.
Donations made to a foreign trust or political parties are not eligible for deduction.
DONATION OF FDR
The donation of a fixed deposit receipt would qualify for deduction under this section because it represents a sum of money though it isn't cash.
Where the donation is made by an assessee to an approved institution and claimed as a deduction, the subsequent withdrawal of the approval
of such institution would not entitle the department to reopen the case and disallow the deduction.
[Jai Kumar Kankaria u. CIT 120 Taxman 810 (Cal.) 2002]
Before allowing deduction under section 80G all other deductions under
Chapter VIA has to be first ascertained and deducted.[Sc India Steam Navigation Co. Ltd. v. CIT (1994) 119 CTR (Bom.)]489]
A Non-Resident Indian (NRI) is blocked from investing in-
[1] Investment in small savings
Non-Resident Indians (NRIs) are not permitted to invest in small savings such as post Office Deposits. However, investments in Post Office Schemes prior to becoming NRI are allowed to be continued till maturity. An NRI can only open and maintain a Non-Resident Ordinary (NRO) account with a Post Office in India.
Post Office Monthly Income Scheme/Post Office Time Deposits, Kisan Vikas Patra.
[2] Investment in National Saving Certificates (NSC)
Non-Resident Indian (NRIs) are not eligible to purchase the National Saving Certificates. However, up to the existing NRI account holders would be allowed to retain
their NSC investments until maturity, subject to such money not being repatriable.
Notification No. GSR 1237 (E), dated 03.10.2017
In a Notification No. GSR 1237 (E) dated 3rd October 2017, the Central Government of India (CGI) amended the Public Provident Fund (PPF) Scheme, 1968 whereby, the PPF account of resident Indians shall be deemed to be closed with effect from the date they become non-residents of India (NRI). A similar amendment has been made the National Savings Certificate (NSC) (VU]-Issue) Rules, 1989, and accordingly, such certificates shall be deemed to be encashed on the day when the resident individuals become NR. In both the above cases, the interest shall be paid at the rate applicable to the Post Office Saving Account (POSA), from the date of deemed closure/encashment up to the last day of the month preceding the month in which the same is actually closed/ encashed. Currently, both instruments (PPF and NSC) carry interest at 7. 6% per annum and the rate applicable to the POSA is 4% per annum.
[3] Senior Citizens Savings Scheme
The Non-Resident Indians (NRIs) are not eligible to open an account under Senior Citizens Savings Scheme Rules, 2004.
If a depositor who subsequently becomes a Non-Resident Indian (NRI) during the currency of the account under these rules, the account may continue till its maturity on a non-repatriation basis and the account shall be marked as a Non-Resident account.
The account continued under the proviso of section 13 of Senior Citizens Savings Scheme Rules, 2004, shall not be extended for any further period as provided under Rule 4 (3) of the Senior Citizen Savings Scheme Rules, 2004.
Existing investments [I.e. those that were purchased before becoming a Non-Resident Indian (NRI)] can be continued until maturity.
[4] Public Provident Fund (PPF)
Non-Resident Indians (NRIs) are not allowed to open a new public Provident Fund (PPF) account. However, an existing PPF account which is opened while they were a Resident can be continued till maturity.
In a Notification No. GSR 1237 (E), dated 3rd October 2017, the Central Government of India (CGI) amended the public provident Fund (PPF) scheme, 1968 whereby, the PPF account of resident Indians shall be deemed to be closed\ with effect from the date they become non-residents of India (NRI). A similar amendment has been made in the National Savings Certificate (NSC) (viii-Issue) Rules, 1989, and accordingly, such certificates shall be deemed to be encashed on day when the resident individuals become Non-Resident. In both the above cases, the interest shall be paid at the rate applicable to the post Office Saving Account, from the date of deemed closure/encashment up to the last day of the month preceding the month in which the same is actually closed/encashed. Currently, both instruments (PPF and NSC) carry interest at 7. 6% per annum and the rate applicable to the Post Office Saving Account is 4% per annum.
[5] Foreign National of Non-Indian origin resident outside India shall not acquire/ transfer any immovable property in India other than on lease not exceeding five years, without prior approval of Reserve Bank of India.
[6] Investment in agricultural
Non-Resident Indians (NRIs) are not allowed Investment in agricultural Property, Investment in plantation and Farmhouse.
[7] Investment in Sukanya Samriddhi Account Scheme
Non-Resident Indians (NRIs) are not allowed Investment in Sukanya Samriddhi Account Scheme.
[8] Non-Resident Indians (NRIs) or PIO are not allowed to invest Proprietorship concern engaged in any agricultural/plantation activity
business or print media.
Foreign Direct Investment (FDI) is completely prohibited in the following sectors
Lottery Business including Government/private lottery, online lotteries, etc.
Gambling and Betting including casinos etc. collaboration in any form including licensing for a brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.)
Trading in Transferable Development Rights (TDRs)
Real Estate Business or Construction of Farm Houses
Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
Activities/ Sectors not Open to private sector investment e.g. Atomic Energy and Transport (other than Mass Rapid Transpor System)
Agricultural or Plantation Activities.
"NIDHI " means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit, and which complies with such rules as are prescribed by the Central Government for relation of such class of companies.
ln the Indian financial sector, "NIDHI COMPANY" refers to any mutual benefit society notified by the MCA. They are created mainly for cultivating the habit of thrift and savings amongst its members.
Double Taxation Avoidance Agreements (DTAA) [Section 90 & 91]
With the increasing movement of employees across countries in the past few years, it is a pertinent question you are an Indian working for one of the IT majors and have been recently transferred to the UK. Six months into the job, you are gripped with a niggling doubt will your income be taxed in the UK or India, or you will be asked to pay taxes in both the countries.
Employees are required to abide by laws of both the countries – their home country being the resident country and source country where the income arises. This would result in the same income being taxed in two countries. To avoid this double taxation, Double Tax Avoidance Agreements (DTAA) have been entered into by various countries to avoid a person being doubly taxed in the source country and the country of residence. In other words, Double Taxation is the levying of tax by two or more jurisdiction on the same declared income (in the case of income taxes), asset (in the case of capital taxes) or financial transaction (in the case of sales taxes). This double liability is often mitigated by tax treaties between countries.
Taxability under the Double Tax Avoidance Agreements
India has entered into Double Tax Avoidance Agreements (DTAAs) with several countries. As per Section 90 (2), taxability for non-residents is determined as per the provisions of the Act or the applicable DTAA, whichever are more beneficial. Capital gains under the DTAA are generally taxed in a different manner than other incomes.
Capital Gain is discussed in Article 13 of the OECD & UN Models (Organization for Economic Co-operation & Development and United Nations Model Tax Conventions). The Models promise that gains from the alienation of assets are taxable in the Country of Residence (COR), i.e., where the seller is a resident. For some assets, Country of source (COS) is also given the right to tax, I.e., where the asset is situated (situs of asset). Generally, the country, which has the right to tax the income from the asset is given the right to tax gains from the sale of such assets.
As per the basic principle of International taxation, a Country of Residence always has the right to tax. The country of source may be given full/partial/or no rights to tax (there are however a few old DTAAs where the right to tax capital gain is only with the Country of Source, e. g., Bangladesh, Greece and Egypt).
In very few DTAAs (e. g., India-UK & India-USA), it is provided that each country can tax capital gains according to its own domestic law. If the DTAA permits India to tax the capital gains, India can tax it as per its domestic law. The computation, disallowance, exemption, rate of tax, etc., apply as per domestic law. India may tax the gain as capital gain or any other income. The taxation of Capital Gains is based on the kind of asset sold. The details are discussed with reference to the UN model.
Why Double Tax Avoidance Agreements (DTAA)
Every country has its own taxation structure according to which they determine the taxability of people residing there and also taxability of the people who does not belong to their country but with some means, they are related to their nation in their form of assessee or deemed assessee.
So, for recoverability of tax from the income generated in other nation by NRI' s DTAA was formed and secondly, to ensure that this taxability of income does not lead to double taxation of same income in both the countries.
The basic objectives of Tax Treaty are as under-
Avoid Double Taxation of income in both the countries (I. e. Double Taxation of same income)
Tax Credit/Relief
Prevent Tax Evasion
Prevent Tax Discrimination
Ease in Recovery of Tax Dues
Promote Investment & Mutual Relation
To promote and foster economic trade and investment between the two countries.
Allocate Tax jurisdiction
The certainty of Tax Treatment of investors.
A Non-Resident Indian (NRI) individual residing in country "A" maintains an NRO account with a bank based in India. The interest income on the balance amount in the NRO account is deemed as income that originates in India and hence is taxable in India.
In case, India and "A" nation are contracted under the Double Taxation Avoidance Agreement (DTAA), this income will have tax implications in accordance with the rate specified in the agreement. Otherwise the interest income will attract tax @ 30.90% I.e. The current withholding tax.
Also, Non-Resident Indian (NRI) is entitled to avail the benefits under the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and his country of residence with respect to interest income on government securities, company fixed deposits, dividend and loans.
Advantage of Double Taxation Avoidance Agreement (DTAA)
The advantage of Double Taxation Avoidance Agreement (DTAA) is as under:-
Lower with-holding Taxes (Tax Deduction at Source).
Complete Exemption of Income from Taxes.
Underlying Tax Credits
Tax Sparing Credits.
Effect of the DTAA in India:
The effect of an agreement entered into by virtue of Section 90 of the Income-tax Act, 1961 ('the Act') would be:
If no tax liability is imposed under the Act, the question of resorting to the DTAA would not arise. No provision of the DTAA can possibly fasten a tax liability where the liability is not imposed by the Act;
If a tax liability is imposed by the Act the DTAA may be resorted to negate or reduce it;
In case of a difference in the provisions of the Act and provisions of the DTAA the provisions of the DTAA, to the extent they are more beneficial to the provisions of the Act, will override the Act.
Relief of double taxation
Foreign income of person becomes liable in two countries I.e. (i) which income is earned and (ii) The country in which the person is resilient. Double Taxation such income is avoided by means of Double Taxation Avoidance Agreement (DTAA). Double taxation can be avoided in two ways: –
The resident country exempts income earned in the foreign country or
It grants credits for the tax paid in other country.
Under Double Taxation Avoidance Agreement (DTAA), the country where the income is generated has the right to tax it according to its laws. the country of residence gives credits for this tax and taxes the income at a lower rate. For example, if India taxes long-term capital gains at 20%, the country of residence where such gains are taxed at 30% will levy only 10% tax on such income.
Basis of levy of tax
In any country, the tax is levied based on-
Source Rule
the source rule holds that income is to be taxed in the country in which it originates irrespective of whether the income accrues to a resident or a non-resident.
Residence Rule
the residence rule stipulates that the power to tax should rest with the country in which the taxpayer resides. In India, the residential status is the key point for the determination of Income Tax. In the case of residents their global income I.e. Indian Income, as well as foreign income, is taxable in India whereas in case of non-residents only Indian income is taxable. In Other words, in India residence rule is applied for residents whereas source rule is applied for non-residents. The residential status of a person is determined based on the provisions of section 6 of the Income Tax Act, 1961.
Tax Treaty
The Double Taxation Avoidance Agreement (DTAA) also referred as Tax Treaty is a bilateral economic agreement between two nations that aims to avoid or eliminate double taxation of the same income in two countries. In other words, the Double Taxation Avoidance Agreement (DTAA) is essentially bilateral agreement entered into between two countries, in our case, between India and other foreign state.
MEANING – A tax treaty is a formally concluded and ratified agreement between two independent nations (bilateral treaty) or more than two nations (multilateral treaty) on matters concerning taxation. DTAA can be defined as an "international agreement between two sovereign States reaching an understanding as to how their residents will be taxed in respect of cross order transactions in order to avoid double taxation on the same income". In yet another way, DTAA can be defined as "an agreement of compromise between two contracting States whereby each country agrees to give up something in consideration of the other country giving up something in its favour ". It may sometimes happen that owing to reduction in tax rates under the domestic law-taking place after coming into existence of the treaty, the domestic rates become more favourable to the NRIs/PIO. Since the object of the tax treaties is to benefit the NRIs/PIO, they have, under such circumstances, the option to be assessed either as per the provisions of the treaty or the domestic law of the land.
LANGUAGE USED BY TREATIES
Tax Treaties employ standard International language and standard terms. This is done in order to understand and interpret the same term in the same manner by both assessee as well as revenue. The language employed is technical and stereotyped, Some of the terms are explained below-
Contracting State-country which enters into Treaty
State of Residence-Country where a person resides
State of Source-Country where income arises-Enterprise of contracting state-Any taxable unit (including individuals of a Contracting State)
Permanent Establishment-A fixed base of an enterprise in the State.
Source (usually a branch of a foreign company and in some cases wholly-owned subsidiaries as well)
Income arising in Contracting state-Income arising in a State of a state.
One has to read the treaty carefully in order to understand its provisions in their
proper perspective. The best way to understand the DTAA is to compare it with an agreement of partnership between two persons. In partnership, the words used are "the party of the first part" and in the DTAA, the words used are "the other contacts state", One can also replace the words "Contracting States" by names of the respective countries and read the DTAA again, for better understanding.
Provisions of Double Taxation Avoidance Agreement (DTAA) will prevail
The provisions of the Double Taxation Avoidance Agreement (DTAA) override the general provisions of taxing statute of a particular country. If the Non-Resident Indian (NRI) is a tax resident of a country with which India has entered into a Double Taxation Avoidance Agreement (DTAA), then the provisions of the Act or DTAA, whichever is more beneficial, would apply. Every Non-Resident should choose lower of the tax rate prescribed in Double Taxation Avoidance Agreement (DTAA) with the country where he resides and the tax rate prescribed under the Indian tax laws.
Provision of the Double Taxation Avoidance Agreement would override the provisions of the Income-tax Act
The facts of the case of P.V.A. L. Kulandagan Chettiar show that Kulandagan Chettiar owned immovable property in IPOH, Malaysia. The firm had income from rubber estates and also derived short-term capital gains from the sale of the estate in Malaysia. The income-tax officer held that both the incomes are assessable in India.
Successive appeals resulted in the Income-Tax Department being told that by virtue of our DTAA with Malaysia, whose incomes were not liable for Indian income-tax. The firm did not have a permanent establishment (PE) in India the property was situated in Malaysia.
The Madras High Court ruled that where there exists a provision to the contrary in the Agreement, there is no scope for applying the law of any one of the respective contracting State to tax the income and the liability to tax has to be worked out in the manner and to the extent permitted or allowed under the terms of the Agreement.
The Court rejected the application of commentaries on the Article of the Model Convention of 1977 presented by the OECD, as it would not be a safe or acceptable guide or aid for such construction.
The Department took up the matter in appeal before the Supreme Court. The apex court pointed out that as per section 90 (2), in respect of cases governed by the DTAA and in relation to the assessee to whom such agreement applies, the provisions of the Income Tax Act shall apply to the extent they are more beneficial to that assessee.
Sections 4 and 5 of the Act provide for taxation of global income. These Sections, however, will have to make way wherever there are provisions to the contrary in the DTAA.
The Act gets insofar as the agreement is concerned, and if the agreement provisions are beneficial to the assessee, they will prevail. Only the treaty governs the taxability. Situations may arise where the assessee is domicile in both the contracting States.
The Supreme Court applied the tiebreaker rule and head that fiscal domicile will have to be determined with reference to the fact that" if the Contracting State with which his personal and economic relations are closer, he shall be claimed to be a resident of the Contracting State in which he has a habitual abode.
This implies that tax liability arising in respect of a person residing in both the contracting states has to be determined with reference to his close personal and economic relations with one or the other.
The Supreme Court held that because of closer economic relations between the assessee and Malaysia, business income to be assessed only in Malaysia and not in India.
For similar reasons, the assessee's residence in India will become irrelevant and treaty provisions will prevail over sections 4 & 5 of the Act. This will also apply to capital gains. The Department's appeal was dismissed.
The court concluded thus: "Taxation policy is within the power of the Government and section 90 of the Income-Tax Act enables the Government to formable it's policy through treaties entered into by it and even such treaty treats the fiscal domicile in one state or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in OECD or any of the decisions of foreign jurisdiction or in any other agreements.
Withholding Tax Rate (TDS) under the Indian Income Tax for Interest 33. 99% whereas, Rate of tax prescribed in the Double Taxation Avoidance Agreement (DTAA) with the country where Non-Resident resides e.g. Singapore-15%. Therefore, the chargeable rate will be 15% (lower of the two).
Where Double Taxation Avoidance Agreement (DTAA) provides for a particular mode of computation of income, the same should prevail over the provision of the Income Tax Act. [F. No. 506/42181-FTD dated 02. 04. 1982]
Provisions of Double Taxation Avoidance Agreement (DTAA) can be resorted to only when a tax liability is imposed on an assessee under the [LG Cable Ltd. u. DDIT (ITAT, Del) 113 ITD 113]
Double Taxation Avoidance Agreement (DTAA) with a certain country cannot be used to interpret a separate DTAA with another country. [Perfetti Van Melle Holding B. V., Inre (AAR) 65 DTR12]
Once the Government has signed an agreement with as foreign country for the avoidance of double taxation and notified it, the said agreement would operate even if inconsistent with the provision of the act.
Specific relief Under sections 90 and 91
Double Taxation Avoidance Agreement (DTAA) is as such agreements which are entered into by the Government of India with Governments of other countries under section 90 also referred as Tax Treaty.
EXAMPLE OF DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA): –
A Non-Resident Indian (NRI) individual living in "X" country maintains an NRO account with a bank based in India. The interest income on the balance amount in the NRO account is deemed as income that originates in India and hence is taxable in India.
In case, India and "X" country are contracted under the DTAA, this income will have tax implication in accordance with the rate specified in the agreement. Otherwise, the interest income will be attracted to tax @ 30% I. e. The current withholding tax.
Section 90 and section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 (1) of the Income Tax Act authorizes the Central Government to conclude tax treaties.
Section 90 is applicable in cases where India has entered into a Bilateral agreement with other countries I. e. For taxpayers who have paid the tax to a country with which India has signed Double Taxation Avoidance Agreement (DTAA), while section 91 provides relief to taxpayers who have paid tax to a country with which India has not signed a Double Taxation Avoidance Agreement (DTAA). In other words, Section 91 is applicable in a case where there is no such bilateral agreement (I. e. there is a multilateral agreement). As of now, there are 192 UN countries, out of which India has entered into Bilateral agreement with 92 countries. Hence in respect of remaining 100 countries section, 91 will apply. Thus, India gives relief to both kinds of taxpayers.
Section 90 (2) of the Income Tax Act, 1961 makes it clear that assessee has an option of choosing to be governed either by the provisions of particular Double
Taxation Avoidance Agreement (DTAA) or the provisions of the Income Tax Act,
whichever is more beneficial. Section 91 provides unilateral relief.
How to avail benefits under the Double Taxation Avoidance Agreement (DTAA)
Section 90 (4) inserted by the Finance Act, 2012, with effect from 01. 04. 2013 which provides that an assessee not being a resident to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.
For the purpose of obtaining a certificate for claiming relief under an agreement
referred to in sub-section 90, Rule 21AB has been inserted to the Income Tax Rules, 1962 by the Income Tax (Twelfth Amdt.) Rules, 2011 with effect from 01. 04.2013. This Rule prescribes: –
FOR RESIDENT ASSESSEE
The specified forms to obtain a Tax Residency Certificate (TRC) and
a taxpayer who is a resident of India, and who wishes to obtain a certificate of residence for the purposes of a tax treaty, shall make an application in Form No. IOFA to the Assessing Officer (A. O.) ·
the Assessing Officer on receipt of an application from the taxpayers has issue a certificate of residence in Form No. 10FB
FOR NON-RESIDENT AS
For non-resident assessee, the following details are required to be furnished in TRC-(I) Name of the assessee
Status (individual, company, firm etc.) of the assessee
Nationality (in case of an individual)
Country or specified territory of incorporation or registration (in case of others.)
(v) Assessee's tax identification number in the country or specified territory of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory.
A Non-Resident Indian (NRI) can avail benefits under the Double Taxation Avoidance Agreement (DTAA) by timely submission of documents listed below to the deductor: –
Tax Residency Certificate (TRC)
Self-attested copy of PAN Card in the bank website)
Self declaration-cum-indemnity number format (formats of such letters are available in the bank website)
Self-attested copy of Passport and Visa.
