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Fundamentals of Tax Planning for NRI's
1. There is no Income-tax in India on a foreign income merely because it is remitted to India during that year.
2. Remuneration for work done in India is taxable irrespective of the place of receipt. Remuneration includes salaries and wages, pension, fees, commissions, profits in lieu of or in addition to salary, advance salary and perquisites. Allowances, deferred compensation and tax equalisation are also taxable.
3. Non-resident person should plan his affairs in such a way that he remains a non-resident for at least two years so that for the coming at least eight years, even if he becomes a resident person in India, he is treated as a non-resident person, thereby he can claim full exemption on the foreign income, earned or accrued or received outside India.
4. Total Income, is computed after adding income from different sources of India and subtracting the various deductions admissible. The resultant income is the total or taxable income.
5. Where a particular income is totally exempt from Income-tax, it does not from part of total income. Section 10 of Income-tax Act gives details of such exemption.
6. Further there are certain expenses or other deductions, which are allowed from the gross income to arrive at net taxable income.
7. A non-resident Indian can further opt to have the special procedure of calculation of Income-tax in respect of some specified sources of Income.
Income-Tax Liability in India of an NRI
A person by whom Income tax or any other sum of money is payable under the Indian Income Tax Act are either (a) resident in India, or (b) non-resident in India.
1. The residential status of an assessee is to be determined for each previous year.
2. A non-resident is liable to pay income-tax on the total income of a particular year, which -
(a) is received or is deemed to be received in India in such year, or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
| Particulars |
During "RNOR" Status |
During "Resident" Status |
| Fixed Deposits with Banks |
Exempt upto maturity
of deposit. |
Taxable as Normal Resident with an option for flat rate @ 20% upto maturity. |
Interest on
NRNR a/c |
Exempt upto maturity
of the deposit. |
Taxable as Normal Resident with an option for flat rate @ 20% upto maturity. |
Interest on
FCNR a/c |
Exempt upto maturity
of the deposit. |
Taxable as Normal Resident with an option for flat rate @ 20% upto maturity. |
Interest on
RFC a/c (NRE/
FCNR a/c
converted) |
Exempt even on deposits renewed during the
status. |
Taxable as Normal Resident. |
Dividend on
Shares/Mutual Fund Units |
Exempt. |
Exempt. |
Capital Gains
on Shares |
Taxable as in case of
Resident. |
Taxable as in case of
Resident. |
Interest on
Debentures |
Taxable as Normal Resident with an option for flat rate @20% upto Transfer Redemption. |
Taxable as Normal Residents with an option for flat rate @20% upto Transfer/Redemption. |
Interest on
Fixed Deposits with Companies |
Taxable as Normal Resident with an option for flat rate @ 20% upto maturity. |
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Taxable Income of NRI
1. Profits of Business
2. Income from property in India
3. Income from any assets or source India
4. Income form money brought into India and lent on interest
5. Fees for technical services and royalties
6. Double taxation relief - to avoid double taxation on the same income in two countries, the central government may enter into an agreement with the government of any country outside India.
(a) for grants of relief in respect of income on which income tax has been paid both under this act and income tax has been paid both under this act in that country
(b) for the avoidance of double taxation of income under this act and under the corresponding law in force in that country.
Non-Taxable Income of NRI
1. Interest on Non-resident (External) Account - Interest on Non-resident (External) Account is fully exempt from Income-tax under section 10(4)(ii) of Income-tax Act.
2. Interest on National Savings Certificates - Interest on National Savings Certificates is completely exempt from Income-tax under section 10(4B) of Income-tax Act.
3. Remuneration of Non-citizens is exempt from Income-tax - There are certain exemptions meant only for non-citizens of India. A Non-resident who is not a citizen of Indian even though he is of Indian origin would also be entitled to such exemptions as are given in section 10(6) of Income-tax Act.
4. Other main fully exempted Incomes - Residents as well as non-residents enjoy certain incomes which are fully exempt from Income-tax, e.g.
(a) Agricultural Income under Section 10(1) of Income-tax Act, Section 2(1A) defines the expression "agricultural income".
(b) Any income derived from such land.
5. Casual Income - Casual Income upto Rs.5,000 is completely exempt from Income-tax under Section 10(3) of Income-tax Act.
