With a view to attract investment by Non-resident Indians and Indian Nationals living abroad, special provisions exist in Chapter XIIA providing incentives in the form of reliefs and concessional tax rate as also simplifying the tax assessment procedure for such persons. Non-resident Indian has been defined as an individual, being a citizen of India or a person of India origin, who is not a resident. A person is of Indian origin if he or either of his parents or any of his grand parents was born in undivided India. These special provisions are dealt with in Chapter XI.
Non-resident persons have been given a special status under the incometax law. Besides the general provisions for computation of long-term capital gains and the tax liability thereon, contained in section 48 and section 112,Chapter XII-A (comprising of sections 115C to 115-I) contains special provisions relating to certain incomes of non-resident Indians (NRIs). Section 115AC makes provision for tax on income from bonds or shares purchased in foreign currency or capital gains arising from their transfer'. Besides, the provisions of Section 115A have been extended to non-residents, besides foreign companies, regarding tax on dividends, interest on foreign currency debts and income from units of mutual fund.
Tax Rates for NRI
For the Assessment Year 2007-08
Name of Income Rate*
Dividend** 20%
Interest received on loans made in foreign currency to an Indian concern or Government of India. 20%
Income received in respect of units purchased in foreign currency 20%
Royalty fees or technical fees For Agreements entered into:
After 31.05.97 but before 01.06.05 - @ 20%
After 01.06.05 - @ 10%
Interest on FCCB 10%
*The rates further increases by surcharge and education cess.
**Other than dividends on which Dividend Distribution Tax (DDT) has been paid.
Note:- If the NRI has a Permanent Establishment (PE) in India & the royalty or the fees for technical services paid is effectively connected with such, the same could be taxed at 40% (+ surcharge & education cess) on net basis.
Exemptions and concessions for NRI's
All receipts which give rise to income are taxable unless they are specifically exempted from tax under the Act. Such exempted income are enumerated in section 10 of the Act. The same are summarised in the table below :
Section Nature of Income Exemption limit, if any
1 2 3
10(1) Agricultural income
10(2) Share from income of HUF
10(2A) Share of profit from firm
10(3) Casual and non-recurring receipts Winnings from races Rs.2500/- other receipts Rs.5000/-
10(10D) Receipts from life Insurance Policy
10(16) Scholarships to meet cost of education
10(17) Allowances of MP and MLA. For MLA not exceeding Rs. 600/- per month
10(17A) Awards and rewards
(i) from awards by Central/State Government
(ii) from approved awards by others
(iii) Approved rewards from Central & State Governments
10(26) Income of Members of scheduled tribes residing in certain areas in North Eastern States or in the Ladakh region. Only on income arising in those areas or interest on securities or dividends
10(26A) Income of resident of Ladakh On income arising in Ladakh or outside India
10(30) (i) Subsidy from Tea Board under approved scheme of replantation
10(31) (ii) Subsidy from concerned Board under approved Scheme of replantation
10(32) Minor's income clubbed with individual Upto Rs. 1,500/-
10(33) Dividend from Indian Companies, Income from units of Unit Trust of India and Mutual Funds, and income from Venture Capital Company/fund.
10(A) Profit of newly established undertaking in free trade zones electronic hardware technology park on software technology park for 10 years (net beyond 10 year from 2000-01)
10(B) Profit of 100% export oriented undertakings manufacturing articles or things or computer software for 10 years (not beyond 10 years from 2000-01)
10(C) Profit of newly established undertaking in I.I.D.C or I.G.C. in North-Eastern Region for 10 years
Income from interest
10(15)(i)(iib)(iic) Interest, premium on redemption or other payments from notified securities, bonds, Capital investment bonds, Relief bonds etc. To the extent mentioned in notification
10(15)(iv)(h) Income from interest payable by a Public Sector Company on notified bonds or debentures
10(15)(iv)(i) Interest payable by Government on deposits made by employees of Central or State Government or Public Sector Company of money due on retirement under a notified scheme
10(15)(vi) Interest on notified Gold Deposit bonds
10(15)(vii) Interest on notified bonds of local authorities
Income from Salary
10(5) Leave Travel assistance/ concession Not to exceed the amount payable by Central Government to its employees
10(5B) Remuneration of technicians having specialised knowledge and experience in specified fields (not resident in any of the four preceding financial years) whose services commence after 31.3.93 and tax on whose remuneration is paid by the employer Exemption in respect of income in the from of tax paid by employer for a period upto 48 months
10(7) Allowances and perquisites by the government to citizens of India for services abroad
10(8) Remuneration from foreign governments for duties in India under Cooperative technical assistance programmes. Exemption is provided also in respect of any other income arising outside India provided tax on such income is payable to that Government.