Copy of PIO proof (application if the passport has been renewed during the financial year).
How to obtain the Tax Residency Certificate (TRC)
NRIs can download Form 10F available at website and approach the tax/government authorities of the overseas where you reside to obtain the form Tax Residency Certificate (TRC) certified. No other document in lieu of the Tax Residency Certificate (TRC) is considered for availing the benefits under Double Taxation Avoidance Agreement (DTAA).
In case failed to submit Tax Residency Certificate (TRC)
In case there is not Double Taxation Avoidance Agreement (DTAA), then the relief under section 91 is available prescribed documents are not submitted to the bank within stipulated timelines, the bank will have to deduct interest earned on NRO deposits at the presently applicable rate of 30.9% (subject to revision by the tax/government authorities).TDS once deducted cannot be refunded.
Documents to be submitted every year
Double Taxation Avoidance Agreement (DTAA), benefit is extended on an annual basis. Therefore, any Non-Resident Indian(NRI) is required to provide all the requisites every year to continue availing the benefit under Double Taxation Avoidance Agreement [DTAA]
Where there is no Double Taxation Avoidance Agreement (DTAA) [Section 911]
In case there is no Double Taxation Avoidance Agreement (DTAA), then the relief under section 91 is available only to resident and not to non-resident. The resident taxpayer shall be entitled to the deduction from the Indian Income Tax payable by him of a sum calculated on such double taxed income at the Indian rate of tax of the said country, whichever is the lower/or at the Indian rate of tax if both the rates are equal.
It applied only to Resident Indians.
Income should have accrued or arisen outside India. In other words,
income should not be deemed to accrue or arise in India.
The assessee should have paid tax in the other country.
For taxes paid in any country with which there is no double taxation avoidance agreement (DTAA).
Provision Illustrated: –
Indian Income = 11,00,000/- out of which 3,00,000/- is from Chile (Tax paid is 1,00,000/-).
Solution : –
Particulars India Chile Total
Income 11,00,000 3,00,000 11,00,000
Tax 1,60,000 1,00,000 2,60,000
Rate 14.55% 33.33% –
Relief 3,00,000 x 14.55 % = 43,636
The foreign Tax credit cannot exceed income tax payable in India.
In absence of a Double Taxation Avoidance Agreement (DTAA)
Even in the Absence of a double taxation avoidance agreement (DTAA) entered with that country, a resident of India can claim a foreign tax credit under the domestic tax laws in accordance with section 91 of the Income Tax Act subject to evidence being maintained. The Requirement is that the income must have been taxed outside India and the same income must have been subjected to tax in India. Credit for tax paid in the USA cannot exceed Income tax liability payable in India in view of Section 25 (2) (a) of Double Taxation Avoidance Agreement (DTAA) between USA and India.
[Vikram Taman u. ITO (ITAT, Mum) 319 ITR (At) 407 ]
Method of Relief of Double Taxation:
Relief of double taxation under section 90 is generally available under two
Exception method
Under this method, a particular income is taxed in one of the two countries. A particular income is taxed in one of the both countries and exempted in the other country. For example, the income from Dividend, Interest, royalty and fees for technical services source rule is applicable in treaty with Greece, Libyan and United Arab Republic. So for a citizen of these three countries if the dividend, interest, royalty or fees for technical services is arising in India, then it will be solely taxable in India only and if for a resident if such income is arising in any of these three countries then the income will solely be taxed in these three countries and it will be at all taxable in India.
PROVISION ILLUSTRATED- EXEMPTION METHOD-
Amounts (in Rs.)
Income in Source Company
Income in Resident Country
World wide Income
Tax Paid In Source Country @ 20%
Tax Paid In Resident Country @ 30%
Total Tax Paid
TAX CREDIT METHOD
The income is taxed in both the countries as per the treaty and the country of residence will allow the tax credit/reduction for the tax charged in the country of source. For example, Mr. "A"(an Indian resident) has received salary for a US company for job in US. Since Mr. "A" is a resident so his global income will be taxable. In this case source country is US (since the service has been rendered in US) and resident country is India. So at the time of computation of tax liability of Mr. "A" the tax paid in US will be allowed as set off against his total tax liability but limited to the tax payable on such foreign income at Indian Tax Rates. In other words, under this method, income is taxable in both the countries in accordance with ADT agreement. Then, the country of residence of tax payer allows him credit for the tax charged.
PROVISION ILLUSTRATED- TAX CREDIT METHOD-
Amount (In Rs.)
Income in Source Country
Worldwide Income
Tax paid in resident country on worldwide Income @ 30%
Tax Credit on Tax paid in Source Country
(-) 20,000
Tax paid in resident Country
Tax credit method or Exemption method to be used-Depend on the particular DTAA applicable.
Credit for foreign tax can be allowed to the extent of foreign tax liability in india is brought to nil and no refund can be issued out of that
Tax credit method is adopted in most of the Indian treaties.
Model of Double Taxation Avoidance Agreement (DTAA)
There are different models OECD model, UN model, US model and the Andean model developed over a period of time on which the treaties are drafted and negotiated between two nations. Of this, the first three models are most prominent and often used models (final agreement could be combination of different models).
MODELS DEAL WITH THE FOLLOWWG-
Imposing liability to tax in one country whilst granting exemption in the other.
Granting exemption from tax in either or both the countries
Deeming geographical source provisions for particular categories of income to be in one country rather than in the other.
Imposing liability to tax in the country in which income is deemed to arise.
O.E.C.D Model
The emergence of present form of OECD model convention can be traced back to 1927, when the Fiscal Committee of the League of Nations prepared the first draft model Form applicable of all countries. In 1946, the model convention was published in Geneva by the Fiscal committee of U. N. Social & Economic council and later by the Organization for European Economic co-operation (OEEC) in 1963. However, in 1961, the Organization for Economic Co-operation and Development (OECD) was
established, with developed countries as its members, to succeed the OEEC and OECD approved the draft presented to the OEEC. In 1997, the final draft was prepared in the present form. It was further revised in 1992 and in 1995, 1997 and 2000.
OECD model is essentially a model treaty between two developed nations. This Model advocates resident's principle, that is to say, it lays emphasis on the right of State residence to tax.
U. N. Model
In 1968, the United Nations set up ad hoc groups of experts from various developed and developing countries to prepare a draft model convention between developed and developing countries. In 1980, this group finalized the UN Model Convention in its present form. It is further revised in the year 2001.
The UN Model is a compromise between the source principle and the residence principle. However, it gives more weight to the source principle as against the residence principle of the OECD model. UN Model is designed to encourage flow of Investments from the developed to developing countries. It takes into account sharing of tax revenue with the country providing capital. Most of India's tax treaties are based on the UN Model.
THE SALIENT FEATURES OF THE UN MODEL:
(a) Prior right of tax on income to the country of its source
(b) Rates of tax which may be withheld from dividends, interest and royalties to be negotiated bilaterally unlike the OECD Model which specifies the maximum rate (or the exemption in the case of royalties)
(c) In the case of shipping profits, the UN Model provides alternative articles, one giving the tax, as in the OECD Model, exclusively to the country in which is situated the shipping operator's place of effective management and the other providing for the tax to be shared between the country in which the operator's place of effective management is situated, and the country where the operation is carried out.
U. S. ModelThe US Model is different from OECD and UN Model in many respects. For example, Indo-US treaty provides for permanent Establishment Tax (Article 23) and Limitation on Benefits (Article 24), which are unique to this treaty as also provision for taxing capital Gains (Article 13) as per domestic law. Thus, US Model has established its individually through a radical departure from the usual treaty clauses under OECD Model and UN Model.
ANDEAN Model
It is a regional level model convention developed in 1971.
A group of lesser and medium developed Latin American countries have adopted this Model, namely, Bolivia, Columbia, Chile, Ecuador, Peru and Venezuela.
It provides for almost exclusive taxation in source country except in cases of international traffic. P. E. concept is not adopted. This model is not used by other countries.
List of countries with whom India has Double Taxation Avoidance Agreement(DTAA)
The Double Taxation Avoidance Agreement (DTAA) treaty has been signed in
order to avoid double taxation on the same declared asset in two different countries. Currently, India has Double Taxation Avoidance Agreement (DTAA) or Tax treaty with 92 other countries into force as on 31.12.2014.
Types of Agreements
Agreements can be divided into two main categories-
(A) COMPREHENSIVE AGREEMENTS
Comprehensive Agreements-which are wider in scope addressing all scopes of income.
Composition of a comprehensive DTAA:
Double Tax Avoidance Agreements are divided under following heads,
Limited agreements are generally entered into to avoid double taxation relating to Income derived from the operation of aircraft, ships, carriage of cargo and freight. A comprehensive agreement, on the other hand are very elaborate documents which lay down in detail how incomes under various heads may be dealt with. In other words, limited DTAAs are those which are limited to certain types of incomes only, e. g. DTAA between India and Pakistan is limited to shipping and aircraft only. Limited agreements cover-
(a) income from operation
(b) estates
(c) inheritance and
(d) gifts of aircraft and ships,
(C) TAX INFORMATION EXCHANGE AGREEMENTS
Limits under various heads like income from immovable property, capital gains, dividends, interest, royalties, fees for technical services, etc. And the manner of taxing the same are generally laid down in the comprehensive agreements. Some of the agreements provide for taxation of annuities and pensions.
TAX DEDUCTIONS AT SOURCE FOR NON-RESIDENT INDIANS
Section 195 of the Income Tax Act provides for the deduction of tax at source on payments made to Non-Residents.
Features of section 195
Payer: Any person
Payee: A non-resident, not being a Company, or a Foreign Company
Subject Matter: Deduction of Income-Tax at Source (TDS)
Payments: Interest or any other sum chargeable under the provisions of
Rate of TDS At the Rates in force
Unique features of section 195
Unlike personal payments exempted in section 194C etc. no exclusion for the same in section 195 (all payments covered excl salaries)
No threshold limit
All payers covered irrespective of legal character HUF, Individuals, etc.
Covers only non-residents and not RNOR'S
WHT not conclusive-subject to regular assessment
Nature of payment to be determined from payee's point of view
Objective of section
To ensure tax liability is recovered through deduction at source itself.
Tax Department is not troubled to recover tax from a non-resident
whose India connection may be transient, or
whose assets in India may not be insufficient
Tax is collected at the earliest point of time
No difficulty in collection of tax at the time of assessment
To avoid loss of revenue as the non-residents may not have any assets in
India from which subsequent recovery can be made
The object of Section 195 is to ensure that tax due from non-resident persons is secured at the Objective of section 195 from non-resident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment.
CBDT's Circular No. 152 [F. No. 484/31774-FTD-ll], dated 27. 11. 1974
Subject: "Where whole payment would not be income chargeable to tax in the hands of recipient non-resident, person responsible for paying such sum may make application for determination of appropriate portion"
I am directed to state that section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any interest (not being "interest on security") or any other sum (not being dividends) chargeable under the provisions of the Income-tax Act to deduct income-tax at the "rates in force", unless he is himself liable to pay income-tax thereon as an agent. Payments to a non-resident, by way of royalty for the use of, or the right to use, any copyright (e.g., of literary, artistic or scientific work including cinematograph films or films or tapes for radio or television broadcasting), any patent, trade mark, etc., and payments for technical services rendered in India are some of the typical examples of sums chargeable under the provisions of the Income-tax Act to which the aforesaid requirement of tax deduction at source will apply. The term "rates in force" means the rates of income-tax specified in this behalf in the Finance Act of the relevant year.
Where the person responsible for paying any such sum to a non-resident considers that the whole amount thereof would not be income chargeable under the Income-tax Act in the case of the recipient non-resident, he may make an application under section 195(2) to the Income-tax Officer for the determination of the appropriate portion of such payment which would be taxable and in respect of which tax is to be deducted under section 195(1).
The object of section 195 is to ensure that the tax due from non-resident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment. Failure to deduct tax at source from payment to a non-resident may result in loss of revenue as the non-resident may sometimes have no assets in India from which tax could be collected at a later stage. Tax should, therefore, be deducted in all cases where it is required to be deducted under section 195 before the payment is made to the non-resident and the tax so deducted should be paid to the credit of the Central Government as required by section 200 read with rule 30. Failure to do so would render a person liable to penalty under section 201 read with section 221, and would also constitute an offence under section 276B.
Circular: No. 152 [F. No. 484/31/74-FTD-II], dated 27-11-1974.
Who is the payer under section 195
Under section 195, all the payer are covred irrespective of their status like Individual, HUF, and Firm & Corporate etc. So, all the payer are responsible to deduct TDS under this section if they are making payment to Non-resident as per prescribed Conditions.
HUFs
Firm & AOPs
Persons having exempt income in India, e. g., trusts and organization claiming exemption under sections 10 and 11 of the Act.
Any other juristic person irrespective of whether such person has an income chargeable to tax in India or not
As regard the recipient of amounts, the section covers all non-residents its ambit. Residents and resident but not ordinarily resident are not covered by the section.
Who is the payee under section 195
Under this section, all the payees are covered whether Individual or Corporate or any other status. So making payment to non-resident, not being company or to a foreign company covered under payee if they meet the non-resident status under section 6 of the Act.
Chargeability of Income
DETERMINE CHARGEABILITY UNDER INCOME TAX ACT
1.Section 5: Scope of Total Income-In case of Non-Resident
Income received or deemed to be received in India or
Income accrues or arises or deemed to accrue or arise to him in India.
2.Section 9 : Income deemed to accrue or arise in India
An income is said to be deemed to accrue or arise in India if the same is accruing or arising directly or indirectly, through-
business connection in India or
from any property in India or
from any asset or source of income in India or
the transfer of a capital asset in India* any other which derives its value from assets in India.
It also includes any share or interest in a company or entity registered or incorporated outside India which derives its value from assets in India.
DETERMINE-CHARGEABILTTY AS PER DTAA
Royalty or Fees for Technical Services.
Independent Personal Services
Dependent Personal Services
Other Incomes
Payments & expenses covered under section 195
As per this section, any interest (not being interest referred to in section194LB or section 194LC or section 194LD) or any other sum chargeable under the provisions of the Income Tax Act (not being income chargeable under the head "Salaries" so following payment not required TDS deduction under this section (I. e. Exception to section 195).
EXCEPTIONS TO SECTION 195
Section 192: Salaries
Section 194L8: Interest from Infrastructure Debt Fund
Section 194LC: Interest from an Indian company.
Section 194LD: Interest payment to a Foreign Institutional Investor (FII) or a Qualified Foreign Investor (QFII On certain Bonds and Government Securities.
No TDS on Dividends referred to in section 115-0.
Above payments are excluded under this section from TDS deduction and all other payments are covered under this section. But payment against import does not come under purview of TDS.
Obtain Tax Deduction Account Number (TAN)
Before deduction of TDS under section 195, buyer should obtain TAN under section 203A of the Act. You can apply for TAN online by filing Form 49B.
Difference between section 195 and other TDS provisions
Facter Other TDS Provisions Section 195
Payer Specified Person Any Person
Payee Resident Non-Resident
Nature Specific payment weather income or not Income chargeable under IT Act.
Threshold Specified No Threshold
Certificate for Remittance Not Required Mandatory
Scope & Condition for Applicability Section 195(1)
Section 195 provides that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194-LB or section 194-LC or section 194-LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") 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 the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
PROVIDED that in the case of interest payable by the government or public sector bank within the meaning of section 10 (23D) or public financial institution within the meaning of that clause, the deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode whichever is earlier, deduct income-tax thereto at the rates in force.
Section 195 derives its form and substance completely from (Section 9 : Income deemed to accrue or arise in India). It includes the business connection, royalty and fees for technical services etc.
Section 195 deals with a situation where the entire sum payable to a non-resident is chargeable to tax. Then the payer is obliged to deduct tax at source from the amount paid to the non-resident.
Explanation 2 inserted to cover payment made by a Non-Resident to
another Non-Resident
Explanation 2 has been inserted vide Finance Act, 2012 with retrospective effect from 01.04.1962 to provide that every non-resident payer who is responsible for making any payment to non-resident (which is chargeable to tax in India) will have to comply with withholding tax requirements irrespective of the fact whether the non-resident has any presence in India of Not.
TEXT OF EXPLANATION 2 TO SECTION 195 (1)
"For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all person, resident or non-resident, whether or not the non- resident person has-
a residence or place of business or business connection in India or
any other presence in any manner whatsoever in India."
Prior to insertion of Explanation 2, the general assumption was that since the Act does not clearly specify the applicability of the provision to non-resident payers, the term person as referred in section 195 (1) should be interpreted as meaning 'resident' payers. Insertion of Explanation 2 clearly overturned the decision of Apex Court in the case of Vodafone International Holdings BV (VIH).
Transfer of shares of foreign company foreign company by non-resident to Non-Resident does not attract Indian the tax even if object is to acquire Indian assets held by foreign company.
Taxability of a transaction between two non-resident companies (having no presence in India), in relation to Transfer of shares of an overseas company, in favour of Vodafone International BV (VIH) to hold that the transaction is not taxable in India and also that the Revenue Authorities (RA) have no jurisdiction to tax the transaction. The SC has also provided observations and decisions on various domestic and international tax issues/principles which could have significant ramifications.
In February 2007, Vodafone acquired a single share of CGP from HTIL CGP, which was then a subsidiary of HTIL, effectively held a 67% share of the economic value of Vodafone Essar Ltd through various Mauritian and Indian companies. The Indian Income Tax Authority contended that the Transfer of a single share in CGP to Vodafone resulted in the transfer of HTIL's interests in Vodafone Essar Ltd to Vodafone. The authority alleged that, in addition to transfer of the share, other rights and entitlements were transferred as an intrinsic part of the transaction. The authority therefore initiated proceedings against Vodafone for a failure to deduct tax under Section 195 of the Income Tax Act 1961, seeking to recover $2.1 billion from Vodafone as alleged withholding.
In September 2007, the Income Tax Department issued a show cause notice to Vodafone under Section 201 of the Act, seeking to treat Vodafone as an 'assessee in default' for not deducting tax at source in terms of Section 195 of the Act. In October 2007, Vodafone filed a writ petition before the Bombay High Court challenging the jurisdiction of the department to issue the notice.
In December 2008, the High Court held that the transaction was prima facie liable to tax in India. Vodafone then filed a special leave petition before the Supreme Court challenging the High Court's ruling. In January 2009, the Supreme Court directed that the jurisdictional issues in relation to the power to tax the transaction first be determined by department. The court also mentioned that Vodafone was entitled, if necessary, to challenge the departments before the High Court.
In May 2010, the Department passed claiming jurisdiction to tax the transaction and treating the transaction as chargeable to tax in India. Vodafone was therefore treated as an assessee in default. In June 2010 Vodafone filed a writ petition before the High Court challenging the department's order. In September 2010, the High Court Med that:
Section 9 of the Act was wide enough to cover the transaction
income is chargeable to tax in India; and
the department had jurisdiction under the Act to pass an order in relation to the transaction.
Vodafone again challenged the order of the High Court before the Supreme Court, through a special leave petition. The hearings began on August 3 2011 and concluded on October 19, 2011, after 28 days of arguments.
The Supreme Court's judgment clarifies the law, based on the provisions contained in the act. While delivering its judgment, the court recognized that it is important to provide certainty with regard to the interpretation of law and the maintenance of a robust judicial system, so that investors can determine the tax position for investment in India. If the government wishes to propose a limitation of benefits or 'look-through' provision, this should be a policy decision introduced either under the extant law or the tax treaties.
'LOOK AT' v 'LOOK THROUGH'
The court ruled that it is important for both the tax administration and the courts to look at the legal nature of the transaction in its entirety and holistically, a dissecting approach should not be adopted. The 'look-through' approach is permissible only in instances where it can be established on the basis of facts and circumstances that avoidance.
INDIRECT TRANSFERS
The court observed that Section 9 of the Act cannot be extended to cover indirect transfers of capital assets or property situated in India, as the legislature has not used the words' indirect transfers' in Section 9 (1) (I) of the Act. If these words are read into this section, the express statutory requirement of Section9 (1) (I) (4) of the act would be rendered worthless. The Direct Tax Code Bill 2010 specifically proposes that such indirect transfers be liable to tax in India. In the absence of such a provision in the existing statute, indirect transfers should not fall within the ambit of Section 9 (1) (I) of the Act and are thereby not liable to tax in India.