6. Certain Interest Payments - Incomes exempt from Income-tax as per Section 10(15) of Income-tax Act.
7. Scholarships - As per Section 10(16) of the Income-tax Act, scholarships granted to meet the cost of education are completely exempt from Income-tax.
8. Dividends - With effect from the Assessment year 1998-99, Section 10(33), provides that dividend income in the hands of all shareholders to the extent distributed by any company (as referred to in Section 115-O would be completely exempt from Income-tax.
9. Securities and Bonds -
(a) any income by way of interest on such securities or bonds including income by way of premium on the redemption of such bonds
(b) interest on National savings certificates.
10. Leave travel concession - this concessions was earlier given to residents only has been extended to non residents from the assessment year 1989-90. The exemption will be limited to the amount actually spent.
11. Remuneration for shooting any cinematographic film.
12. Certain incomes of individuals not a citizen of India irrespective of their residential status.
13. Tax holiday for foreign technicians in in certain cases.
14. Remuneration for service on a foreign ship.
15. Remuneration for foreign professors and teachers provided the condition laid down therein satisfied.
16. Remuneration for doing research work In India by foreigners.
17. Remuneration of foreign government employees for training.
18. Specially low rate of income tax on dividends, royalties, interest from securities, fees for technical services in the case of foreign companies.
19. Tax paid by a Government or an Indian concern to a non resident (not being a company) or a foreign company on any income derived pursuant to an agreement entered into by the central government of a foreign state or an international organisation is also exempt from tax with effect from 1-04-88.
20. Interest received by a non resident Indian from such bonds as notified by the central Government or by any individual owning the bonds by virtue of being a nominee or survivor of such non resident Indian or by an individual to whom the bonds have been gifted by the non resident, will not be included in computing the total income of such individual. The bonds should have been purchased by a non resident Indian in foreign exchange and the interest & principle received in respect of such bonds whether on their maturity or otherwise is not allowable to be taken out of Indian. Even where the individual who is non resident Indian in the previous year in which the bonds are acquired, becomes a resident in India in any subsequent year, the interest received from such bonds will continue to be exempt in the subsequent years as well. In case of premature encashment of the bonds, the exemption shall stand withdrawn from the year of encashment.
21. Tax Free Bonds - Resurgent India Bonds: SBI offered these bonds to NRIs from August 5,1998 upto August 24,1998.The Bonds were issued to individual Non-resident Indians(NRIs), Overseas Corporate Bodies(OCBs) and Banks acting in a fiduciary capacity on behalf of NRIs and OCBs. The following bonds earlirer issued are also exempt from tax
(a) NRI Bonds (7 Years)were issued by State Bank of India.
(b) SBI had also issued India Development Bonds (5 years).
22. NRI's Exempted From One-By-Six Provisions - NRIs are now fully exempted from the provisions of the one-by-six income tax return filing scheme introduced in the last budget. Also, travel to neighbouring countries has been excluded from the criteria of foreign travel under the scheme, and senior citizens have been offered concessions under the scheme. NRI's are now exempted from having to file returns even if they maintain the assets mentioned in the scheme in India. Individuals aged 65 years and above, not engaged in any business or profession will not be required to file a return even if they meet the criteria on ownership of immovable property or subscription of a telephone. however, they will have to file a return under the scheme if they fulfil any of the other four criteria. Now travel to a foreign country for the purpose of the criteria under this scheme does not include travel to neighbouring countries: Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka. Also, travel to Saudi Arabia on Haj pilgrimage organised by Central Haj committee constituted under Haj committee Act,1959, and travel to China on pilgrimage to Kailash Mansarover organised by ministry of external affairs shall not be regarded as travel to any foreign country.
Special Provisions Applicable to Non-resident
Indians
With a view to attract investment by Non-resident Indians (NRIs) and Indian Nationals living abroad, certain reliefs, exemptions and incentives have been provided in the scheme of income taxation. Chapter XIIA of the Income Tax Act contains special provisions relating to taxation of non-resident Indians. Nonresident Indian has been defined as an individual being a citizen of India or a person of Indian origin, who is not a resident. A person is considered to be of Indian origin if he or either of his parents or any of his grand parents was born in undivided India. All the special exemptions, deductions and concessions applicable to NRIs are dealt with in the succeeding paragraphs. These concessions are in addition to the concessions available to nonresidents in general since NRIs form only a special class of nonresidents.