10(10) Death-***-retirement Gratuity-
(i) from Government
(ii) Under payment of Gratuity Act 1972 Amount as per Sub-sections (2), (3) and (4) of the Act.
(iii) Any other Upto one-half months salary for each year of completed service.
10(10A) Commutation of Pension-
(i) from government, statutory Corporation etc.
(ii) from other employers Where gratuity is payable - value of 1/3 pension. Where gratuity is not payable - value of 1/2 pension.
(iii) from fund set up by LIC u/s 10(23AAB)
10(10AA) Encashment of unutilised earned leave
(i) from Central or State government
(ii) from other employers Upto an amount equal to 10 months salary or Rs. 1,35,360/- which ever is less
10(10B) Retrenchment compensation Amount u/s. 25F(b) of Industrial Dispute Act 1947 or the amount notified by the government, whichever is less.
10(10C) Amount received on voluntary retirement or termination of service or voluntary separation under the schemes prepared as per Rule 2BA from public sector companies, statutory authorities, local authorities, Indian Institute of Technology, specified institutes of management or under any scheme of a company or Co-operative Society Amount as per the Scheme subject to maximum of Rs. 5 lakh
10(11) Payment under Provident Fund Act 1925 or other notified funds of Central Government
10(12) Payment under recognised provident funds To the extent provided in rule 8 of Part A of Fourth Schedule
10(13) Payment from approved Superannuation Fund
10(13A) House rent allowance least of-
(i) actual allowance
(ii) actual rent in excess of 10% of salary
(iii) 50% of salary in Mumbai, Chennai, Delhi and Calcutta and 40% in other places
10(14) Prescribed [See Rule 2BB (1)] special allowances or benefits specifically granted to meet expenses wholly necessarily and exclusively incurred in the performance of duties To the extent such expenses are actually incurred.
10(18) Pension including family pension of recipients of notified gallantry awards
Exemptions to Non-citizens only
10(6)(i)(a) and (b) (i) passage money from employer for the employee and his family for home leave outside India
(ii) Passage money for the employee and his family to 'Home country' after retirement/termination of service in India.
10(6)(ii) Remuneration of members of diplomatic missions in India and their staff, provided the members of staff are not engaged in any business or profession or another employment in India.
10(6)(vi) Remuneration of employee of foreign enterprise for services rendered during his stay in India in specified circumstances provided the stay does not exceed 90 days in that previous year.
10(6)(xi) Remuneration of foreign Government employee on training in certain establishments in India.
Exemptions to Non-residents only
Refer Chapter VII (Para 7.1.1)
Chapter VIII (Para 8.4)
Chapter IX
Chapter X (Para 10.4)
Exemptions to Non-resident Indians (NRIs) only
Refer Chapter XI
Exemptions to funds, institutions, etc.
10(14A) Public Financial Institution from exchange risk premium received from person borrowing in foreign currency if the amount of such premium is credited to a fund specified in section 10(23E)
10(15)(iii) Central Bank of Ceylon from interest on securities
10(15)(v) Securities held by Welfare Commissioners Bhopal Gas Victims, Bhopal from Interest on securities held in Reserve Bank's SGL Account No. SL/DH-048
10(20) any local Authority (a) Business income derived from Supply of water or electricity any where. Supply of other commodities or service within its own jurisdictional area.
(b) Income from house property, other sources and capital gains.
10(20A) Housing or other Development authorities
10(21) Approved Scientific Research Association
10(23) Notified Sports Association/ Institution for control of cricket, hockey, football, tennis or other notified games.
10(23A) Notified professional association/institution All income except from house property, interest or dividends on investments and rendering of any specific services
10(23AA) Regimental fund or Non-public fund
10(23AAA) Fund for welfare of employees or their dependents.
10(23AAB) Fund set up by LIC of India under a pension scheme
10(23B) Public charitable trusts or registered societies approved by Khadi or Village Industries commission
10(23BB) Any authority for development of khadi or village industries
10(23BBA) Societies for administration of public, religious or charitable trusts or endowments or of registered religious or charitable Societies.