PURPOSIVE INTERPRETATION
The court noted that no purposive interpretation can be rendered to a legal statute. The effect of the language of the section should be given, especially when the transaction is unambiguous A legal fiction has a limited scope and cannot be interpretation is to the purposes of tax particularly if the result of such interpretation is to transform the concept of chargeability.
SITUS OF SALE OF SHARES
The situs cannot be determined on the basis of the location of the underlying assets. In the case at hand, the situs of the shares would be where the company was incorporated and where its shares could be transferred.
BASIS OF VALUATION
The court also noted that the basis of valuation cannot be the basis of taxation. Taxation is based on profits, income or receipt. In contrast, valuation may be a science, not law-to arrive at the value it is necessary to take into consideration the business realities, including the business model, the duration of its operations and concepts such as cash flow, discounting factors, assets and liabilities, and intangibles.
APPLICABILITY OF THE ACT
Section 195 of the Act is applicable only when the transaction is liable to tax in India. In the event that the transaction is not liable to tax in India, Section 195 of the Act has no applicability. The court's judgment in this case reiterates its previous judgment in GE India Technology Centre Private Limited u. CIT.
REPRESENTATTVE ASSESSEE
The court finally noted that Section 161 of the Act makes a representative assessee liable only if the eventualities stipulated in Section 161 of the Act are satisfied.
OTHER RELEVANT CASES
In this decision the court also discussed a number of related cases. The court upheld the Westminster principle-that is, that form prevails over substance ingenuine transactions. In contrast, Ramsay lays down the principle of statutory interpretation rather than an overarching anti-avoidance doctrine imposed on tax laws and enunciates the 'look-at' principle. Ramsay does not discard Westminster in fact, Ramsay reads Westminster in the proper context by which a 'device', which was colourable in nature, had to be ignored as fiscal nullity.
The court also discussed Azadi Bachao Andolan, McDowell and Mathuram Agrawal. The observations of Justice Chinappa Reddy in McDowell departed from the Westminster decision and were clearly made only in the context of artificial and colourable devices. In relation to cases involving treaty shopping and/or tax avoidance, the court noted that there was no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal. The court further noted that all tax planning cannot be said to be illegal, illegitimate and impermissible. Instead, every taxpayer is entitled to arrange its affairs so that the taxes shall be as low. As possible and the taxpayer is not bound to choose the pattern which will benefit the treasury.
After deciding the case in favour of VIH, the SC has also directed the RA to refund INR 25 billion deposited by VIH (following SC directions) with interest @ 4% p. a. within two months from the date of this decision.
Application by payer to Assessing Officer for determining appropriate portion of sum chargeable [Section 195 (2) ]
Section 195 (2) deals with a situation where only a part of the sum payable to a non-resident is chargeable to tax. In that case the payer may approach the Assessing Officer having jurisdiction over the non-resident to determine the quantum of sum chargeable to tax and the tax payable thereon. The application of section 195 (2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO(TDS) for determining, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
TEXT OF SECTION 195 (2)
Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
Section 195 (2)-Requirement to apply to Assessing Officer for determination of appropriate portion of sum chargeable to tax.
plain paper application.
amount chargeable to tax and not the rate or tax,
Assessing Officer cannot grant total exemption.
[Graphite Vicarb India Ltd v. ITO (1987) 28 TTT 425 (Cal)]
Application by the "payee" to the Assessing officer for lower or NIL withholding Certificate [Section 195 (3) ]
Section 195 (3) deals with the obligations of the recipient of the income. Where the non-resident in India is of the opinion that no tax will be payable by him, for the year, on account of anticipated losses or on account of heavy accumulated losses he may approach the Assessing Officer for a Certificate authorizing him to receive the income without deduction of tax at source. The procedure is prescribed in section 195 (3) read with Rule 29B of the Rules. Rule 29B prescribes certain conditions to be fulfilled for making the said application. The Rule is inter alia, to ensure that the person making the application has a long standing presence in India and has not been deemed to be in default in respect of any tax, interest or penalty.
In other words, any person (Recipient) entitled to receive any interest or other sum on which income-tax has to be deducted under section 195 (1) may make an application in the prescribed form (Form No. 13) to the Assessing Officer for grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that section and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under section 195 (1). Rule 29B permits an application by a non-resident person only if following conditions are satisfied :-
Non-resident has prior track record of assessment in India
Non-resident has been carrying on business or profession in India continuously for a period of 5 years
Value of fixed assets in India exceeds 50 lakhs
Should not have been deemed to be an assessee in default
Not been subjected to penalty under section 271 (1) (iii)
TDS Instruction No. 51 [F. No. SW/TDS/02/201 3/DIT(S)-II ], dated 04.02.2016
Subject: – Deduction at source-Non-residents, payments to-issuance of online certificate under section 195 (2) and 195 (3)
Request has been received from field formations and tax payers to provide functionality for issue of online certificate under section 195 (2) and 195 (3) for lower/no deduction as manual certificates were not being considered during processing of TDS statements by CPC TDS.
In this regard, existing functionality to issue online certificate undersection 197 in ITD application has been enhanced to issue online certificate undersection 195 (2) and 195 (3) as under :-
Assessing Officers of International taxation charges who are authorized to issue certificate under section 195 (2) and 195 (3) may be assigned the role AR INT TAXATION in ITD application by respective Computer Centre through HRMS module, if not already assigned. The certificate type I. e. 197/195 (2)/195 (3) also needs to be specified.
For issue of certificate under section 195 (2) and 195 (3), jurisdiction restriction of PAN has been relaxed. For issue of certificate under section 195 (3), TAN and Amount has been made optional.
As par existing procedure for issue of certificate under section 197,certificate under section 195 (2) and 195 (3) is required to be approved, by Range officer through ITD application.
The above functionality may kindly be brought to the notice of AOs under your charge.
The validity of a certificate issued by the Assessing Officer [section 195 (4)]
A certificate granted under Section 195 (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by Assessing officer before the expiry of such period, till such cancellation.
Power of the CBDT to issue Notifications [Section 195(5)]
Section 195(5) states that the Board may make Rules specifying the case in which, and circumstances under which, an application under section 195 (3) shall be made. The non -resident is eligible to make an application under section 195 (3) only if the conditions laid down in Rule 29B are satisfied. The application in case of Banking Companies is to be made in Form 15C and in case of any other person, the application is to be made in Form 15D.
Board may, having regard to the convenience of assessee and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under section 195 (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.
Furnishing of information relating to the payment of any sum [Section 195(6)]
UP T0 31. 05. 2015
In terms of provisions of section 195 (6) of the Act, a person responsible for making payment [as referred in section 195 (1)] to a non-resident was required to furnish information in Form 15CA to the income-tax department. The form was required to be filed electronically with the tax authorities and a signed printout of it to be submitted to the authorized dealer, prior to remitting the payment to non-resident. Also, a certificate from an accountant was required to be obtained in Form 15CB before filing of Form ISCA.
The provision o section 195 (6) have been amended by Finance Act, 2015 to provide that the person responsible for paying any sum, whether chargeable to tax or not, to a non-resident, to a non-resident, not being a company, or to a foreign company, shall be required to furnish the information of the prescribed sum in such form and as may be prescribed.
With effect from 01.06.2015, Section 195 (6) provides that the person responsible for paying to a non-resident/foreign company, any sum (whether or not chargeable under the provisions of the Act in the hands of recipient) shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed in rule 37BB and Form Nos. I5CA, 15CB and 15CC.
In other words, Forms I5CA/15CB become mandatory irrespective of the chargeability of the amount concerned. Even in respect of payments hitherto considered as non-taxable (e. g. Import of goods), Form ISCA/15C13 will be warranted.
FURNISHING OF INFORMATION-SECTION 195 (6) READ WITH RULE 37BB
Furnishing of Information to Tax Department-Form 15CA
CA Certificate before making payment-Form 15CB
FORM I5CA
Part A: Information of Remitter, Information of Account Particular of Remittance & TDS
Part B: Nature of Remittance (64 Categories Specified) 37 Mandatory Fields (Marketed with "*")
Rule 37BB and Forms I5CA & 15CB (as amended vide Income Tax (21st Amendment Rules, 2015)
The issue of Tax Residency certificate of payee etc. will come up when benefits are claimed under any DTAA.
Form No. 15CB is certificate from chartered Accountant and Form 15CA is e-form-cum—deduction to be uploaded by the taxpayer, without which the payer's banker should not transfer funds to the non-resident or foreign company in a covered transaction.
CBDT empowered to notify class of persons [Section 195 (7)]
Sub-section (7) was inserted by Finance Act, 2012 to partially neutralize the impact of ratio of GE Technology Centre and thereby the Board may specify a class of persons or cases where the payer has to approach Assessing Officer through an application to determine proportion of sum through an application to determine proportion of sum chargeable to tax for deduction of tax accordingly.
SUB-SECTION (7) TO SECTION 195 INSERTED TO MAKE APPLICATION MANDATORY IN NOTIFIED CASES
With effect from 01.07.2012, Section 195 (7) provides that "Notwithstanding anything contained in section 195 (1) and section 195 (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the Person responsible for paying to a non-resident, not being a company or to foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable."
Thus CBDT has been empowered by virtue of provisions of section 195 (7)inserted by Finance Act, 2012 to notify a class of persons or cases to furnish an application to the Assessing Officer to determine the appropriate proportion of sum chargeable, and upon such determination, the payer is liable to deduct tax under sub-section (l) on that proportion of the sum which is so chargeable. It may be noted that a notification specifying such classes of persons or cases is not yet notified by CBDT.
Grossing up of tax [Section 195A]
Section 195A is applicable if the following condition are satisfied-
(I) It covers any payment other than that referred to in section 192 (1A).
(ii) Tax chargeable on such income is to be borne by the person by whom income is payable.
(iii) Such liability is to be borne by the payer under an agreement or other arrangement.
If these conditions are satisfied, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.
If tax is to be borne by the payer, under section 195A grossing up the rate which is applicable is "rates in force". Rates in force is defined by section 2 (37A). For the purpose of section 195, sub-clause (iii) of clause (37A)
TEXT OF SECTION 2 (37) (iii)
For the purposes of deduction of tax under section 194LBA or section 194LBB or section 194LBC or section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be.
Grossing up for computing TDS to be done in cases where the payer bears tax liability.
FOR EXAMPLE Amount payable to Non-resident is INR 100, rate of TDS is 10%.
Gross amount for TDS purpose is INR 111. 11 (100 X 100/90)
Grossing up of income in case of Expatriate taxation
An Expatriate or expat is a person residing in a country, temporarily or permanently, which is different from his/her home country [say different from a country in which he/she is a citizen]. This term is broadly used in the context of professionals/technicians sent by their companies to their associated enterprises or foreign subsidiaries. These people are different to those who are foreign citizen coming to India for employment, as those are called immigrants.
Grossing up of Income
There is such kind of agreement that the tax burden is on the company to which he/she sent and expatriate employee gets the net salary. This term is most frequently used in terms of salary, an employee call receive their salary grossed up, which means that they would receive the full salary promised to them, without deductions for tax. This gives rise to the concept of grossing-up an expatriate's salary is to be considered as net salary + tax liability on it, as it has been borne by the company.
When a Japanese Expatriate is sent to India, then the income-tax burden of that expatriate will be on the Indian concern and not on the expatriate employee. This gives rise to the concept of grossing-up.
Step by Step calculation Gross up amount
Step 1: First calculate TDS liability in normal way
Step 2: Calculated Tax % as per existing Tax slab, let us assume it is 20. 6%
Step 3: Find out Gross up % I. e. 100-Tax Rate I. e. 100-20. 6 = 79. 40%
Step 4: Calculate Gross up Tax amount, (it is Tax amount in Step 1 divide by Gross up rate in Step 3)
Step 5: Add Tax calculated in Step 4 to as Taxable Perquisite to Income given in Step 1
Step 6: Now re-calculate tax liability & net income, now you can see net income is same as Gross Income.
Concept of Grossing up/Income to be paid "Net of tax"[Section 195A]
In cases where tax payable on payment to a non-resident is to be borne by the payer
Such tax borne by the payer also forms part of non-resident's income.
Accordingly, payment to non-resident required to be grossed up to equal to the net amount payable to non-resident an amount which would, after withholding appropriate taxes, be
In other words, grossing up for computing TDS to be done in cases where the payer bears the tax liability. The grossing up is to be done with the rates in force.
PROVISIONS ILLUSTRATED-1: –
X Ltd. want to send 1000 to a Non-resident company net of taxes. The rate of TDS as per Act is 10%, effective rate turns out to be 10. 5575 % after including surcharge & cess, then grossing up will be done at 10%.
Particular Amount (In. Rs.)
Net Payment 1000
Rate in force as per section 2(37A) 10%
Grossed amount [1000 X 100]
1000 – 10 1111.11
Tax deductible under section 195 at rates in force I.e. 10% 111.11
Amount in (Rs.)
Rate in force as per section 2 (37A)
Grossed amount r 1000 X 1001 1111. 11
Tax deductible under section 195 at rates in force 111. 11
1. e. 10%
PROVISIONS ILLUSTRATED-2-
Net Payment 100
Tax rate applicable 20%
Gross up Income [100 X 100]
100 – 20 125
Tax Payable (125 X 20%) 25
Net amount paid to non- resident (125 – 25) 100
Section 195A-Does not apply when profits of non-resident covered by presumptive provisions
Section 195A in cases of presumptive taxation (Sections 44B, 44BB, 44BBA &44BBB) is not applicable.
[CIT u. ONGC (2005) 276 ITR 585) (Uttarakhand) ]
Certificate for deduction at lower rate [Section 197]
CERTIFICATE FOR DEDUCTION AT LOWER RATE ALTERNATIVE REMEDY UNDER SECTION 197
Application may be made by the Non-Resident payee to the Assessing Officer in Form 13 for tax deduction at a lower rate or nil rate.
The Assessing officer shall issue a certificate prescribing appropriate rate of tax.
The same shall be valid only for the specified assessment year.
TEXT OF SECTION 197
197. (1) Subject to rules made under sub-section (2A), where, in the case of any Income of any person or sum payable to any person, income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA, 194LLB, 194LBC and 195, the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate.
(2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.
(2A) The Board may, having regard to the convenience of assessee and the interests of Revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (1) and the condition subject to which such certificate may be granted and providing for all other matters connected therewith.
Certificate for deduction at lower rates or no deduction of tax from income other than dividends [Rule 28AA]
(1) Where the Assessing Officer, on an application made by a person under sub-rule (1) of rule 28 is satisfied that existing and estimated tax liability of a person justifies the deduction of tax at lower rate or no deduction of tax, as the case may be, the Assessing Officer shall issue a certificate in accordance with the provisions of sub-section (1) of section 197 for or no deduction of tax.
(2) The existing and estimated liability referred to in sub-rule (1) shall be determined by the Assessing Officer after taking into consideration the following
(I) tax payable on estimated income of the previous year relevant to the assessment year
(ii) tax payable on the assessed or retuned income, as the case may be, of the last three previous years.
(iii) existing liability under the Income-tax Act 1961 and Wealth-tax Act,1957
(iv) advance tax payment for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28;
(v) tax deduction at source for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28; and
(vi) tax collected at source for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28.
(3) the certificate shall be valid for such period of the previous year as may be specified in the certificate, unless it is cancelled by the Assessing officer at any
(4) The certificate for no deduction of tax shall be valid only with regard to person responsible for deducting the tax and named therein.
(5) The certificate referred to in sub-rule (4) shall be issued direct to the person responsible for deducting the tax under advice to the person who made an application for issue of such certificate.
(6) The certificate for deduction of tax at lower rate shall be issued to the person who made an application for issue of such certificate, authorizing him to receive income or sum after deduction of tax at lower.
Instruction No. 7/2009 [F. No. 275/23/2007-1T-(B) ], dated 22. 12. 2009
Section 197 of the Income-tax Act, 1961-Deduction of tax at source
Subject: Certificate of lower deduction or Non-Resident of Tax at Source.
I am directed to bring to your notice on the subject of issue of certificates under Section 197. Instruction No. 8/2006, dated 13. 10. 2006, was issued stating that 197 certificates for lower deductions or nill deduction of TDS U/S 197 are not to be issued indiscriminately and for issue of each certificate, approval of the JCI/ADDL .CIT concerned need to be taken by the assessing officer (AO). Power of issue of certificates under section 197 would ordinarily be exercised by
the officers manning TDS Administration. However, instances are being brought deduction of tax at source under section 197 indiscriminately, in contravention of relevant Income tax rules and Instructions.
I am, therefore, directed to communicate to you that further to the contents of Instruction No-8/2006, prior administrative approval of the Commissioner of Income Tax (TDS) shall be taken (where the cumulative amount of tax foregone by non-deduction/lesser rate of deduction of tax arising out of certificate under Section 197 during a financial year for a particular assessee exceeds Rs. 50 lakhs in Delhi, Mumbai, Chennai, Kolkata, Bangalore, Hyderabad, Ahmedabad and Pune station and Rs. 10 Lakhs for other station (TDS) Gives Administrative approval of the above, A copy of it has to be endorsed in variably of the jurisdictional CIT also.
The content of the above instructions may be brought to notice of all the officer working in your charges for strict compliance.
Comparative analysis of section 195(2), 195(3), and 197
Particulars 195 (2) 195 (3) 197
Applicant Payer Payee (who satisfies conditions specified in rule 29B) Payee
Purpose To determine the portion of income liable for tax withholding To receive a specified payment without deduction tax at source To obtain nill/lower tax withholding rate for all receipts
Applicability Applicable to specified payment Applicable to specified receipt Applicable to all receipt
Whether appealable under section 248? YES-where the tax is deposited by the payer NO NO
Whether revisable U/S 264? YES YES YES
Whether writ a possible? YES YES YES
[1] TDS on Salary
TDS on salary to non-residents (including Indian NR) is governed section 192 and not by section 195 as section 195 specifically excludes salary and a dividend payment.
Salary payment to non-resident covered under section 192, not under section 195.
Salary earned by NRI is taxable in India as per the provisions of sect on 9 (1) (ii) of the Income Tax Act and TDS has to be effected as per section 192.
Matters pertaining to the TDS made in case of Non-Resident Indian
Where Non-Residents are deputed to work in India and taxes areborne by the employer, if any refund becomes due to the employee after he has already left India and has no bank account in India by the time the assessment orders are Passed, the refund can be Issued to the employer as the tax has been borne by it.
Circular: No. 707, dated 11-7-1995.
Subject: Whether, where non-residents are deputed to work in India and taxes are borne by employers, in certain cases if an employee to whom refunds are due has already left India and has no bank account here by the time assessment orders are passed, refund can be issued to employer as tax has been borne by it
References have been received by the Board in cases where non-residents are deputed to work in India and the taxes are borne by the employers. In certain cases, an employee to whom refunds are due has already left India and has no bank account here by the time the assessment orders are passed. A question has been raised whether in such cases, the refund can be issued to the employer as the tax has been borne by it.
The Board has considered the matter and it is of the view that insofar as the payment of refund which has already become due in concerned, there may be no objection to giving the refund to the employer if the non-resident assessee duly gives authorisation in this regard. In such cases, the procedure laid down in Circular No. 285, dated 21-10-1980 issued by the Central Board of Direct Taxes needs to be followed.
Under the provisions of section 163 of the Income-tax Act, 1961, inter alia, any person from or through whom the non-resident is in receipt of any income, whether directly or indirectly, can be regarded as an agent in relation to the non-resident. Accordingly, the company itself can file the return and can be assessed in its own name in respect of that income under section 161(1) of the Act, and claim the refund.
Circular: No. 285 [F. No. 275/77/79-IT(B)], dated 21-10-1980.
Subject: Procedure for regulating refund of amounts paid in excess of tax deducted and/or deductible
The Board have been considering the manner of refunding the amount paid in excess of the tax deducted and/or deductible (whichever is more) under sections 192 to 194D of the Income-tax Act. The Board are advised that such excess payment can be refunded, independently of the Income-tax Act, to the person responsible for making such payment subject to necessary administrative safeguards.
In supersession of the earlier instruction on the subject, the following procedure is laid down to regulate the refund of such excess payments.
The excess payment would be the difference between the actual payment made by the deductor and the tax deducted at source or that deductible, whichever is more. This amount should be adjusted against the existing tax liability under any of the Direct Tax Acts. After meeting such liability the balance amount, if any, should be refunded to the assessee.