Joint holdings of non-resident Indians
Non-residents of Indian nationality/origin may invest in shares either singly or jointly with their close relatives resident in India. The Reserve Bank of India permits such joint holdings with repatriation benefits, provided :
- the investment is made by sending remittances from abroad or out of funds held in the Overseas Investor's Non-resident (External) Account or FCNR account;
- the first holder of shares is the non-resident Indian who actually made the investment out of his funds; and
- the resident holder is closely related to the non resident investor.
Remittance/repatriation of capital/dividend will be allowed to the non-resident investor, i.e. the first holder. In the event of the joint resident holder inheriting shares, he/she will not be entitled to any remittance/repatriation facilities. The special tax incentives provided in the Act to non-residents of Indian origin are available only to them and not to the resident Indians.
Special Exemptions in respect of Investment income
of Non-Resident Indians
Following investment income arising to Non-resident Indians (NRIs) are totally exempt :-
- The entire income accruing or arising to a NRI investing in the units of the Unit Trust of India is free of income tax provided the units purchased by them are out of the amount remitted from abroad or from their Non-resident (External) Account,
- Income arising from investment in notified savings certificates obtained by NRIs is exempt from tax provided the certificates are subscribed to in convertible foreign exchange remitted from a foreign country in accordance with Foreign Exchange Regulation Act. For this purpose National Saving Certificate VI and VII issues are notified.
- Income from NRI Bonds 1988 and NRI Bonds (Second Series) purchased by NRIs in foreign exchange is exempt from tax. This exemption continues to be available to a Non-resident Indian even after he becomes resident and is available also to the nominee or survivor of the NRI and to the donee who gets a gift of such bonds from the NRI.
Concessional Tax Treatment of certain incomes of
non-resident Indians
The income other than dividend and long term capital gains derived from any 'Foreign Exchange Asset by NRI is charged to tax at the flat rate of 20%. Long term capital gains arising on transfer of such assets are charged at the flat rate of 10%. The term 'Foreign Exchange Asset means any of the following assets acquired, purchased or subscribed to in convertible foreign exchange in accordance with Foreign Exchange Regulation Act :-
a. Shares in Indian company
b. Debentures issued by a public limited company
c. Deposits in a Public Ltd. Co.
d. Securities of the Central Government
e. Any other notified asset.
In computing the total income of such persons from any foreign exchange asset, no deduction is allowed in respect of any expenditure or allowance under any provision of the Act. Further, where a NRI has income only from foreign exchange asset or income by way of long term capital gains arising in transfer of a foreign exchange asset, or both, and the tax deductible at source from such income has been deducted, he is not required to file the return of income as otherwise required under the Act.
It may further be noted that the special provisions mentioned as above, will continue to apply in relation to the investment income from 'foreign exchange assets' (other than shares of an Indian Comapany) even after the NRI becomes resident in India. If the NRI becoming a resident wishes to be assessed under these provisions, he is required to file a declaration in writing along with the return of income. These special provisions will apply in relation to such income until the transfer or conversion of such assets into money.
Non-resident Indian may also elect not to be governed by these provisions for any assessment year by furnishing to the assessing officer the return of income for that assessment year and declaring therein that these provisions shall not apply to him for that assessment year. If he does so, then his total income and tax will be computed in accordance with the normal provisions of the Act.
Any long term capital gain arising to a NRI from the transfer of a foreign exchange asset, the net consideration of which is invested or deposited within a period of 6 months from the date of transfer in any specified asset mentioned at (a) to (e) of para 11.3 or in the National Saving Certificate VI or VII issue is dealt with as follows:-
a. If the cost of the new asset is not less than the net consideration in respect of the original foreign exchange asset, the whole of the capital gain will not be liable to tax;
b. If the cost of the new asset is less than the net consideration in respect of the original foreign exchange asset, proportionate amount of capital gain will be exempted from tax. The proportionate amount will be- Capital gain x (Cost of new assets / Net consideration of Transfer)
Simplified procedure of remittances
With a view to simplify the procedure for tax deduction at source and to avoid delay and inconvenience in the case of nonresident Indians wishing to remit the sale proceeds of foreign exchange assets, it has been provided that the non-resident Indians can remit such proceeds abroad or credit the same to their Non-resident (External) Account without having to obtain 'No Objection Certificate1 from the Income-tax authorities provided tax @ 10% on the long term capital gains relating to such assets is deducted by the authorised dealer, i.e. the bank concerned.
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Case Studies 