10(23BBB) European Economic Community from Income from interest, dividend or capital gains
10(23BBC) SAARC Fund
10(23C) Certain funds for relief, charitable and promotional purposes, certain educational or medical institutions
10(23D) Notified Mutual Funds
10(23E) Notified Exchange Risk Administration Funds
10(23EA) Notified Investors Protection Funds set up by recognised Stock Exchanges
10(23FB) Venture capital Fund/ company set up to raise funds for investment in venture Capital undertaking Income from investment in venture capital undertaking
10(23G) Infrastructure capital fund, or infrastructure capital company Income from dividend, interest and long term capital gains from investment in approved infrastructure enterprise
10(24) Registered Trade Unions Income from house property and other sources
10(25)(i) Provident Funds Interest on securities and capital gains from transfer of such securities
10(25)(ii) Recognised Provident Funds
10(25)(iii) Approved Superannuation Funds
10(25)(iv) Approved Gratuity Funds
10(25)(v) Deposit linked insurance funds
10(25A) Employees State Insurance Fund
10(26B)(26BB) and (27) Corporation or any other body set up or financed by and government for welfare of scheduled caste/ scheduled tribes/backward classes or minorities communities
10(29) Marketing authorities Income from letting of godown and warehouses
10(29A) Certain Boards such as coffee Board and others and specified Authorities
Taxable income of NRI's
As mentioned in Chapter-II, a person who is non-resident is liable to tax on that income only which is earned by him in India. Income is earned in India if:
It is directly or indirectly received in India; or
It accrues in India or the law construes it as having accrued in India.
The following are some of the instances when the law construes and income to have accrued in India:
Income from business arising through any business connection in India (refer Chapter X);
Income from property if such property is situated in India;
Income from any asset or source if such asset or source is in India;
Income from salaries if the services are rendered in India. In such cases salary for rest period or leave period will be regarded as earned in India if it forms part of service contract;
Income from salaries payable by the Government to a citizen of India even though the services are rendered outside India;
Income from dividend paid by an Indian company even if the same is paid outside India;
Income by way of interest payable by the Government or by any other person in certain circumstances (refer Chapter VII);
Income by way of Royalty if payable by the Government or by any other person in certain circumstances (refer Chapter VIII);
Income by way of fees for technical services if such fees is payable by the Government or by any other person in certain circumstances (refer Chapter VIII).
The following income, even though appearing to be arising in India, are construed as not arising in lndia:
If a non-resident running a news agency or publishing newspapers, magazines etc earns income from activities confined to the collection of news and views in India for transmission outside India, such income is not considered to have arisen in India.
In the case of a non-resident, no income shall be considered to have arisen in India if it arises from operations which are confined to the shooting of any cinematography film. This applies to the following types of non-residents:
Individual who is not a citizen of India; or
Firm which does not have any partner who is a citizen of India or who is resident in India; or
Company which does not have any shareholder who is resident in India.
Deduction of Tax at Source from payments to Non-residents
Any person responsible for making any payment (except dividend declared after 1.6.97) to a non-resident individual or a foreign company is required to deduct tax at source at the prescribed rate at the time of credit of such income to the account of the payee or at the time of payment thereof. If, however, person responsible for making the payment is the government, public sector bank or public financial institutions, deduction is to be made at the time of payment only.
Where the person responsible for making such payments considers that the whole of such sum would not be income chargeable in the case of recipient, he may make an application to the assessing officer to determine the appropriate proportion of such sum which will be chargeable to tax and upon such determination tax is required to be deducted only on the chargeable proportion.
The rate at which tax is to be deducted at source will be the rates as specified in the Finance Act of the relevant year or the rate specified in any agreement for avoidance of double tax whichever is beneficial to the assessee.
In respect of income of the nature referred to in para 7.2(iii) arising to Offshore Funds and of the nature referred to in para 7.2(iv), tax is deductible at the rates at which such income is taxable.
For certain remittances, the Reserve Bank of India Exchange Control Manual requires production of a no objection certificate from the Income-tax authorities. The Central Board of Direct Taxes, vide circular No. 759 and 767, has simplified the procedure by dispensing with such requirement. The person making the remittance has only to furnish an undertaking (in duplicate) addressed to the Assessing Officer which should be accompanied by a certificate from a Chartered Accountant in the prescribed form. The undertaking should be submitted to the Reserve Bank of India or the authorised dealer in foreign exchange who will forward a copy to the assessing officer.
Any tax deducted in excess of the required amount is normally refundable to the non-resident on making a proper claim for it. Sometimes the non-resident returns the amount in respect of which tax was deducted or, circumstances occur in which tax is found to be non-deductible or, in which tax is found to have been deducted in excess and the non-resident is either not able to claim refund or does not show initiative in claiming such refund. In such cases, the CBDT has by circular No. 790 dated 20.4.2000 permitted refund of excess tax to the person making the deduction.