Where the tax is deducted at source and paid by the branch office of the assessee and the quarterly statement/annual return (in case of salaries) of tax deduction at source is filed by the branch, such branch office would be treated as a separate unit independent of the head office. After meeting any existing tax liability of such a branch, which would normally be in relation to the deduction of tax at source, the balance amount may be refunded to the said branch office. The Income-tax Officer, who will refund the amount, would be the one who receives the quarterly statement/annual return (in case of salaries) of tax deduction at source from that branch office and keeps a record of the payments of tax deduction at source made by that branch.
The adjustment of refund against the existing tax liability should be made in accordance with the present procedure on the subject. A separate refund voucher to the extent of such liability under each of the direct taxes should be prepared by the Income-tax Officer in favour of the "income-tax department" and sent to the bank along with the challan of the appropriate type. The amount adjusted and the balance, if any, refunded would be debitable under the sub-head "Other refunds" below the minor head "Income-tax on companies"—major head "020—Corporation Tax" or below the minor head "Income-tax other than Union Emoluments"—major head "021—Taxes on incomes other than corporation tax" according as the payment has originally credited to the major head "020—Corporation tax" or the major head "021—Taxes on incomes other than corporation tax".
Since the adjustment/refund of the amount paid in excess would arise in relation to the deduction of tax at source, the recording of the particulars of adjustment/refund should be done in the quarterly statement of TDS/Annual return (in case of salaries) under the signatures of the Income-tax Officer at the end of the statement, i.e.,below the signatures of the person furnishing the statement.
Salary payable m foreign currency [Section 192(6)]
Where salary of an expat is payable in foreign currency, the amount of the tax deducted is to be calculated after converting the salary payable into Indian adopted by State Bank of India with Section 192 (6) of Indian Income Tax Act.
This rule is applicable only for determination of Income Tax in TDS. However, h computing the salary income, the rate of conversion to be applied is the telegraphic transfer buying rate on the last day of month in which the salary is due or is paid.
Both the Indian Salary as well as the Foreign Salary of an Expatriate is liable to Tax and Deduction of TDS.
[2] TDS on Interest Income
Non-Resident Indians (NRIs) can earn interest income from various sources in India.
Interest earned by a Non-Resident Indian (NRI) from the NRO deposits is taxable in India as per the provisions of Section 9 (1) (v) of the Income Tax Act, 1961 and TDS has to be effected as mentioned in the Finance Act.
RATE OF TDS: INTEREST ON BANK DEPOSITS (As per provisions of section 195 currency at the telegraphic transfer buying rate as on the date of deduction of tax (Rule 26) read
There are three types of accounts available for NRIs in India-
(I) Non-Resident External (NRE),
(ii) Foreign Currency Non-Resident (FCNR) and
(iii) Non-Resident Ordinary (NRO) Account
Interest on NRE and FCNR account is tax-free in India and thus there is no question of TDS in both of these cases. Whereas interest earned on the Non-Resident Ordinary Account (NRO) is taxable and will be subject to a TDS of 30% as compared with 10% for fixed deposits for resident Indians.
The TDS is applicable for a resident Indian if the interest exceeds-10,000/- in a year per bank branch. However, this threshold limit does not apply to NRO deposits. The interest earned on all other investments, such as corporate deposits and bond is subject to a 201b TDS whereas the rate for resident Indians is a much lower at 10%.
Interest earned by resident Indians from blank deposit is subject to TDS only over and above a limit of 10, 000/-. No such limit applies for Non-Resident Indians (NRIs).
NON-RESIDENT INDIANS NRIs) ARE NOT INVITED TO SUBMIT FORM 15G
Resident Indians can avoid the TDS on bank interest by submitting the Form 15G or 15H. However, NRIs are not permitted to submit Form 15G for their NRO deposits in banks and TDS is mandatory.
TDS is deducted on every rupee of interest earned @ 30% (15% in case tax Residency Certificate is submitted from a treaty country).
OBLIGATION TO DEDUCT TDS
There is no income threshold under which TDS is not chargeable. Under the provisions (Section 195), payer (being bank, company, PSU, Govt. Etc.) is under obligation to deduct TDS before paying interest income to the Non-Resident Indian (NRI). Due to this, Non-Resident Indians (NRIs) would have to claim tax refund if more is being deducted than is their tax liability. Alternatively, they can submit tax exemption certificate to all their deductors.
INTEREST ON ALL OTHER INVESTMENTS
Interest earned on all other investments like corporate deposits and bonds will be subject to TDS at 20%. In all these cases, the company or party making the payment will deduct this tax.
Dividends from equity shares, equity mutual funds and debt mutual funds are exempt in the hands of the share or unit holder.
TDS on rent paid to Non-Resident Indian (NRI) under section 195
Non-Resident Indians (NRIs) are holding immovable property in India either by way of purchase or inheritance or gift or otherwise. These immovable properties fetch them rental income by letting out the same. Under the TDS provision (Section 195), payer (being tenant) is under obligation to deduct TDS before paying rental income to the NRI.
THE RATE OF TDS IN CASE THE PERSON RECEIVING THE RENT IS A NON-RESIDENT INDIAN (NRI)
TDS in such case would be deducted @ 30% Under section 195 (plus Education CESS & SHEC) as there is no separate rate prescribed for TDS on rent paid to NRIs. Therefore, this would fall under the category of other income and rate of TDS on the rental income is maximum I. e. 30%.
Tax will be deducted at source by the payer of the rent. The payer of the rent, in this case, must obtain a TAN number and deduct TDS of 30% from the rent amount. He must also provide a TDS certificate to the Non-Resident Indian (NRI). The onus of du ducting tax is on the payer.
However, the Non-Resident Indian (NRI) may make an application to the Income Tax Officer to issue a certificate for lower deduction of TDS. If the Income Tax Officer issues such certificate, then TDs on rent paid to NRI would be deducted at the rates specified in the certificate.
RATE OF TDS IN CASE TW PERSON RECEIVING THE RENT IS A RESIDENT INDIAN
TDS on rent @ 10% is required to be deducted by the person paying the rent.
But at the same time, that income will be subject to tax in your country of residence. In such cases, we need to refer to the Double Taxation Avoidance to Agreements that India has entered into with country has not Double Taxation Avoidance Agreement (DTAA) with India, Income-tax on rent received would be liable to be paid in India as well as the country of residence.
TDS on sale of immovable property by Non-Resident Indian (NRI)
Non-Resident Indians (NRIs) who have sold immovable property which is situated in India have to pay tax on the Capital Gains. 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.
Long-term capital gains are taxed at 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).
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.
As per section 112, long-term capital gains on sale of a capital asset is to be taxed at the rate of 20%. Short-term capital gain on sale of a capital asset excepts on sale of equity shares and equity oriented mutual funds) is to be taxed at the slab rates prescribed under the Finance Act applicable to the year of sale.
Therefore, the buyer/transferee has to deduct tax on sale of immovable property by the non-resident at the slab rate prescribed in case property is sold within three years of its purchase and at the rate of 20% where property is sold after three years of its purchase I. e. where LTCG accrues.
SECTION 90-As per section 90 of the Income Tax Act, 1961, the rates of taxation on taxable income of a non-resident will be as prescribed under the Income Tax Act, 1961 or under the DTAA of India with the country of which the non-resident is a resident whichever is more beneficial to the tax payer.
Therefore if the rates prescribed for taxation of capital gains in the DTAA are less then the 20 % rate of the slab rate, then tax will be deduct at that rate.
However, for availing the benefit of lower rate of deduction of tax under the DTAA, the non-resident transfer will have to furnish a Tax Residency the payer indicating the tax residency of which he is a resident.
TDS on purchase of immovable property by Non-Resident Indian (NRI)
WHO CAN PURCHASE AND ACQUIRE IMMOVABLE PROPERTY IN INDIA
Under normal circumstances, the following can purchase and acquired immovable property in India-
(a) Non-Resident Indian (NRI)
(b) Person of Indian Origin (PIO)
NRIs can buy as many properties as they want. There is no restriction on such number of properties held. For this purpose, they do not need any special permission from Reserve Bank of India. However, they are only permitted to acquire a residential and commercial property.
The only condition in this regard is that all transactions must be conducted in Indian currency and through normal banking channels using an NRI account. TDS is applicable on property
purchased by NRIs also. TDS payable on any immovable property purchased by NRI in India was made applicable from June 1st, 2013 with the introduction of Section 194-IA.
Section 194-IA applies in case of every immovable property other than agricultural land. It states that every person (transferee), who is a non-resident and responsible for paying any amount to the resident (transferor) as a consideration for the transfer of immovable property other than agricultural land shall deduct tax on such rate as applicable at the time of making payment by whichever mode.
AMOUNT OF TDS DEDUCTION
If payment is made to a Non-Resident then section 194-IA will not be applicable. Rather section 195 will be attracted and
TDS is required to be deducted @ 20% + EC & SHEC on the sale consideration. surcharge @ 10% will be applicable if the amount paid exceeds one crore. This means TDS on property purchased by NRI has to be deducted by himself and to be deposited into the account of the government. He has to deduct it before making payment to the seller of the property.
WHEN SHOULD THE TDS SE DEDUCTED
TDS on purchase of immovable property must be deducted at the time of-
Credit to the account of the transferor (booking in the books)
The credit of payment in cash or cheque or through any other mode(whichever is earlier).
After deducting TDS, the deductor has to pay the same to the government within 7 days from the end of the month in which the TDs was deducted (In case of March, due date is April 30).
Online payment is to be made to the income-tax Department through any of the Authorised banks. A new challan-cum-statement form, Form 26QB is introduced for the same.
PAN number of both seller, as well as purchaser, needs to be mentioned in the online form for providing details regarding the transaction.
TDS CERTIFICATE
Like in all other cases, the deductor needs to issue TDS certificate under this section too. This certificate is issued in Form 16B within 15 days from the date of deposit of TDS, I. e., within 22 days from the end of the month in which the TDS was deducted.
NO NEED TO FILE SEPARATE RETURN FOR TDS PAYMENT
There is no need to file a separate return for the TDS payment on purchase/sale of immovable property on a quarterly basis. Form 26QB acts as challan-cum-statement and contains all details required to be provided in TDS return.
[6] TDS on Professional services and royalty
If you are a Non-Resident Indian (NRI) and are receiving a payment from a company in India for providing professional services, your income would be subject to TDS.
RATE OF TDS
If your agreement is dated between 1st JUNE 1997 and 30th MAY 2005,
You would be subject to a TDS at the rate of 20 per cent.
If your agreement is dated on or after 1st June, 2005,
[7] TDS on Non-Resident Indian (NRI) Investments in Mutual Funds
Taxation on Mutual Funds is same for NRIs as for resident individuals. In case of Long-Term Capital Gain Tax in equity-oriented funds-TDS is NIL as Long-Term Capital Gain is tax free in India.
In case of Long term capital gain in non-equity oriented funds (I. e. Pure debt funds, a hybrid fund with less than 65% equity), gold funds, fund of funds, International funds-TDS on NRI investment applicable @ 20 % of the gain amount. However, unit holder can claim indexation benefit on filing the Income Tax Return.
Short-Term Capital Gain Tax in equity fund is 15% and so is the TDS on NRI investments. In case of non-equity fund TDS rate on short-term capital gain is 30% plus Surcharge and CESS wherever applicable.
TDS Rates Long-term capital Gain Short Term Capital Gain
Units of an Equity Oriented Scheme NIL
(Exempt under section under section 10 (38) in case of redemption of units where STT is payable on redemption. 15%
Units of a Non-Equity Oriented Scheme (Such a debt and Money Market Mutual funds) 20% (under section 195) 30%
[8] TDS on capital gains on other assets like house property, gold
Long-term capital gains will be subject to a TDS of 20 per cent.
Short-term capital gains will be subject to a TDS of 30 per cent.
WHO IS RESPONSIBLE FOR DEDUCTING TAX AT SOURCE
The payer of the sale proceeds, even if he is an individual will be responsible for deducting tax at source and paying it to the Government. He must get a Tax Deduction Account Number (TAN) and issue a TDS certificate for the same. The onus of deducting tax is on the payer. So in case the individual does not deduct tax and the Non-Resident Indian (NRI) too fails to declare the income and pay the tax, the income-tax authorities can hold the payer responsible.
[9] All other income
All other income that you earn as a Non-Resident Indian (NRI) and which are liable for tax as per Indian laws, will be subject to a TDS of 30 per cent.
[10] payments to Non-Resident Sportsmen/Sports associations entertainer (with effect from 01. 07. 2012) [Section 194-E]
ELIGIBLE & NATURE OF PAYMENT
(I) Non-resident foreign citizen sportsman including an athlete Income is by way of-
(a) participation in India in any game other card game or gambling, etc.
(b) Advertisement or.
(c) contribution of articles relating to any game or sport in India in newspapers, magazines or journals.
(d) Non-resident sports association or institution.
Any amount guaranteed to be paid or payable in relation to any game (but other than card game, etc.) or sport played in India.
RATE OF TAX DEDUCTION AT SOURCE
10% + Surcharge + Education Cess + Secondary and Higher Education Cess at the rate of 20% [10% up to 31. 05. 2012]
(I) For the financial year 2016-17. There is no surcharge, education cess etc., if the recipient is a resident.
(ii) If recipient is non-resident, it will be increased by surcharge (when payment subject to TDS exceeds one crore), education cess and secondary and higher education cess.
(iii) If the recipient does not furnish his PAN to the deductor, tax will be deducted (with effect from 01-04-2010) at the rate of 20%.
Applicability of Section 206AA
APPLICABLE RATE OF WITHHOLDING TAX IF PAN IS NOT THERE
Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as 'deductor'), failing which tax shall be deducted at the higher of the following rates, namely: –
(I) at the rate specified in the relevant provision of this Act or
(ii) at the rate or rates in force or
(iii) at the rate of twenty per cent.
Exemption from the applicability of section 206AA to non-residents
Section 206AA provides that notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter-XVRM (hereafter referred to as 'deductee') shall furnish his Permanent Account Number to the person responsible for deducting such
However, with effect from 01. 06. 2016, section 206AA) (7) provides that the Provision of section 206AA shall not apply to a non -resident not being a company, or to a foreign company, in respect of: –
(I) payment of interest or long-term bond as referred to in section 194LC and
(ii) any other payment subject to such conditions as may be prescribed.
Relaxation from deduction of tax at a higher rate under section 206AA [Rule 37BC]
The Central Board of Direct Taxes (CBDT) has notified a Rule 378C in the Income-tax Rules, 1962 (the Rules) vide Notification No. 53/2016, F. No. 370 142/16/2016-TPL to specify the conditions to avail the aforesaid relaxation specifying the conditions to be fulfilled by non-resident deductees to obtain relaxation from higher withholding tax rate under section 206AA of the Income- tax Act, 1961 (the Act) in the absence of Permanent Account Number (PAN) in India.
The existing provisions of section 206AA of the ACT inter alia, provide that any person who is entitled to receive any amount on which tax is deductible at source shall furnish his PAN to the deductor, failing which a higher withholding tax rate will be applicable. In order to reduce compliance burden, the Finance Act, 2016 amended the provisions of section 206AA of the Act (w. e. f. June 1, 2016) to provide relaxation from higher withholding tax rate while making payment to non-resident deductees in the absence of PAN, subject to fulfilment of a prescribed condition. For this purpose, CBDT has notified a new Rule.
CBDT NOTIFICATION
Rule 37BCof the Rules provides that the provisions of section 206AA of the Act shall not apply on following payments made to non-resident deductees who do not have PAN in India
Fee for Technical Services and
Payments on transfer of any capital asset
In respect of the above-specified payments, the non-resident deductee shall be required to furnish following details and documents
Name, e-mail id, contact number
Address in the country of residence'.
Tax Residency Certificate (TRC), if the law of country of residence provides for such certificate and
Tax Identification Number (TIN) in the country of residence. Where TIN is not available a unique identification number is required to be furnished through which the deductee is identified in the country of residence.
TEXT OF RULE 37BC
Relaxation from deduction of tax at higher a rate under section 206AA(Rule 37BC)
(1) In the case of a non-resident, not being a company, or a foreign company (hereafter referred to as 'the deductee') and not having permanent account number the provisions of section'206AA shall not apply in respect of payments in the nature of interest, royalty, fees for technical services and payments on transfer of any capital asset, if the deductee furnishes the details and the documents specified in sub-rule (2) to the deductor.
(2) The deductee referred to in sub-rule (1), shall in respect of payments specified therein, furnish the following details and documents to the deductor, namely-
address in the country or specified territory outside India of which the deductee is a resident
a certificate of his being resident in any country or specified territory outside India from the Government of that country or specified territory if the law of that country or specified territory provides for issuance of such certificate
Tax Identification Number of the deductee in the country or specified territory of his residence and in case no such number is available, then a unique number on the basis of which the deductee is identified by the Government of that country or the specified territory of which he claims to be a resident.
Exchange rate of RBI on the day on which TDS is required to be deducted has to be considered
In respect of transaction with non-residents, where payments attracting tax withholding are made in foreign currency, Rule 26 of the Rules prescribes the rate of exchange to be used for conversion of foreign currency into INR for the purpose of making TDS. The rate of exchange is the TT buying rate of the respective foreign currency on the date on which tax is required to be deducted at source I. e. Date of payment or credit, whichever is earlier (except in case of TDS on salaries under section 192 where deduction is to be made on payment basis). The IT buying rate in relation to foreign currency in this case has the same meaning as given above under Rule 115.
TEXT OF RULE 26 0F INCOME TAX RULES, 1962
"RATE OF EXCHANGE FOR THE PURPOSE OF DEDUCTION OF TAX AT SOURCE ON INCOME PAYABLE IN FOREIGN CURRENCY
For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for the calculation of the value in rupees of such income payable to an assessee outside India shall be the telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted at source under the 'provisions of Chapter XVIIH by the person responsible for paying such income.
Explanation: For the purposes of this rule, "telegraphic transfer buying rate ",in relation to a foreign currency, means the rate or rates of exchange adopted by the State Bank of India constituted under the State Bank of India Act, 1955 (23 of having regard to the guidelines specified Bank of India for buying such currency, where to that bank through a telegraphic transfer."
Procedure for refund of tax deducted at source under section 195
In the following cases tax deducted under section 195 can be refunded to the deductor:-
(a) the contract is cancelled and no remittance is made to the non-resident
(b). the remittance is duly made to the non-resident, but the contract is cancelled. In such cases, the remitted amount has been returned to the person responsible for deducting tax at source
(c ) the contract is cancelled after partial execution and no remittance is made to the non -resident for the non-executed part
(d). the contract is cancelled after partial execution and remittance related to non-executed part is made to the non-resident. In such cases the remitted amount has been returned to such cases, the remitted amount has been returned to the person responsible for deducting the tax at source or no remittance is made but tax was deducted and deposited when the amount was credited to the account of the non-resident.
(e) there occurs exemption of the remitted amount from tax either by amendment in law or by notification under the provisions of Income-tax Act, 1961
(f) an order is passed under section 154 or 248 or 264 of the Income-tax Act, 1961 reducing the tax deduction liability of a deductor under section 195
(g) there occurs deduction of tax twice from the same income by mistake.
(h) there occurs payment of tax on account of grossing up which was not required under the provisions of the Income-tax Act, 1961
(I) there occurs payment of tax at a higher rate under the domestic law while a lower rate is prescribed in the relevant double taxation avoidance treaty entered into by India.
(J) there occurs payment of tax at a higher rate under the Treaty while a lower rate is prescribed in the domestic law.
An undertaking that no certificate under section 203 was issued to non-
An undertaking that no certificate under section 203 was issued to non- resident and if issued the same shall be recalled. Indemnity bond to be given for any loss to the department.
Refund can be granted only if the deductee has not filed return or the time for filing return has expired.
Deductor entitled to interest on refund of excess TDS from date of payment [Section 244A]
The assessee made an application under section 195 (2) for permission to remit technical service charges and reimbursement of expenses to a foreign company without deduction of tax at source. The Assessing Officer passed an order directing the assessee to deduct TDS at the rate of 20% before making remittance. The assessee effected the deduction and filed an appeal before the CIT (A) in which it claimed that the said remittance was not subject to TDS. The CIT (A) upheld the claim with regard to the reimbursement of expenses with the result that the TDS thereon was refunded to the assessee. However, the Assessing Officer declined to grant interest under section 244A on the said interest by relying on Circular Nos. 769, dated 06.08.1998 and 790, dated 20.4.2000 issued by the CBDT. The CIT A upheld the Assessing Officer's stand though the Tribunal and High Court upheld the assessee's stand. On appeal by the department to the Supreme Court held dismissing the appeal.
Circular: No. 769, dated 6-8-1998
Subject: Procedure for refund of tax deducted at source under section 195
The Board has received a number of representations for granting approval for refund of excess deduction or erroneous deduction of tax at source under section 195 of the Income-tax Act. The cases referred to the Board mainly relate to circumstances where :—
(i) after the deposit of tax deducted at source under section 195,
(a) the contract is cancelled and no remittance is required to be made to the foreign collaborator;
(b) the remittance is duly made to the foreign collaborator, but the contract is cancelled and the foreign collaborator returns the remitted amount to the person responsible for deducting tax at source;
(c) the tax deducted at source is found to be in excess of tax deductible for any other reason;
(ii) the tax is deducted at source under section 195 and paid in one assessment year and remittance to the foreign collaborator is made and/or returned to the Indian company following cancellation of the contract in another assessment year.
In all the cases mentioned above, where either the income does not accrue to the non-resident or excess tax has been deducted thereby resulting in a refund being due to the Indian enterprise which deposited the tax, at present a refund can be issued only if valid claim is made by filing a return.
In the absence of any statutory provision empowering the Assessing Officers to refund the tax deducted at source to the person who has deducted tax at source, the Assessing Officers insist on filing of the return by the person in whose case deduction was made at source. Even adjustments of the excess tax or the tax erroneously deducted under section 195 is not allowed. This has led to a lot of hardship as the non-resident in whose case, the deduction has been made is either not present in the country or has no further dealings with the Indian enterprise, thus, making it difficult for a return to be filed by the non-resident.
The matter has been considered by the Board. It has been decided that in the type of cases referred to above, a refund may be made independent of the provisions of the Income-tax Act, 1961 to the person responsible for deducting the tax at source from payments to the non-resident, after taking the prior approval of the Chief Commissioner concerned.
The excess tax deducted would be the difference between the actual payment made by the deductor and the tax deducted at source or that deductible. This amount should be adjusted against the existing tax liability under any of the Direct Tax Acts. After meeting such liability, the balance amount, if any, should be refunded to the person responsible for deduction of tax at source.
Where the tax is deducted at source and paid by the branch office of the person responsible for deduction of tax at source and the quarterly statement/annual return of tax deduction at source is filed by the branch, each branch office would be treated as a separate unit independent of the head office. After meeting any existing tax liability of such a branch, which would normally be in relation to the deduction of tax at source, the balance amount may be refunded to the said branch office.
The adjustment of refund against the existing tax liability should be made in accordance with the present procedure on the subject. A separate refund voucher to the extent of such liability under each of the direct taxes should be prepared by the Income-tax Officer in favour of the "Income-tax Department" and sent to the bank along with the challan of the appropriate type. The amount adjusted and the balance, if any, refunded would be debitable under the sub-head "Other refunds" below the minor head "Income-tax on companies" major head "020 – Corporation Tax" or below the minor head "Income-tax other than Union Emoluments" major head "021 – Taxes on Incomes other than Corporation Tax", depending upon whether the payment was originally credited to the major head "020 – Corporation Tax" or to the major head "021-Taxes on Income other than Corporation Tax".
Since the adjustment/refund of the amount paid in excess would arise in relation to the deduction of tax at source, the recording of the particulars of adjustment/refund should be done in the quarterly statement of TDS/annual return under the signature of the ITO at the end of the statement, i.e.,below the signature of the person furnishing the statement.
CIRCULAR NO.790, DATED 20-4-2000
[SUPERSEDED BY CIRCULAR NO.7/2007, DATED 23-10-2007]
The Board has issued Circular No. 769, dated 6-8-1998, laying down procedure for refund of tax deducted under section 195, in certain situations to the person deducting the tax at source from the payment to the non-resident. After reconsideration, Circular No. 769 is revoked with immediate effect and refund to the person deducting tax at source under section 195 shall be allowed in accordance with the provisions of this Circular.
The Board had received representations for approving grant of refund to the persons deducting tax at source under section 195 of the Income-tax Act, 1961. The cases referred to the Board mainly related to circumstances whereafter the deposit into Government account of tax deducted at source under section 195,—
(a) the contract is cancelled and no remittance is made to the non-resident;
(b) the remittance is duly made to the non-resident, but the contract is cancelled. In such cases, the remitted amount may have been returned to the person responsible for deducting tax at source.
In the cases mentioned above, income does not accrue to the non-resident. The amount deducted as tax under section 195 and paid to credit of Government, therefore, belongs to the deductor. At present, a refund is given only, on a claim being made by the non-resident with whom the transaction was intended.
In the type of cases referred to in sub-paragraph (a) of paragraph 2, the non-resident not having received any payment would not apply for a refund. For cases covered by sub-paragraph (b) of paragraph 2, no claim may be made by the non-resident where he has no further dealings with the resident deductor of tax. This resident deductor is, therefore, put to genuine hardship as he would not be able to recover the amount deducted and deposited as tax.
The matter has been considered by the Board. In the type of cases referred to above, where no income has accrued to the non-resident due to cancellation of contract, the amount deposited to the credit of Government under section 195 cannot be said to be 'tax'. It has been decided that this amount can be refunded, with prior approval of Chief Commissioner concerned to the person who deducted it from the payment to the non-resident under section 195.
The refund being made to the person who made the payment under section 195, the Assessing Officer may after giving intimation to the deductor, adjust it against any existing tax liability of the deductor under the Income-tax Act, 1961, Wealth-tax Act, 1957 or any other direct tax law. The balance amount, if any, should be refunded to the person who made such payment under section 195. A separate refund voucher to the extent of such liability under each of the direct taxes should be prepared by the Income-tax Officer or the Assessing Officer in favour of the "Income-tax Department" and sent to the bank along with the challan of the appropriate type. The amount adjusted and the balance, if any, refunded would bedebitable under the sub-head "Other refunds" below the minor head "Income-tax on Companies"—major head "020—Corporation Tax"or below the minor head "Income-tax other than Union Emoluments" major head "021—Taxes on Incomes other than Corporation Tax" depending upon whether the payment was originally credited to the major head "020—Corporation Tax" or to the major head "021—Taxes on Income other than Corporation Tax". Since the adjustment/refund of the amount paid would arise in relation to the deduction of tax at source, the recording of the particulars of adjustment/refund, should be done in the quarterly statement of TDS/annual return under the signature of the Income-tax Officer or the Assessing Officer at the end of the statement, i.e.,below the signature of the person furnishing the statement.
Refund to the person making payment under section 195 is being allowed as income does not accrue to the non-resident. The amount paid into the Government account in such cases, is no longer 'tax'. In view of this, no interest under section 244A is admissible on refunds to be granted in accordance with this Circular or on the refunds already granted in accordance with Circular No. 769.
A refund in terms of this Circular should be granted only after obtaining an undertaking that no certificate under section 203 of the Income-tax Act has been issued to the non-resident. In cases where such a certificate has been issued, the person making the refund claim under this Circular should either obtain it or should indemnify the Income-tax Department from any possible loss on account of any separate claim of refund for the same amount by the non-resident.
The refund as per this Circular is permitted only in respect of transactions with non-residents, which have either not materialised or have been cancelled subsequently. It, therefore, needs to be ensured by the Assessing Officer that they disallow corresponding transaction amount, if claimed as an expense in the case of person making refund claim.
It is hereby clarified that refund shall not be issued to the deductor of tax in the cases referred to in clause (i)(c) of paragraph 1 of Circular No. 769, dated 6-8-1998.
The limitation for making a claim of refund under this Circular shall be two years from the end of the financial year in which tax is deducted at source.
CIRCULAR NO. 7/2007 DATED 23-10-2007
Subject: Procedure for refund of tax deducted at source under section 195 to the person deducting the tax – section 239 of the Income Tax 1961 – Refunds
The Board had issued Circular No. 790 dated 20th April, 2000, laying down the procedure for refund of tax deducted under section 195, in certain situations to the person deducting the tax at source from the payment to the non-resident. Representations have been received in the Board from taxpayers requesting that the said Circular may be amended to take into account situations where genuine claim for refund arises to the person deducting the tax at source from payment to the non-resident and it does not fall in the purview of the said Circular.
1. The cases which are being referred to the Board mainly relate to circumstances where, after the deposit into Government account of the tax deducted at source under section 195,
the contract is cancelled and no remittance is made to the non-resident;
the remittance is duly made to the non-resident, but the contract is cancelled. In such cases, the remitted amount has been returned to the person responsible for deducting
the contract is cancelled after partial execution and no remittance is made to the non-resident for the non-executed part;
the contract is cancelled after partial execution and remittance related to non-executed part is made to the non-resident. In such cases, the remitted amount has been returned to the person responsible for deducting the tax at source or no remittance is made but tax was deducted and deposited when the amount was credited to the account of the non-resident;
there occurs exemption of the remitted amount from tax either by the amendment in law or by notification under the provisions of Income-tax Act, 1961;
an order is passed under section 154 or 248 or 264 of the Income-tax Act, 1961 reducing the tax deduction liability of a deductor under section 195;
there occurs deduction of tax twice from the same income by mistake;
there occurs payment of tax on account of grossing up which was not required under the provisions of the Income-tax Act, 1961;
there occurs payment of tax at a higher rate under the domestic law while a lower rate is prescribed in the relevant double taxation avoidance treaty entered into by India.
2. In the cases mentioned above, income does not either accrue to the non-resident or it accrues but the excess amount in respect of which refund is claimed, is borne by the deductor. The amount deducted as tax under section 195 and paid to the credit of the Government therefore belongs to the deductor. At present, a refund is given only on a claim being made by the non-resident with whom the transaction was intended or in terms of Circular No. 790 dated 20th April 2000.
In the type of cases referred to in sub-paragraph (a) of paragraph 2, the non-resident not having received any payment would not apply for a refund. For cases covered by sub-paragraph ( b) to (i) of paragraph 2, no claim may be made by the non-resident where he has no further dealings with the resident deductor of tax or the tax is to be borne by the resident deductor. This resident deductor is therefore put to genuine hardship as he would not be able to recover the amount deducted and deposited as tax.
The matter has been considered by the Board. In the type of cases referred to above, where no income has accrued to the non-resident due to cancellation of contract or where income has accrued but no tax is due on that income or tax is due at a lesser rate, the amount deposited to the credit of Government to that extent under section 195, cannot be said to be "tax".
4. It has been decided that this amount can be refunded, with prior approval of the Chief Commissioner of Income-tax or the Director General of Income-tax concerned, to the person who deducted it from the payment to the non-resident, under section 195.
5. Refund to the person making payment under section 195 is being allowed as income does not accrue to the non-resident or if the income is accruing no tax is due or tax is due at a lesser rate. The amount paid into the Government account in such cases to that extent is no longer "tax". In view of this, no interest under section 244A is admissible on refunds to be granted in accordance with this circular or on the refunds already granted in accordance with Circular No. 769 or Circular No. 790.
6. In case of a refund is made to the person who made the payment under section 195, the Assessing Officer may, after giving intimation to the deductor, adjust it against any existing tax liability of the deductor under the Income-tax Act, 1961, Wealth-tax Act, 1957 or any other direct tax law. The balance amount, if any, should be refunded to the person who made such payment under section 195. A separate refund voucher to the extent of such liability under each of the direct taxes should be prepared by the Income-tax Officer or the Assessing Officer in favour of the "Income-tax Department" and sent to the bank along with the challan of the appropriate type. The amount adjusted and the balance, if any, refunded would be debitable under the major head "020-Corporation Tax" or the major head "021-Taxes on incomes other than Corporation tax" depending upon whether the payment was originally credited to the major head "020-Corporation tax" or to the major head "021-Taxes on Income other than Corporation tax".
7. A refund in terms of this circular should be granted only after obtaining an undertaking that no certificate under section 203 of the Income-tax Act has been issued to the non-resident. In cases where such a certificate has been issued, the person making the refund claim under this circular should either obtain it or should indemnify the Income-tax Department from any possible loss on account of any separate claim of refund for the same amount by the non-resident. A refund in terms of this circular should be granted only if the deductee has not filed return of income and the time for filing of return of income has expired.
8. The refund as per this circular is, inter alia, permitted in respect of transactions with non-residents, which have either not materialized or have been cancelled subsequently. It, therefore, needs to be ensured by the Assessing Officer that they disallow corresponding transaction amount, if claimed, as an expense in the case of the person, being the deductor making refund claim. Besides, in all cases, the Assessing Officer should also ensure that in the case of a deductor making the claim of refund, the corresponding disallowance of expense amount representing TDS refunded is made.
9. The limitation for making a claim of refund under this circular shall be two years from the end of the financial year in which tax is deducted at source. However, all cases for claim of refund under items (c) to (i) of paragraph 2 which were pending before the issue of this circular and where the claim for refund was made after the issuance of Circular No. 790 may also be considered.
10.It has been represented to the CBDT that in Circular No. 769 dated 6th August 1998, there was no time limit for making a claim for refund. A time limit of two years, for making a refund claim, was stipulated vide circular No. 790 dated 20th April 2000. Some cases covered by Circular No. 769, which were also covered by Circular No. 790, now listed in item (a) and (b) of paragraph 2 of this Circular, and filed before the issue of Circular No. 790, became time-barred because of the specification of a time limit in Circular No. 790. It is hereby clarified that such cases may also be considered for refund.
11. This Circular is issued in supersession of the Circular No.790/2000 dated 20th April 2000.
12. The contents of this Circular may be brought to the notice of all officers in your region.
CIRCULAR NO. 07/2011 [F.NO. 500/135/2007-FTD-I], DATED 27-9-2011
Subject: SECTION 239 OF THE INCOME-TAX ACT, 1961 – REFUNDS – PROCEDURE FOR REFUND OF TAX DEDUCTED AT SOURCE UNDER SECTION 195 TO THE PERSON DEDUCTING THE TAX – AMENDMENT IN CIRCULAR NO. 7/2007, DATED 23-10-2007
1. The Board had issued Circular No. 7/2007, dated 23-10-2007 laying down the procedure for refund of tax deducted at source under section 195 of the Income-tax Act, 1961 to the person deducting tax at source from the payment to a non-resident.
Para 2 of the Circular lists the circumstances under which the provisions of the said Circular shall apply. This paragraph does not cover a situation where the tax is deducted at a rate prescribed in the relevant DTAA which is higher than the rate prescribed in the Income-tax Act, 1961. Since the law requires deduction of tax at a rate prescribed in the relevant DTAA or under the Income-tax Act, whichever is lower, there is a possibility that in such cases, excess tax is deducted relying on the provisions of the relevant DTAA. Since in these cases as well, the resident deductor is put to genuine hardship, the Board has decided that the provisions of Circular No. 7/2007, dated 23-10-2007 shall also apply to those cases where deduction of tax at a higher rate under the relevant DTAA has been made while a lower rate is prescribed under the domestic law.
Circular No. 7/2007, dated 23-10-2007 stands modified to this extent.
Payment in kind to non-resident-TDS provisions applicable
The assessing authority held that the assessee made the payment to the non-resident within the meaning of section 195 of the Income-tax Act and was liable to deduct tax at source therefrom and that failure to do so made the assessee liable to deposit the amount to the credit of the Government of India and pay interest for such failure under section 201 (1A) of the Income-tax Act.
Deposit of Tax Deducted
If the amount is credited on 31st March, on or before 30th April.
In any other case, within seven days of the end of the month of deduction.
TDS certificate in Form 16A
Within fifteen days from the due date for furnishing the statement of tax deducted at source under rule 31A, I. e., TDS returns.
TDS Return
Quarterly statement in form 27Q to be submitted as under.
For amounts credited on 31st March by 15th May.
In all other cases, within fifteen days from the end of the Quarter.
Rate at which tax to be deducted,
RATE IN FORCE
the rates specified in the Finance Act of the relevant year, or
the rates specified in DTAA,
Whichever is beneficial
Rates in Force defined in section 2 (37A) (iii) for purposes of section 195 to mean rate or rates specified in the Finance Act of the relevant year or the rates of tax specified in the DTAA, whichever is applicable, by virtue of provisions of section 90 of the Act Circular No. 728 dated 30.10.1995-DTAA rates to be applied for TDS under section 195, if more favourable to the assessee- No Surcharge/Education cess if treaty rates applied.
Double Taxation Avoidance Agreement (DTAA) rate includes surcharge and Education Cess.
Circular No. 728, Dated 30.10.1995
Subject: Applicable rates of taxes under the Double Taxation Avoidance Agreement between India and the United Arab Emirates
1. It has been represented to the Board that when making remittances of the nature of royalties and technical fees, tax is being deducted at source at the rates specified in the Finance Act of the relevant year, without taking into account the special rates for taxation of such income provided for under the Double Taxation Avoidance Agreement with the country concerned.
2. The expression "rates in force" has been defined in section 2(37A) of the Income-tax Act. Under sub-clause (iii) of section 2(37A), for the purposes of deduction of tax under section 195, the expression is to mean the rate or rates of income-tax specified in this behalf in the Finance Act in the relevant year or the rates of tax specified in the Double Taxation Avoidance Agreement entered into by the Central Government whichever is applicable by virtue of the provisions of section 90 of the Income-tax Act, 1961.
3. It is hereby clarified that in view of the provisions of sub-section (2) of section 90 of the Act, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.
Surcharge NIL where payment is below one crore, @ 2% where payment is more than one crore but not more than 10 crore and 5% where payment is more than 10 crore in case of Non-Domestic Companies.
Education cess @ 3% is applicable in all cases.
No Deduction of Tax in Certain Cases
No deduction of tax if "income" does not involve credit or payment
No deduction under section 195 when section 172 applies [Shipping business of Non-Residents]-Circular No. 723, dated 19. 09. 1995
No deduction from income by way of Capital Gain to Foreign Institutional Investors (FII) referred in section 115AD
TDS on payment basis under the provision to section 195 (1) when interest is paid by Government, public sector bank or public financial institution.
It was held that if the income is not chargeable to tax in India, there is no liability of TDS under section 195 of the Income-tax Act, 1961. Therefore, in order to determine the applicability of the provisions of section 195, it is first essential to find out whether the sum paid to non-residents is chargeable to tax as per the provisions of section 9. The provisions of section 9 (1) (I) states
"that all income accruing or arising, whether directly or indirectly through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of capital asset situate in India shall be deemed to accrue or arise in India."
foreign institutional Investor" means such investor as the Central Government may, by notification in the official Gazette, specify in this behalf
A non-resident payee cannot furnish a declaration in form 15G/15H for non-deduction of tax at source.
Section 195 does not apply to payments made outside India
Section 195 does not apply to payments made outside India by one foreigner to another even if the other has rendered services in India. A country does not recognize or enforce the revenue laws of another country.
Circular No. 723 Dated 19.09.1995
Subject: Tax deduction at source from the payment made to foreign shipping companies
1. Representations have been received regarding the scope of sections 172, 194C and 195 of the Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents.
2. Section 172 deals with the shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, ship-wise, and journey wise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.
3. The provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172.
4. Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a ) to (j) of sub-section (1) to any "resident" (termed as a contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any "resident". On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections.
5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for the carriage of passengers etc., shipped at a port in India. Since the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply.
The CBDT has issued Instruction No. 02/2014, dated 26.02.2014 in which it has referred to the judgements of the Supreme Court in Transmission Corporation of AP 299 ITR 587 and GE India Technology PITT. Ltd. 327 ITR 456 on the Issue of deduction of tax at source under section 195 while making payments to non- residents, The CBDT has directed Assessing Officers under section 119 that in a case where the assessee fails to deduct TDS under section 195, the Assessing Officer cannot treat the whole sum remitted to the non-resident as being chargeable to tax but he has to determine the appropriate proportion of the sum chargeable to tax as mentioned in section 195 (1) for treating the assessee as being in default under section 201.
Boards instruction no. 02/2014, [F. No. 500/33/201 3-FTD-I], dated [.26. 02. 2014]
Subject Deduction of tax at source under section 195 read with section 201 of the Income-tax Act, 1961 relating to payment made to a non-resident-Reg.
Section 195 of the Income-tax Act (hereafter referred to as 'the Act') provides that any person, responsible for paying to a non-resident not being a company or to a foreign company, any sum chargeable under the provisions of this Act, shall at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, deduct income-tax thereon at the rates in force. Section 201 of the Act inter alia provides that any person who is required to deduct tax in accordance with the provisions of the Act, does not do so, shall he deemed to be an assessee in default and shall also be liable to pay simple interest at the specified rate.
2. References were received from field officers on the issue of deduction of tax at source under section 195 of the Income-tax Act, 1961 in the light of the decision of the Supreme Court of India in the case of GE India Technology Private Limited u. crr 327 ITR 456 and Transmission Corporation of AP Limited and another v. CIT (1999) 299 ITR 587, and the decision of the Madras High Court in CIT u. Chennai Metropolitan Water Tax Cases Appeals Nos. 500-501 of 2005, with a request for clarification as to whether the tax is to be deducted under sub-section (1) of section 195 on the whole sum being remitted to a non-resident or only the portion representing the sum chargeable to tax, particularly if no application has been made under sub-section (2) of section 195 of the Act to determine the sum.
3. The matter has been examined in the Board and accordingly, in exercise of powers vested under section 119 of the Act, the Board hereby directs that in a case where the assessee fails to deduct tax under section 195 of the Act, the Assessing Officer shall determine the appropriate proportion of the sum chargeable to tax as mentioned in sub-section (1) of section 195 to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201 of the Act, and the appropriate proportion of the sum will depend on the facts and circumstances of each case taking into account nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion.
4. The undersigned is directed to state that the above position may be brought to the notice of all officers concerned.
Circular No. 3/2015 Dated 12.2.15
Subject:- Clarification regarding 'Amounts not deductible' under sub-clause (i) of clause (a) of section 40 of Income-tax Act, 1961 ('Act')-regarding.
Section 40(a)(i) of the Act stipulates that in computing the income chargeable under the head "Profits or gains of business or profession", any interest, royalty, fees for technical services or other sum chargeable under this Act either payable in India to a non-resident (not being a company)/a foreign company or payable outside India, shall not be allowed as a deducation, if there has been a failure in deduction or in payment of tax deducted in respect of such amounts under Chapter XVII-B of the Act.
2. Disallowance regarding 'other sum chargeable' under section 40(a)(i) is triggered when the deductor fails to withhold tax as per provisions of section 195 of the Act. Doubts have been raised about the interpretation of the term 'other sum chargeable' i.e. whether this term refers to the whole sum being remitted or only the portion representing the sum chargeable to income-tax under relevant provisions of the Act.
3. Central Board of Direct Taxes has already issued Instruction No. 02/2014 dated 26.02.2014 (F.No. 500/33/2013-FTD-I) regarding deduction of tax at source under sub-section (1) of section 195 read with section 201 of the Act relating to payments made to non-residents in cases where no application is filed by the deductor for determining the sum so chargeable under sub-section (2) of section 195 of the Act. Vide this Instruction, Board has clarified that in cases where tax is not deducted at source under section 195 of the Act, the Assessing Officer shall determine the appropriate portion of the sum chargeable to tax, as mentioned in sub-section (1) of section 195, to ascertain the tax-liability on which the deductor shall be deemed to be an assessee in default under section 201 of the Act. It has been further clarified that such appropriate portion of the said sum will depend on the facts and circumstances of each case taking into account the nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion.
4. As disallowance of amount under section 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the Act as mentioned in section 195 of the Act for the purposes of tax deduction at source, the Central Board of Direct Taxes, in exercise of powers conferred under section 119 of the Act, hereby clarifies that for the purpose of making disallowance of 'other sum chargeable' under section 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the Assessing Officer having jurisdiction for the purpose of sub-section (1) of section 195 of the Act as per Instruction No.02/2014 dated 26.02.2014 of CBDT. Further, where a determination of 'other sum chargeable' has been made under sub-sections (2), (3) or (7) of section 195 of the Act, such a determination will form the basis for disallowance, if any, under section 40(a)(i) of the Act.
5. This may be brought to the notice of all concerned.
6. Hindi version to follow.
Payment of interest on refund under section 244A of excess TDS deposited under section 195 of the Income-tax Act, 1961
The CBDT has issued Circular No. 11/2016, dated 26. 04. 2016 stating that in accordance with the judgement of the Supreme Court in UOI v. TATA Chemical Ltd. 363 ITR 658 It is settled that if resident deductor is entitled for the refund of tax deposited under Section 195 of the Act, then it has to be refunded with interest under section 244A of the Act, from the date of payment of such tax. The CBDT has directed that no appeals may henceforth be filed on this ground by the officers of the department and appeals already filed on this issue may not be passed.
Circular No. 11/2016, Dated 26.04.2016
Subject Payment of interest on refund under section 244A of excess TDS deposited under section 195 of the Income-tax Act,
The procedure for refund of tax deducted at source under section 195 of the Income-tax Act, 1961, to the person deducting the tax is delineated in CBDT Circular No. 7/200, dated 23.10.2007. Circular No. 7/2007 states that no interest under section 244A of the Act, is admissible on refunds to be granted in accordance with the circular or on the refunds already granted in accordance with Circular No. 769 or Circular 790, dated 20. 4. 2000.
The issue of eligibility for interest on refund of excess TDS to a tax deductor has been a subject-matter of controversy and litigation. The Hon'ble Supreme Court of India in the case of Tata Chemical Limited, Civil Appeal No. 6301 of 2011 vide order dated 26. 02. 2014, held that, "Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. The State having received the money without right, and having retained and used it is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received with it the right to interest."
In view of the above judgment of the Apex court it is settled that if resident deductor is entitled for the refund of tax deposited under section 195 of the Act, then it has to be refunded with interest under section 244A of the Act, from the date of payment of such tax.4. Accordingly, it is advised that no appeals may henceforth be filed on this ground by the officers of the department and appeals already filed on this issue may not be pressed.5. this may be brought to the notice of all concerned.
Non-Resident Indian Bank Account in India
During the last many years, many Indians are moving abroad for better prospects of career. Many of them maintain bank accounts in India. A Non-Resident Indian (NRI) with a bank account in India should be aware of the tax laws relating to Non-Resident Indians (NRIs). Non-Resident Indian (NRIs) are permitted to maintain accounts with authorized banks in India, in rupees as well as in foreign currency. Following types of accounts Non-Resident Indians (NRIs) may maintain-
RUPEE ACCOUNTS
Non-Resident Ordinary Account (NRO)
Non-Resident (External) Rupee Account (NRE)
FOREIGN CURRENCY ACCOUNTS
Foreign Currency (Non-Resident) Accounts (FCNR)
Resident Foreign Currency Accounts (RFC) (for returning Indians).
There are two types of Non-Resident Indian (NRI) accounts, namely: –
(I) REPATRIABLE ACCOUNTS
Legally Indian rupees can be transferred back to foreign currency, that is money can be converted to any foreign currency (NRE Account and FCNR account).
(ii) NON-REPATRIABLE ACCOUNTS
Money cannot be converted to any foreign currency (NRO Account).
Non-Resident Ordinary (NRO) account is the normal bank account opened by an Indian going abroad with the intention of becoming a Non-Resident Indian (NRI). Any repatriation done through Non-Resident Ordinary (NRO) account should be reported to RBI by filling up prescribed forms. The very first requirement of this account is that the source of funds that are deposited in this account need to be from within the country. The source of a fund should not be from abroad.
WHO CAN OPEN
Any person resident outside India can open this account. this account can be opened if you want to deposit earnings receipts originating in India. Further, you can also use this account if you can also use this account if you do not want to repatriate the funds held in this account to outside India.
DESIGNATED CURRENCY
This account involves Indian Currency, thus, this account is maintained in Indian Rupee. In other words, Funds are held in Indian Rupees.
TYPES OF ACCOUNT
Non-Resident Ordinary (NRO) account is a rupee dominated account and can be opened in the form of-
Current account.
Saving account.
Recurring Deposit account.
Fixed Deposit account.
NRO account is mainly for pulling Indian incomes.
The income which is deemed to accrue or arise in India can be deposited only in this type of account. (Such as rent, Dividend, commission etc.)
MODE OF DEPOSIT
NRO accounts may be opened/maintained in the form of-
Income from domestic non-repatriable sources or
Realizations from local investments/sources,
Transfer from NRE/FCNR accounts, forex remittance from abroad or
Deposit of foreign exchange during visit to India.
PERIOD FOR DEPOSTFS
No restriction
INR 5, 00, 000/-
NRO Term Deposit = INR 1,00,000
A person can have a resident in India as a joint account holder in the NRO bank account. Non-Resident Indian (NRI) and Resident Indian Account holder jointly or severally operate the account. Also power of Attorney holder.
Permitted. You can add a nominee in your NRO account.
Savings-As applicable to domestic savings account.
Term Deposit-Banks are free to determine interest rates.
Current-No interest is paid.
TAXATION OF INTEREST
Interest earned on this form of account is taxable. Tax deducted at Source (TDS) on interest is also deducted at the applicable rate.
FOREIGN CURRENCY RISK
Account holder is exposed to the fluctuations in the value of INR.
A Non-Resident Indian (NRI) can also open this account by sending remittances from his home country or by transferring funds from his other Non-Resident Ordinary (NRO) account.
Money cannot be transferred from Non-Resident Ordinary (NRO) account to Non-Resident External (NRE) account.
REPATRIATION FROM NRO BALANCE
As the funds in this type of account are non-reparable, they cannot be deposited abroad to the account holders or transferred to their NRE accounts without the Reserve Bank's prior permission.
Principal repatriable up to USD 1 million per financial year for any bona fide Purpose out of the balances in NRO account. Authorized dealers can allow remittances up to USD 1 million per financial year, out of the balance held in NRO accounts subject to payments of applicable taxes. The limit of USD 1 million includes sale proceeds of assets/the assets in India acquired by him by way of inheritance/legacy, on production of documentary evidence in support of acquisition, inheritance/legacy of assets by the remitter, and an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes.
TRANSFER OF FUNDS FROM NRO ACCOUNT TO NRE ACCOUNT
As per Reserve Bank of India's Notification RBI/2011-12/536, dated 07. 05. 2012, Non-Resident Indians (NRIs) are eligible to transfer tax. funds from NRO account per financial year subject to payment of tax.
Such credit of funds to NRE account shall be treated as eligible credit.
CHANGE IN RESIDENTIAL STATUS
Account to be designated as a Resident account.
CONVERSION OF RESIDENT SAVINGS ACCOUNT INTO AN NRO ACCOUNT
According to the FEMA regulation, it is illegal for NRIs to hold resident savings account in India. You will need to convert your resident savings account into an NRO account. If you continue to use your resident account, you might incur huge penalties.
Once the account holder returns back to India and becomes an Indian resident NRO account can be converted to a normal resident account.
Non-Resident External Rupee Account (NRE)
Non-Resident External (NRE) account is a bank account that is opened by depositing foreign currency at the time of opening a bank account. NRE account is for depositing income from abroad. Currency can be tendered in the form of traveller's cheques or notes.
Non-Resident External Rupee (NRE) accounts come handy for the Indians who are residing in foreign countries. This type of account helps you to transfer foreign currency to India for your family with ease. This account is opened in order to keep foreign currency and you cannot deposit Indian currency in this account. Non-Resident External (NRE) Bank account can be opened and maintained only after becoming a Non-Resident Indian.
WHO CAN OPEN?
Non-Resident Indian (NRI) can open this account himself and not through the holder of the power of attorney.
Foreign exchange transfer from abroad, (I. e. only by remittance from abroad or deposit of foreign currency) or
Transfer of funds from existing other NRI's Non-Resident External(NRE)/FCNR Account held with another bank or
By deposit of foreign exchange during NRI's visit to India.
TYPES OF ACCOUNT:
Non-Resident External (NRE) account may be opened/maintained in the form of: –
Current account,
Savings account,
Recurring Deposit account,
NRE Term Deposit = INR 1,00,000/-
PERIOD OF DEPOSITS:
No restriction.
Money can be freely transferred from Non-Resident External (NRE) account to Non-Resident Ordinary (NRO) account. Further once you decide to return back to India, this account gets converted into Resident Account.
This account is a rupee dominated account maintained in Indian Rupees and the amount is freely repatriable (all foreign exchange deposits received need to be first converted to Indian rupees at the buying rates by the banks).
The entire credit balance (including interest earned accumulated) can be repatriated freely (sent back) outside India at any time without requiring permission from the Reserve Bank of India (RBI). This means that the Funds can be freely sent to any other country.
Non-Resident External (NRE) account can be jointly held with another Non-resident Indian (NRIs), but not with resident Indian. Non-Resident External (NRE) account cannot be held jointly with resident Indian. However, a power of attorney to operate the account can be given by Non-Resident Indian (NRI) in favour of a resident Indian.
OPERATION OF ACCOUNT
The basis account holder, Power of Attorney holder is also eligible to operate Non-resident External (NRE) account on behalf of account holder provided that such operations are restricted to withdrawals for local payments. In case where the Non-Resident External (NRE) account on behalf of account holder provided that such operations are restricted to withdrawals for local payments. In case where the account holder is eligible to make investments in India, the power of attorney holder may be permitted by the Authorised branch to operate the account to facilitate such investments. However, the resident power of attorney holder shall not be allowed to repatriate funds outside India held in Non-Resident External(NRE) Account under any circumstances other than to the account holder himself nor to make payment by way of gift to a resident on behalf of the account holder or transfer fads from the account to another NRE account.
Permitted. You can add a nominee in your Non-Resident External (NRE) account.
Savings-Ceiling rate of six months USD LIBOR.
Term Deposit-Ceiling rate of USD LIBOR a corresponding maturity current : No interest is paid.
TREATMENT OF INTEREST
The interest on all types of Non-Resident External (NRE) accounts is tax-free under section 10 (4) (ii) in India as long as you are Non-Resident Indian (NRI) and have not returned to India permanently. If a Non-Resident Indian (NRI) Permanently returns to India, interest accrued with effect from the date of a permanent return to India is taxable.
The account holder is exposed to the fluctuations in the value of Non-Resident Indian (NRI).
Change maturity, but to be designated as resident account or converted to Resident Foreign Currency (RFC) Account. Funds originated in India cannot be credited to the NRE account. It can credit in Non-Resident Ordinary (NRO) account.
Amount received on account of PF settlement from the Indian company.
FOREIGN CURRENCY NOTES/TRAVELLER'S CHEQUE
The proceeds of foreign currency notes/travellers cheques brought by the account holder from abroad during his visit to India can be credited to the Non-Resident External (NRE) account provided they are tendered in person by the account holder.
Where the amount of foreign currency notes tendered exceeds $ 5000 or its equivalent or the total amount tendered I. e. currency notes and Travellers ' cheque are in excess of $ 10,000 or its equivalent, it should have been declared to the Customs Department on the Currency Declaration Form at the time of arrival in India.
[3] Foreign currency Non-Resident account (FCNR)-(not in rupees)
This account helps you in keeping your foreign currency earnings in the
same denomination.
Foreign currency Non-Resident account (FCNR) Deposit account can be opened and maintained only after becoming a Non-Resident Indian. It can only be opened in Foreign currency and not in the Indian currency.
This account is in the form of Term Deposit only (fixed Deposit Account) for 1 year to 3 year on which regular interest is paid.
DESIGNATED SPECIFIED CURRENCIES
This account operates other than Indian rupee in this account. In other words, the fluids are held in foreign currency. One has to nominate a currency say GBP or US Dollars in which the account should be maintained. The following foreign currencies are
permissible-
US Dollar,
Swedish Krona,
Canadian Dollar,
Australian Dollar,
Swiss Francs,
Danish Krone,
Great Britain Pound,
Pounds Sterling,
FREE FROM ANY FOREIGN EXCHANGE RISK
Foreign currency Non-Resident account (FCNR) is that the investor will not have to bear any risk of fluctuations in the foreign currency. For example, Mr. "A " invests $ 10 in FCNR account of NRI and the interest rate is 10% P. A., he would get $ 11 at the end of the year irrespective of the Rupee-Dollar exchange rates. And therefore in this form of NRI Bank account, he is free from any foreign exchange risk.
The interest earned on FCNR account is exempted from income-tax under section 10 (15) (iv) (fa) in India. Even on permanent return to India, interest is tax free till the time a person is "Not ordinarily Resident" within the meaning of the Income Tax Act.
FREELY REPATRIATION
Since the deposit is held in foreign currency, you can always transfer the funds out of India (Both principals an interest earned are freely repatriable).
Besides account holder, Power of Attorney holder.
Permitted. You can add a nominee in your FCNR Account.
You can open an FCNR Account in the name of two or more non-resident individuals. However, opening this account in joint names with Indian Residents is prohibited.
PERIOD FOR DEPOSIT
This type of NRI Bank account (FCNR) can be opened for a minimum of one year and a maximum of 3 years.
Fixed or floating within the ceiling rate of LIBOR/SWAP rates for the respective currency/corresponding term minus 25 basis points at present. The risk for fluctuations in currency conversion is eliminated and the investor can earn a fixed rate of interest on his FCNR deposits.
PREMATURE WITHDRAWAL OF FIXED DEPOSITS FROM FCNR ACCOUNT
Reserve Bank of India has extended the facility of premature withdrawal from FCNR account for the NRIs/PIOs and a penal interest is levied on the same. The penal interest charged is different by different banks and is usually 1%. However, if the deposit is closed before the maturity for the purpose of renewal, to avail the benefit of an increase in the interest rates, for a period more than the unexpired period and renewed under the same scheme and in the same currency, no penal interest is payable.
FCNR account can continue till the maturity date at the contract rate the interest even after the account holder's resident status changes to resident Indian. On maturity, these accounts are converted to either a Resident Foreign currency (RFC) account or the resident rupee deposit account.
Minimum deposit required is
Currency Deposit Amount
US Dollars (USD) 1,000
British Pound (GBP) 500
Japanese Yen (JPY) 1,25,000
Euro (EUR) 750
Canadian Dollars (DKK) 1,500
Australian Dollars (AUD) 1,500
Danish Krone (DKK) 1,000
Swiss Francs (CHF) 1,000
Swedish Krona (SEK) 1,000
RANGE OF TENORS OF DEPOSIT
Enjoy a wide range of tenors: –
1 year-3 years (USD), GBP, DKK, CHF, SEK)
1 year-2 years (EURO, JPY, CAD, AUD)
Resident Foreign Currency (RFC) deposit account
Resident Foreign Currency (RFC) accounts are bank accounts that can be unmaintained by resident Indians in foreign currency. These accounts are especially useful for Non-Resident Indians (NRI) who return to India and would like to bring back foreign currency from their overseas bank accounts. If you are returning to India you need not to convert your foreign currency savings into Indian Rupees at exchange rates. You can retain them in foreign currency by placing RFC deposit with Authorized banks and convert them into Indian Rupees at a later date as and when you desire. Reserve Bank of India (RBI) has allowed Resident Indians to maintain foreign currency accounts without any calling to it.
This account can be opened by Non-Resident Indian (NRI) who has returned to India for permanent settlement after his foreign stay of minimum one year and subsequently ceases to be Non-Resident Indian (NRI). In order to calculate stay period, any short trips for personal visits would be ignored. Any Indian person can open a Resident Foreign Currency (RFC) account in any freely convertible foreign currency. Thus all resident Indian (Individuals) are eligible to open RFC Domestic accounts. The RFC accounts can be opened without any
regulatory approval from the Reserve Bank of India (RBI).
IN WHICH FOREIGN CURRENCY CAN RFC ACCOUNT BE MAINTAINED
Resident Foreign Currency (RFC) account can be a convertible foreign currency like AUD, CAD, Euro, GBP for a resident Foreign Currency (RFC) account.
RFC accounts can be maintained in the form of-
No loans are available against the RFC account.
You can hold the account/deposit jointly with Non-Resident Indian (NRI)as well as other residents who are close relatives. Deposits held jointly with residents can be operated only on "Former or Survivor" basis.
PERMISSIBLE CURRENCIES FOR OPENING RESIDENT FOREIGN CURRENCY DEPOSIT ACCOUNT
You can open an RFC account in any freely convertible foreign currency. These are foreign currencies that can be exchanged easily with other Currencies and are recognized by the international market.
43 US Dollar (USD)
Japanese Yen and (JPY)
Interest is credited quarterly and is taxable. However, if you are a Resident but not Ordinary Resident, then you will be able to avail of a tax exemption on the interest on RFC accounts for the two-year period whom you hold this Currently RFC term deposit rates are in the range of 2.5-3.5% 1 year for the US dollar. Interest rates by term by currency.
MINIMUM RFC DEPOSIT
Currency Amounts
GBP 3,500
JPY 5,00,000
You can nominate either a resident or a non-resident for your RFC account. In case of death of the account holder where the nominee is a resident, the balance in the Resident Foreign Currency (RFC) account will be paid to the Nominee in Indian rupees. If the nominee is a Non-Resident Indian (NRI), balance would be remitted abroad.
RFC ACCOUNT TO NRE OR FCNR ACCOUNT
If you decide to go abroad again for a long time, you can either remit the RFC balance abroad or transfer funds from your RFC account into an NRE or FCNR account.
WHAT KIND OF FUNDS CAN BE DEPOSITED IN THE RFC ACCOUNT
The sources of funds which can be deposited in a Resident Foreign Currency (RFC) account are specified below-
Funds kept in foreign bank account in foreign currency, which is earned has been earned through the conduct of some business or by way of employment abroad.
Any money in the form of Superannuation, pension, etc. Received by a Non-Resident Indian (NRI) from a foreign employer.
Foreign exchange received on account of sale of assets including
shares, bank account, immovable property and investments held by the individual outside India.
Any income earned from assets held abroad such as interest income and dividend.
On attaining the status of a resident Indian, funds from FCNR or NRE account can be deposited in the RFC account and in such case no penalty is levied on the premature withdrawal of FCNR or NRE account.
FOREIGN CURRENCY NOTES OF DIFFERENT DENOMINATIONS BROUGHT FROM FOREIGN NATIONS
In cases where the valuation of such foreign currency notes exceeds $ 5000 or the total value of notes and traveller's cheque and notes is over $ 10, 000, a Currency Declaration Form (CDF) has to be submitted to the customs authorities on arrival in India. The form has to be produced at the bank for endorsement at the time of opening of account or depositing money into the RFC account.
FOR WHAT PURPOSE RFC ACCOUNT BALANCE CAN BE USED
The balance maintained in an RFC account can be utilized for making investments or for remitting money abroad. RFC account balance can also be used for making payments and investment in India
With effect from 01. 04. 2002, both Non-Residents Special Rupee Accounts (NRSR) and Non-Resident Non-Repatriable Term Deposits Accounts (NRNR)Schemes have been discontinued by Reserve Bank of India (RBI).
Non-Resident Indian (NRI) accounts cannot be opened/operated by a Power-of-Attorney holder
Non-Resident Indian (NRI) accounts cannot be opened/operated by a Power-of-Attorney holder in India on behalf of the Non-Resident Indian (NRI). However, the power-of-Attorney holder can operate the accounts for the purpose of local payments (such as insurance premium, EMI on loans) to be made on behalf of the NRI account holder. The Power-of-Attorney holder is not permitted to make gifts from these accounts and is not allowed to make remittances outside
International Credit Cards (ICC/Debit Cards)
International Credit Cards/Debit Cards can be made for making personal payments like subscription to foreign journals, internet subscription, etc., and for travel abroad in connection with various purposes. The entitlement of foreign exchange on International Credit Cards is limited by the credit limit fixed by the banks. International Credit Cards (ICC) can be used for-
Meeting expenses/making purchases while abroad to the extent of the limit of the card.
Making payments in foreign exchange for purchase of books and other items through internet.
Residents holding a foreign currency account in India or with a bank overseas is also free to obtain ICCs issued by overseas banks and other reputed agencies.
The legal framework for the administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999. under the Foreign Exchange Management Act, 1999 (FEMA), which came into force with effect from July 1, 2000, all transactions involving foreign exchange have been classified either as capital or current account transactions. All transactions are undertaken by a resident that do not alter his/her assets or liabilities, including contingent ]liabilities, outside India are current account Transactions.
the terms of Section 5 of the FEMA, persons resident in India are free to buy or sell foreign exchange for any current account transaction except for those transactions to which drawal of foreign exchange has been prohibited by Central Government, such as remittance out of lottery winnings remittance of income from racing /riding etc. or any other hobby remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc.; remittance of dividend by any company to which the requirement of dividend balancing is applicable payment of commission on exports under Rupee State Credit Route except commission up to 10% of invoice value of exports of tea and tobacco payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian Companies remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme and payment related to "call back services" of telephones.
Foreign Exchange Management (Current Account Transactions) Rules, 2000-Notification [GSR No. 381 (E)] dated May 3, 2000, and the revised Schedule III to the Rules as given in the Notification G. S. R. 426 (E), dated May 26, 2015 is available in the Official Gazette as well as, on website www.rbi.org.in.
Whether you plan to go abroad for a Business trip, holiday, studies or any other purpose like making an investment in shares and property, you need foreign exchange in the local currency. Foreign exchange can be released only to a person who is resident in India. Release of foreign exchange is prohibited to a person visiting Nepal and Bhutan. Foreign exchange can be released for the purpose and within the entitlement limits as specified. Foreign currency in excess of entitlement can only be released against prior approval from Reserve Bank of India (RBI) by customer.
Requisite document for release of foreign exchange
ln case of release of foreign exchange requisite documents must be on record and duly signed by the customer I. e.-
(I) an application-cum-declaration in Form A-2,
(ii) copy of passport,
(iii) copy of Visa or ticket etc.
(iv) where received more than Z 25, 000/-and up to 50, 000/-copy of PAN card is required.
(v) In case of Business visit Business Letter(Terms ) is also required.
Acceptance of money for purchase of foreign currency
Cash may be accepted only up to Rs. 50,000/- either by a single drawl or more than one drawls taken together for a single journey/visit within 30 days period. In excess of 50,000/- the payment must be accepted only by a crossed cheque drawn on the applicant's bank account or Crossed cheque is drawn on the bank account of the firm/company sponsoring the visit of the applicant) Banker's cheque/Pay Order/Demand Draft. No third party payments are to be accepted.
For purchase of foreign currency notes and/or Travellers' Cheques from Customers for any amount equivalent to or less than Rs. 50,000/-, photocopies of the identification document need not be obtained. However, full details of the identification document should be maintained. For purchase of foreign currency notes and/or Travellers Cheques from customers for any amount equivalent to or in excess of 50,000/- the photocopies of the Identification documents must be required.
If The total amount of foreign currency notes/coins or traveller's cheques brought into India at one time, exceeds USD 5000 or its equivalent, or foreign exchange exceeds USD-10000 or its equivalent it is required to be declared by the holder to the Indian Customs Authorities OTL arrival on a Currency Declaration Form (CDF).
The Reserve Bank of India (RBI), the nodal body for managing foreign exchange, has prescribed limits up to which a resident individual can remit or spend foreign exchange freely I. e. without any approval requirement.
1. Personal (Holiday) (USD 10,000) Holidaying abroad may require spending (Holiday) foreign currency for hotel accommodation, tour arrangements, shopping, etc. Under the category, an individual is allowed to draw foreign exchange up to USD 10, 000 in a year for one or more private visits abroad.
2. Business Trip (USD 25,000) If you are going abroad for business travel, attending of an International conference, seminar or specialized training , study tour, apprentice training etc. You can apply to your bank for release of foreign exchange up to USD 25, 000.
3. Employment abroad (USD 1,00,000) R8Is allowed drawing foreign exchange up to USD 100, 000 to a person for taking up employment abroad on the basis of self-declaration.
4. Education (USD 1,00,000) You can draw up to USD 100,000 equivalent per academic year for studying abroad. Studying abroad covers all expenses relating to education including admission fee, tuition fee and purchase of study you require funds in excess of USD 100, 000, you need to produce an estimate from the institute you intend to study to the concerned bank.
5. Medical Treatment (USD 1,00,000) An individual willing to travel abroad for getting medical treatment is allowed to withdraw foreign exchange up to USD 100,000 based on self-declaration of essential details without providing any estimate from a doctor or hospital. However, if the individual wishes to take money over the prescribed limit, he/she will have to provide an estimate from a hospital or doctor. In addition, a maintenance expense of up to USD 25,000 is allowed.
6. Emigration facilities (USD 1,00,000) RBI has allowed drawal of foreign exchange for emigration facilities up to USD 100,000 based on self-declaration or an amount prescribed by the country of emigration. This amount is only to meet the incidental expenses in the country of emigration.
7. Gift remittances (USD 5,000) Reserve Bank of India (RBI) has allowed
drawing foreign exchange up to USD 5,000 per remitter/donor per annum. Self -declaration with the details of the
recipient and relationship with the applicant, details of previous gifts, if any and Form A-2 are required.
8. Donations (USD 5,000) Reserve Bank of India (RBI) has allowed drawing foreign exchange up to USD5, 000 per remitter/donor per annum. Self-declaration giving therein details of the recipient/organizations/charity organizations details of. previous donations if any and Form A-2 are required.
9. Liberalized Remittance Scheme (LRS) (USD 2,50,000) In addition to these limits there is a scheme known as Liberalized Remittance Scheme in force since 2004 which allows resident individuals to draw foreign exchange up to a specified limit. The Remittance limits under LRS keep changing and under the present limit an individual can draw up to USD 250,000 Per year for the transaction permissible under the scheme. Under this scheme, an individual can freely acquire and hold shares, debentures, units of mutual funds, venture capital funds, unrated debt securities, promissory note or any other instrument of like nature. Further, the resident can invest in such securities out of the bank account opened abroad under the Scheme. He can also set up a company, enter into joint venture or buy immovable properties abroad Provided the law of the host country allows such transactions.
How to exchange money in India
Foreign exchange can be purchased from any Authorized dealer. Besides Authorized airliners, full-fledged money changers are also permitted to release exchange for business and private visits.
Authorized Dealer is normally a bank specifically authorized by the Reserve Foreign securities. However, an Authorized Dealer (AD) is any person specifically authorized by the Reserve Bank under Section 10 (1) of FEMA, 1999, to deal in foreign exchange or foreign securities (the list of ads is available on www.rbi.org.in) and normally includes banks.
Surrender of foreign exchange on return
on return from a foreign trip, travellers are required to surrender urgent foreign exchange held in the form of foreign currency notes and travellers cheques within 180 days of return. However, in case of foreign exchange up to USD 2,000 in the form of foreign currency notes or Travellers Cheques (TCs) can be retained indefinitely for future use. Amount in excess of USD 2,000 have to be surrendered to a bank within 180 days of return or credited to Resident Foreign Currency (Domestic) Account.
A person resident in India are required to surrender foreign exchange acquired/held by them
Residents receiving foreign exchange from abroad by way of gift, inheritance, remuneration for services rendered etc. Are required to bring it to India within three months acquiring the foreign exchange and surrender it to an Authorised Dealer within seven days from its receipt in India. This rule also applies to non-residents who return to India for a purpose other than temporary visits.
Indian travelling abroad Carry USD 3,000 in cash
Indian travelling abroad carry USD 3,000 in cash Travellers are allowed to purchase foreign currency notes/coins up to USD 3,000. The Balance amount can be taken in the form of Prepaid Forex card travellers cheques.
Acquisition or purchase of any property by an Indian residing out of the country, I . e., Non-Resident Indian (NRI) is regulated by the provisions of section 6 (3) (1) of the Foreign Exchange Management Act (FEMA), 1999 and other notifications issued under the Act with regard to the same from time to time.
According to section 6 (5) of the Foreign Exchange Management Act (FEMA),1999, a Non-Resident Indian (NRI) can own, hold and transfer immovable properties, invest in Indian currency or any security situated in India only if such property, currency or security
(a) Acquired and owned by him when he was resident outside India or
(b) inherited from a person who is resident in India at the time of transfer,
Who can purchase immovable property in India?
Under the general permission available, the following categories of persons can freely purchase immovable property in India::-
(I) Non-Resident Indians (NRI)-that is a citizen of India resident outside India.
(ii) Person of Indian Origin (PIO)-that is an individual (not being a citizen Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran Or Nepal or Bhutan), who-
(a) at any time, held Indian passport, or
(b) who or either of whose father or grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955).
The general permission, however, covers only purchase of residential and commercial property and not for the purchase of agricultural land/plantation property/farm house in India.
Establishing eligibility
For a non-resident Indian (NRI) to invest in Indian estate, it is essential that he has a Person of Indian Origin (PIO) certificate as eligibility proof. He can apply for the same in the Indian Embassy or Consulate in his country where he is residing. In the absence of a valid PIO certificate, he could also use his parent's birth certificate as proof of his origin.
Buying residential accommodation home loan for
Reserve Bank of India (RBI) has given general permission to banks and Housing Finance Companies (HFCs) registered with National Housing bank to grant a home loan to NRI for the purpose of buying residential house property in India.
As per these guidelines, the loans to be granted to NRIs is be on the same basis and criteria as those are applicable in case of resident Indians. These would include the loan amount eligibility based on the income, tenure the of the loan and the extent to which the lenders can finance purchase of residential house property by NRIs. These loans shall be given in Indian Rupees and shall also be repayable Indian Rupee. As per the regulations, the amount of loan cannot be credited directly to the bank account of the Non-Resident Indian (NRI) and thus by implication should only be disbursed to the seller or the builder. In the case where the Non-Resident Indian (NRI) has already paid the consideration, the loan cannot be availed subsequently. The home loan to NRI shall be secured by equitable mortgage of the property which the NRI intends to purchase. The lenders are also allowed to accept any other assets India as security.
Repayment of Home Loan
The home loan taken by Non-Resident Indian (NRI) from these banks/housing finance companies can be serviced through various sources. Since the NRI is working outside India, it is always convenient for him to pay the EMI by way of remittances through the banking channels. The loan can also be serviced out of the funds lying in his credit in any of the banking accounts like his Non-Resident External (NRE) account, of his Foreign Currency Non-Resident (FCNR) deposits. Even the home loan taken by him can be repaid out of the funds lying in his NRO account. The Reserve Bank of India (RBI) even permits the rental incomes received on such property to be used for the purpose of servicing of the EMIs.
Funding the Purchase
According to Reserve Bank of India (RBI) norms, a maximum of 80% of the value of property can be funded by a financial institution. Rest has to come from the NRI personal resources. Indian financial institutions give rupee loans and so the same needs to be repaid in rupees only. "Another option NRIs can use is to get funding overseas where interest rates are lower and is a good idea especially if you are still overseas and have income accruing there.
Since all transactions must happen through the banking channel, repayment has to be done by inward remittances. You can directly get the money remitted from Non-Resident Ordinary (NRO)/Non-Resident External (NRE) account in India or issue post-dated cheques or Electronic clearance service (ECS) from your Non-Resident External (NRE), Non-Resident ordinary (NRO) or Foreign currency Non-Resident (FCNR) account in EMIs.
In case you let out the property you call use the rent to repay the loan as well. Cheques issued from a relative's local account can also be used to make the loan payments.
Prior permission for acquisition or transfer of immovable property in India by a citizen of certain countries
No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan shall acquire or transfer immovable property in India, other than lease, not exceeding five years without prior permission of Reserve Bank. Foreign nationals of non-Indian origin resident outside India are not permitted to acquire any immovable property in India unless such property is acquired by way of inheritance from a person who was resident in India. Foreign Nationals of non-Indian origin who have acquired immovable property in India by way of inheritance with the specific approval of Reserve Bank of India (RBI) cannot transfer such property without prior permission of Reserve Bank of India (RBI).
An office of a foreign company can purchase immovable property in India
A foreign company which has established a Branch Office or other place of business (excluding a liaison office) in India, in accordance with FEMA regulations, can acquire any immovable property in India, which is necessary for or incidental to carrying on such activity. The payment for acquiring such a property should be made by way of foreign inward remittance through proper banking channel. A declaration in form IPI should be filed with Reserve Bank of India (RBI) within ninety days from the date of acquiring the property. Such a property can also be mortgaged with an Authorised Dealer as a security for other borrowings. On winding-up of the business, the sale proceeds of such property can be repatriated only with the prior approval of
Reserve Bank of India (RBI). Further, acquisition of immovable property by entities who had set up Branch Offices in India and incorporated in Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would require prior approval of Reserve Bank of India (RBI) to acquire such immovable property. However, if the foreign company has established a Liaison Office, it cannot acquire immovable 5 years.
Non-Resident Indian (NRI/Person of Indian Origin (PIO) cannot acquire agricultural land/plantation property/farm house in India
Since general permission is not available to Non-Resident Indian (NRI)/Person of Indian Origin (PIO) to acquire agricultural land, plantation property/farm house in India, such proposals will require specific approval of Reserve Bank of India (RBI) and the proposals are considered in consultation with the Government of India.
No documents need to be filed with Reserve Bank of India (RBI) after purchase
A Non-Resident Indian (NRI)/Person of Indian Origin (PIO) who has purchased residential/commercial property under general permission, is not required to file any documents with the Reserve Bank of India (RBI).
No restrictions on purchase of number of residential/commercial properties under the general permission
There are no restrictions on purchase of number of residential commercial properties that can be purchased.
Immovable property in India can be acquired by way of Gift
Non-Resident Indians (NRIs ) and Persons of Indian Origin (PIOs) can freely acquire immovable property by way of gift either from-
(I) a person resident in India or
(ii) a Non-Resident Indian (NRI) or
(iii) Indian a Person of Indian Origin (PIO)
Payment for properties purchased by Non-Resident Indians (NRIs)
Payment for acquisition of property can be made out of-
(I) funds received in India through normal banking channels by way of inward remittance from any place of India or
(ii) funds held in any non-resident account maintained in accordance with the provisions of the Foreign Exchange Management Act, 1999 and the regulations made by Reserve Bank of India (RBI) from time to time.
* Such payment cannot be made either by traveller's cheque or by foreign currency notes or by other mode than those specially mentioned above.
TDS on property purchased by Non-Resident Indian (NRI) in India
TDS is applicable on Non-Resident Indians (NRIs) also. So, it needs deducted at the time of making payment by Non-Resident Indian (NRI) too. TDS payable on any immovable property purchased by NRI in India was made applicable from June 1st, 2013 with the introduction of section 194-IA.
Section 194-IA applies in case of every immovable property other than agricultural land. It states that every person (transferee), who is a non-resident and responsible or paying any amount to the resident (transferor) as a consideration for the Transfer of immovable property other than agriculture agricultural deduct an amount equal to one percent one percent or such rate as applicable at the time of making payment by whichever mode.
This means, TDS on property purchased by Non-Resident Indian (NRI) has to be deducted by himself hard to be deposited into the account of the government. He Has to deduct it before making payment to the seller of the property.
No TDS shall be deducted on purchase of immovable property by Non-Resident Indian (NRI) in case the consideration for such transaction is less than 50,00,000/-
Section 194-IA is applicable only in case where the transferor is a resident. Also, the location of the property is irrelevant. This section is applicable even if the property is situated outside India. Section 194-IA shall not be applicable in case section 194-LA applies which covers TDS on compensation payment of compulsory acquisition of immovable property. The deductor need not obtain TAN number under section 203A For deducting TDS tinder this section.
There may be two cases define the amount of TDS to be deducted-
(a) SELLER PROVIDES HIS PAN NUMBER
If the seller provides his PAN number r at the time of the transaction, TDS shall be deducted ® 1% on the purchase price, provided the value of the property the exceeds 50 lakhs.
(b) SELLER DOES NOT PROVIDE HIS PAN NUMBER
If the seller does not provide his PAN with the member at the time of the transaction, TDS shall be deducted @ 20% on the purchase price.
TIME OF DEPOSIT OF TAX DEDUCTED AT SOURCE
TDS on purchase of immovable property must be deducted at the home of-
(a) Create it to the account of the transferor (the credit in the books)
(b) Credit of payment in cash or cheque or through any other mode(whichever is earlier).
WHAT TO DO AFTER DEDUCTING TDS?
After deducting TDS, the conductor has to pay the same to the government within 7 days from the end of the Month in which the TDS was deducted (in case of Mar Due Date is April 30). Online payment is to be made to the Income Tax Department through any of the authorized banks. A new challan-cum-statement form, Form 26QB is introduced for the same. PAN number of both seller as well as purchaser needs to be mentioned in the online form for providing details regarding the transaction to be mention in the online form for providing details regarding
Like ILI all other cases, the deductor needs to issue this section came under this section too. This certificate is issued in Form 16B within of deposit from the date of deposit of TDS, I. e., within 22 days from the end of the month in which the TDS was deducted.
NO SEPARATE RETURN FOR THE TDS PAYMENT TO BE FILED
There is no need to file a separate return for the TDS payment on purchase/sale of immovable property on a quarterly basis. Form 26QB challen-cum-statement and contains all details required to be provided in TDS return.
INTEREST ON DELAYS
The provisions of interest and penalty in case of late deduction and late payment apply to this section also. For any delay in a deduction of TDS, deductor has to pay interest ® 1% per forth and 1.5% per month for any delay in payment of TDS.
Indians nowadays are increasingly buying properties overseas, particularly in London, New York, Singapore and Dubai. It is critical for them to study foreign exchange regulations and tax provisions of the relevant country as well as India Before they make buying decisions.
If you are looking to make investments overseas, it is important to be aware of certain exchange control laws and income-tax implications. Important aspects to keep in mind if you wish to buy a property abroad are mentioned below-
(I) Foreign Exchange Regulations
Under the Indian foreign exchange regulations, the limit for permissible remittance outside India (including for investing in property) by resident individuals is cumulatively USD 2,50,000 in a financial year per person. Each member of a family can remit out of his/her own balance USD 2,50,000 per financial year for the purpose acquisition of property.
(ii) Exchange Control Laws
The Reserve Bank of India (RBI) allows approval-free remittances under the Liberalized Remittance Scheme (LRS) for a resident individual up to USD 2,50,000 Per financial year (April to March), (nearly 1.6 crores per person) for any purpose (except exceptions). One can remit more through other members of the family, being joint owners. There is no restriction on the frequency or number of remittances under the liberalized Remittance Scheme (LRS) within the overall limit-this can also help where the purchase price needs to be paid in instalments.
(Ill) Disclosure requirement of foreign Asset and Income
Residents and ordinarily resident India. Individuals are required to disclose the details of immovable property held outside India at any time during the previous year in income-tax returns. Details in relation to property, like the country of investment, the address of the property, date of acquisition, total investment, nature and amount of income derived from property.
Income Tax Implications
Investing in property overseas could involve a variety of tax complexities, particularly if the country where the immovable property is situated also levies a tax on the property earrings.
Such rental income may also be taxable in India due to the Ordinarily Resident status of the investor.
Compliance requirements include obtaining tax registration, file returns etc. For example, the tenant may need to withhold tax under the overseas country tax laws while making rental payments to a non-resident landlord. Depending upon the foreign exchange regulation in the overseas country, there could also be limitations on repatriation of sale proceeds at the time of exiting the investment. The rental income is taxable on lines similar to the second property in India.
Taxation of rental income
If the person, who has invested in immovable property abroad, earns rental income, then he stays have to offer such income in India as Resident and ordinarily resident individuals are subject to income tax on their worldwide income. Accordingly, the rental income from immovable property held abroad will also be taxed in India. The majority of tax treaties which India has signed provide taxing rights to both the countries I. e. country of residence and the country where the immovable property is located.
Further, Where the tenant withholds tax as per the tax laws of the foreign country where the person may claim tax credit of tax withheld abroad against his tax liability in India as per the provisions of the relevant tax treaty. For this purpose, he may need to obtain certain documentation like proof of tax paid abroad.
Rental Income and final sale proceeds
Being a resident of India, the investor would be required to repatriate the rental income as well as the final sale proceeds from the overseas property into his Indian bank account within a in time limit of 90 days.
When the property is sold, capital gains would be taxable in India similar to the sale of the Indian property. The following points may be relevant: –
Long-term capital gain (LTCG) (property held for more than 36 months) will be taxed at a flat rate of 20% after applying for indexation benefit. Short-term capital gain (STCG) are taxed at normal slab rates. It may also be possible to avail of tax exemption by investing the amount of long-term capital gain (LTCG) in another residential house property in India or in specified NHAI/REC bonds-these are subject to additional condition.
If the capital gains are taxable in the other country as well, the relevant Double Taxation Avoidance Agreement (DTAA) can be examined to avoid double taxation or avail credit of foreign taxes against Indian tax liability, subject to maintenance of appropriate documentation.
No benefit of capital gain tax exemption Capital Gain under section 54/54F
The benefit of capital gain exemption under section 54/54F is not allowed as in order to claim capital gain exemption under section 54/54F, the purchase/construction of residential house must be in India and not outside India
The credit of foreign Income-tax paid
The credit of foreign income-tax paid to reduce the Indian tax burden could be explored, subject to the conditions under the relevant Double Taxation Avoidance Agreement (DTAA) between Indian and the other country. Such foreign tax credit is also available (Subject to conditions) if India does not have a Double Taxation Avoidance Agreement (DTAA) with the other country. This claim would be required to be supported by appropriate documents, such as proof of income-tax paid overseas, overseas tax return filed, etc. The required details should be reported in the Indian tax return form.
Transaction of Immovable Property.
Indian Citizen Resident outside India May
Purchase property from
Sell property to
Receive gift from
Give Gift to
Person of Indian Origin who is Resident outside India May
FOREX / NRI
Citizen of India
Non Resident Indians (NRIs) – Gift
Gift Tax in India
Prior to 1998, in India, gifts used to be taxed in the hands of the giver in the form of Gift Tax. However, in 1998, this Gift Tax was abolished. Subsequently, in 2004, a new tax on gifts was introduced in the Income Tax Act according to which, the tax would be levied, in certain cases, in the hands of the receiver. According to this provision, any gifts in excess of Rs. 50,000/- received by any Individual will be taxed in the hands of thee receivers. The value of the gift would be added to the receiver's total income and tax would be calculated thereon. This includes cash gifts as well as gifts in kind. For Gifts in kind, such as property, jewellery etc., the asset must necessarily arise in India and for valuation purposes, certain rules would apply. In the case of immovable property, the value will be based on the stamp data value of the property. In case of any other property such as shares and securities, jewellery, paintings, work of art etc., value would be based on the fair market value of such property.
Gifting Immovable properties
There is a valuation aspect involved in the gifting of immovable properties: –
If the property is gifted without any consideration then if the stamp duty value exceeds 50,000/-, stamp duty value will be taken
If the property is gifted for consideration, then the actual value of the property will be taken
Non-Resident Indian (NRI) can gift property
A Non-Resident Indian (NRI)/PIO can gift property (residential/commercial) to–
A resident Indian or
another Non-Resident Indian (NRI) or
A foreign national of non-Indian origin needs prior approval of the Reserve Bank in such case.
But agricultural land, plantation land and farmhouse on land and a farm house can be gifted only to a resident Indian and not another Non-Resident Indian (NRI)/PIO.
In the case of other properties: –
If gifted without consideration and the fair market value exceeds Rs. 50,000/-, then the fair market value will be taken as the final value.
If gifted for consideration and the Fair Market Value (FMV) less consideration is greater than Rs. 50,000/-, then the Fair Market Value (FMV) less consideration amount will be taken as the value of the gift.
Exemptions to the tax on Gifts
Exemption to the tax on gifts shall not apply to any sum of money or any proper received
from any relative or
on the occasion of the marriage of the individual or
under a will or by way of inheritance or
in contemplation of death of the payer or donor, as the case may be or
from any local authority as defined in the Explanation to clause (20) of section 10 or
from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10 or
from any trust or institution registered under section 12AA.
ln other words, as a Non-Resident Indian (NRI), if you make gifts to people in India, the onus of paying tax in India would be on the recipients. Recipients in India who are relatives would not have to pay any tax while non-relatives would have to pay tax on gifts in excess of Rs. 50,000/-.
"ASSESSABLE" means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purpose of the payment of stamp duty.
"FAIR MARKET VALUE OF A PROPERTY, OTHER THAN AN IMMOVABLE PROPERTY" means the value determined in accordance with the method as may be prescribed: –
'JEWELLERY INCLUDES"
ornaments made of gold, silver, platinum or any other precious metal or any other containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sworn into any wearing apparel;
Precious or semi-precious stones, Whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel
"PROPERTY" means–
immovable property being land or building or both;
shares and securities
archaeological collections)
sculptures or
any work of art
"RELATIVES" means: –
Spouse (Husband)
Sisters or wife
Spouse's brother
Spouse's sister
Parents of spouse
Lineal ascendants of individual or spouse (lineal ascendants are the persons who are supposed to be parents from the time being).
Brothers or sisters of parents of individual or spouse.
"STAMP DUTY VALUE" means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment stamp duty in respect of an immovable property.
Gifts when Resident Indians send to Non-Resident Indians (NRIs)
A resident Individual is permitted to make a rupee gift to a Non-Resident Indian (NRI)/PIO who is a close relative as defined under the Act. The gift amount should be without the overall limit of USD 200,000 per Financial Year as permitted under Liberalized Remittance Scheme (LRS) for a resident individual.
Any resident individual can remit gift up to USD 2,00,000 in one financial year under Liberalized Remittance Scheme to Non-Resident without taking permission from RBI. Approval from RBI will be required for remittance above USD 2,00,000. Non-Resident Indian (NRI) will need to speak to his banker about the method of remittance.
It would be the responsibility of the resident donor to ensure that the gift amount is under the Liberalized Remittance Scheme (LRS) and remittances in the form of gifts during the Financial Year including the gift amount have not exceeded the limit prescribed under the LRS. Only Liberalized Remittance Scheme (LRS) limit of the remitter would utilize and gift amount would actually be credited to NRO account of Non-Resident Indian (NRI)/PIO close relative.
Indian mother/father can gift to Non-Resident Indian (NRI's) children
(U. S. citizen)
There are no taxes applicable when gift is received from a relative as defined under the Act. In other words, if gift is received from a relative as defined under the Act, no taxes would be payable.
Non-Resident Indian (NRI) sends money to India-exempt from tax
According to the Act, all income earned outside India by a non-resident is exempt from tax. Therefore, any remittance to India of such income will not attract any tax. Non-Resident Indian (NRI) may send money to his own account maintained in India, whether Non-Resident External (NRE), NRO or any other account, there will not be any tax on such a transaction.
Non-Resident Indian (NRI) can utilize the amount free in whatever way Non-Resident Indian (NRI) wants. Of course, income arising from such an amount invested in India will be liable for income-tax. He can send money to India as a gift to a resident relative. The gift made on or after 1st October, 1998 is not chargeable to gift tax. Non-Resident Indians (NRIs) can send gifts (in the form of money/cash transfers/goods) to their relatives/Non-relatives irrespective of any amount as per Act as follow : –
Treatment of Gifts To Relatives To Non-relatives
In The form of cash/ cheque or articles/goods. Exemption from tax irrespective of Gift Value. Exempt from tax upto 50000 in aggregate in one Financial year.
Non-Resident Indian (NRI) can gift to his/her parents in India from their Non-Resident External (NRE) account
A Non-Resident Indian (NRI) can gift to his/her parents in India from their NRE account without
their parents suffering any tax.
Non-Resident Indian (NRI) can gift shares to relatives
A Non-Resident Indian (NRI) can gift shares to an Indian resident. The gift would not be taxable in the hands of the donor. The recipient of the shares would be taxed in India if the fair value of the shares exceeds Rs 50,000/-, and if the recipient does not qualify to be a relative as defined under section 56 (2) of the Act.
Resident individual can give rupee gifts to his visiting Non-Resident Indian (NRI) /persons of Indian Origin (PIOs) close relatives
Resident individual can give rupee gifts to his visiting Non-Resident Indian (NRI) /Persons of Indian Origin (PIOs) close relatives by way of crossed cheques/electronic transfer within the overall limit prescribed under Liberalized Remittance Scheme for the resident individual and the gifted amount should be credited to the beneficiary's NRO account.
Resident individual can gift shares/securities/convertible debentures etc. To Non-Resident Indian (NRI) close relative.
Resident individual is permitted to gift shares/ securities /convertible debentures etc. To Non-Resident Indian (NRI) close relatives up to USD 50, 000 per financial year subject to certain conditions.
"CLOSE RELATIVE" means relative as defined in Section 2 (77) of the Companies Act, 201 (18 of " 013)
A Non-Resident Indian (NRI PIO/foreign national holding an agricultural land plantation property/farm house in India can gift the same.
A Non-Resident Indian (NRI)/PIO can gift such property, but only to a person resident in India, and who is a citizen of India. A foreign national of non-Indian Origin would need prior approval of the RBI for such a transaction.
Non-Resident Indian (NRI PIO can acquire a property in India by way of gift
A Non-Resident Indian (NRI)/PIO can acquire a property in India by way of gift from either a resident Indian or another Non-Resident Indian (NRI)/PIO. (Nevertheless, the Non-Resident Indian (NRI) can acquire only a commercial or residential property and not a plantation land, an agricultural land or a farmhouse.
Foreign national cannot acquire a property by way of gift in India
Rupee gifts should be created directly to NRO account.
Tax on Gifts in the US,
In the Us, tax on gifts is levied in the hands of the donor or person making the gift and not the receiver. Moreover, this only applies where the person making the gift is a US taxpayer, that is a US resident, green card holder or citizen. Where a gift is made by a person resident in India to a US person no gift is payable as the donor is not a US taxpayer. However, the person receiving the gift, being a US taxpayer, must up Form-3520- " Annual return to report transactions with foreign trusts and receipt of certain foreign gifts. If a US person receives a gift of more than USD 1,00,000, Form 3520 should be filed. If the amount of the gift is less than USD 1,00,000, then no Form 3520 is required.
Keynote;
You can make gifts of up to USD 13, 000 per gift to as many people as you like in a year without paying any gift tax. The only things to remember is that each recipient must not get more than USD 13, 000 in the year. Also, this is an individual limit. So a couple can make gifts up to USD 26, 000.
You gift your mother USD 13, 000 and your brother USD 13, 000 in 2012. You pay no gift tax in the US.
FILING OF INCOME TAX RETURN BY NON-RESIDENT INDIAN
The income earned by Non-Resident Indians (NRIs) abroad is not subject to tax in India. However, if their income in the country crosses the basic exemption limit (2,50,000 for assessment year 2017-18), they are required to file their returns. This income could be in the form of interest on deposits, rental income on property in India etc. Also if NRIs carry out transactions in securities like shares and mutual funds the capital gains are liable to tax. In other words, a Non-Resident Indian (NRI) is required to file an income tax return in India, if sourced income in India exceeds them basic exemption limit or taxes withheld exceed tax liability for the year thus resulting in a refund situation.
Non-Resident Indians (NRIs) have to file return of Income
A Non-Resident Indian (NRI) with income sourced in India, have to file his limit.
Exceptions: Non-Resident Indian (NRI) not required to file his return of income
As per section 115G of the Act, it shall not be necessary for a Non-Resident
Indian (NRI) to furnish under section 139 (1) a return of his income, if he satisfies the
following conditions as laid down in section 15-G:-
If his total income in respect of which he is assessable under the Act during the previous year consisted only of investment income (interest income) or income by way of long term capital gains or both and.
If tax deductible at source under the provisions of chapter XVIII-B has been deducted at source from such Income.
"INVESTMENT INCOME" means any income derived (other than dividend to in section 115-O) from a foreign exchange asset.
"FOREIGN EXCHANGE ASSET" means any specified asset which the assessee has acquired or purchased with, or subscribed in convertible foreign exchange.
PROVISIONS ILLUSTRATED:-
You moved abroad during the F. Y. 2016-17 and you are a Non-Resident Indian (NRI) for purposes of Income Tax for this financial year. Prior to your move, you spent a few months in India and earned a salary in India.
If your Gross Income from this employer and including all your incomes in India For the entire financial] year exceed the maximum exemption limit, you are required
to file a return in India.
Non-Resident Indians (NRIs) do not get the benefit of differential exemption limits on basis of age or gender that is available to Resident Indians. The enhanced exemption limits on the for senior citizens and women is applicable only to residents and not to non-residents.
Due date of filing returns
The due date of filing of returns by Non-Resident Indians (NMs) is 31st July.
Impact of non-filing of return of income
It may result in a penalty of RS 5000/-for each year also.
One may be subject to prosecution under section 276CC of the Income Tax Act, 1961
PROVIDED that a person shall not be preceded for penalty or prosecution for failure to furnish a return of income, if-
The return is furnished by him before the expiry of the assessment year or
The tax payable by him on the total income determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source (TDS) does not exceed three thousand rupees I. e. his balance tax liability after considering TDS and Advance Tax does not exceed three thousand rupees.
Resident Foreign Currency (RFC) Accounts Scheme
Facilities for returning Indians:
The Provision relating to assets of retuning Indian are governed by FEMA, 1999 as: –
Movable assets abroad :
Foreign exchange/Overseas assets such as bank accounts, stock and securities, Life insurance policies, Loan, company deposits, debentures, bonds, etc., acquired, held by NRI while he was abroad can be continued to be so held even after the NRI returns to India for permanent settlement such investments can accumulate/accrue income outside India . Such balances can be utilized for investment and can be repatriated to India at any time.
Immovable assets abroad :
Non-Resident Indians (NRIs) can continue to hold their immovable properties outside India, Such properties can be rented out; rentals can be credited to overseas bank accounts. Such properties can be sold/transferred and the sale proceeds credited to overseas bank accounts. Expenses relating to such properties, such as maintenance, insurance premium etc. can be paid out of the overseas balances.
Bank accounts in India:
Immediately on return to India, NRIs should inform their bankers and the banker will designate their account as resident accounts or transfer the balance in their Non-Resident External (NRE)/Forign currency Non-Residency (FCNR) account to Resident Foreign Currency (RFC) accounts if so desired. Foreign Currency Non-Resident (FCNR) accounts can be continued till the date of maturity and on maturity can be converted to RFC accounts.
Concessional tax treatment for foreign exchange assets:
Non-Resident External (NRE)/Forign currency Non-Resident (FCNR) deposits with a bank in India and Investment in Government securities and company debenture out of foreign exchange fund would be eligible for a flat income tax of 20% on their income after the permanent return of the Non-Resident Indian (NRI). The concession will be available till the maturity of these investments.
This is a scheme approved by Reserve bank of India permitting person of Indian nationality or origin, who have returned to India on or after 18.04.1992 for permanent settlement (Returning Indians), after being resident outside India for a continuous period of not less than one year, to open foreign currency accounts with banks India for holding funds brought by them to India.
Persons who have returned to India before 18.04.1992 can also open Resident Foreign Currency (RFC) account if (a) they are holding Foreign currency assets abroad with RBI's permission or (b) they are in receipt of a pension or other monetary benefits from their erstwhile employers abroad.
Resident Foreign Currency (RFC) account can be held singly or jointly in the names of eligible persons.
Resident Foreign currency (RFC) account can be maintained in the form of savings, Current and term deposit. No cheque books are given for RFC-SB account.
Resident Foreign Currency (RFC) account can be opened and maintained in US Dollars, pounds Sterling and Deutsche Marks.
Only certain permissible credits viz., remittances in any permitted currency from abroad, pension or any other monetary benefits received from abroad, interest on RFC accounts, foreign currency notes/ travelers cheques, transfers from other RFC account of the account holder, balance in Non-Resident External (NRE)/Foreign Currency Non-Resident (FCNR) account at the time of his arrival in India and any other amount specifically permitted by Reserve Bank of India (RBI) are allowed under RFC. Funds in RFC accounts can be remitted abroad for any bona fide purpose of the account holder and his dependents including exchange required for travel and other personal purposes and investments.
Funds can be transferred from one RFC account to another RFC account of the same person. Withdrawals/payments other than foreign currency remittance abroad. are required to redesignate their Non-resident accounts as Resident Rupee/RFC accounts after their arrival in India.
However, Reserve Bank of India (RBI) has now permitted Returning Indians to continue their Foreign Currency Non-Resident (FCNR) (B) deposits till the original maturity date and on maturity be transferred to RFC accounts. RFC accounts are eligible for interest benefits, as prescribed by the Bank from time to time.
No loans/advances are allowed whether directly or indirectly against balance in an RFC account. If the Returning Indian subsequently goes abroad to become a Non-Resident Indian (NRI), the balance in the RFC account can be converted to Non-Resident External (NRE)/Foreign Currency Non-Resident (FCNR) account. Interest income from RFC is exempt from income-tax till such time the Returning Indian maintains the status of Resident but Not Ordinarily Resident (RNOR). Hence if the Returning Non-Resident Indian (NRI) had been non-resident for a continuous period of 2 years, he gets exemption from income-tax for subsequent 9 years.