Wealth Tax
Wealth tax w.e.f. assessment year 1993-94 is leviable only on certain specified assets. These include :-
guest house or any other house including farm house within twenty-five kilometres from the local limits of any local body but does not inlcude a house which has been allotted by a company to an employee, or an officer, or a director who is in the whole time employment having a gross annual salary of less than Rs. 5,00,000/-. It also does not include any house for residential or commercial purposes which form part of stock-in-trade or which is occupied by the assessee for his business or profession or a residential property let out for atleast 300 days in the year. Exemption from total wealth has been provided for one house or part of a house or a plot of land of up to 500 sq. metres belonging to an individual or a Hindu Undivided Family;
motor cars other than those used in the business of running them on hire;
jewellery, bullion (other than those used as stock-in-trade);
yachts and boats and aircraft (other than those used for commercial purposes);
cash in hand in excess of Rs. 50,000/- held by individuals or HUFs and in case of other person any amount not recorded in the books of account; and
urban land.
Urban lands on which construction of buildings is not permissible or land occupied by building constructed with approval or land held for industrial purposes for two years are not included. Land held as stock in-trade for ten years is also not included. Only those debts which have been incurred in relation to the aforementioned assets are allowed as a deduction in the computation of net wealth. The value of an asset, other than cash, is taken as per the rules framed for valuation of assets and where no rules exist, at the estimated price which it would fetch if it were sold in the open market. In the case of an individual the wealth of others in certain cases, as specified in section 4 of the Act is deemed to be owned by him and is also taken into account in computing his net wealth.
In computing the net wealth of an individual who is not a citizen of India or of an individual or HUF not resident in India or resident but not ordinarily resident in India or of a company not resident in India during the year ending on the valuation date, the value of assets and debt located outside India and the value of assets in India represented by such loan or debts due to the assessee in respect of which interest is exempt under section 10 of the Income-tax Act, 1961 is not taken into account.
From assessment year 1993-94, the wealth tax is leviable at the rate of one per cent of the amount by which the net wealth exceeds Rs 15,00,000/-.
In the case of an assessee being a person of Indian origin or a citizen of India who was ordinarily residing in a foreign country and who has returned to India for settling permanently, the moneys and the value of assets brought by him into India and the value of assets acquired by him out of such moneys within one year immediately preceding the date of his return and at any time thereafter will not be included in the net wealth of assessee. But this exemption shall apply only for a period of successive assessment years commencing with the assessment year next following the date on which such person returned to India.
The return of net wealth is ordinarily required to be furnished to the Wealth Tax Officer before the due date which is the due date for filing the income tax return by him (Refer 13.1). If any wealth-tax is payable on the net wealth declared by the tax payer in his return, he is required to pay such tax on the basis of self-assessment before furnishing the return and to attach the proof of payment thereof with the return.
Assessment of NRIs
A non-resident may be assessed to tax in India either directly or through agents. Persons in India who may be treated as 'agent1 of a non-resident are:-
i. employee or trustee of the non-resident;
ii. any person who has any business connection with the non-resident;
iii. any person from or through whom the non-resident is in receipt of any income;
iv. any person who has acquired a capital asset in India from the non-resident.
A broker in Indian who has independent dealings with a non-resident broker acting on behalf of a non-resident principal is, however, not treated as an 'agent' of the non-resident, if the transactions between the two brokers are carried on in the ordinary course of their business.
Before any person is treated as an 'agent' of non-resident, he is given an opportunity of being heard and any representation from him in the matter is considered.
Tax clearance certificate for NRIs
The following categories of persons are required to produce a tax clearance certificate from the concerned assessing officer prior to their departure:-
persons who are not domiciled in India, and in whose case the stay in India has exceeded 120 days;
persons of Indian or non-Indian domicile whose names have been communicated to the airlines/shipping Companies by the Income Tax authorities;
persons who are domiciled in India at the time of their departure; but
intend to leave India as emigrants; or
intend to proceed to another country on a work permit with the object of taking any employment or other occupation in that country; or
in respect of whom circumstances exist, which in the opinion of the income tax authorities render it necessary for him to obtain the Tax Clearance Certificate.
Such certificates is granted where there are no outstanding taxes under the Income Tax Act, the Excess Profits Tax Act, the Business Profits Tax Act, the Wealth Tax Act, the Expenditure Tax Act or the Gift Tax Act against him or where satisfactory arrangements have been made for the payment of any such taxes. Obtaining guarantee from the employer of the person leaving the country is one of the methods of ensuring satisfactory arrangement for payment of taxes. For those who have to go abroad frequently for employer's work, facility of one-time Clearance Certificate has been provided to the foreign employee who has a fixed tenure of service in India or upto 5 years on furnishing an employer's guarantee in the prescribed form for payment of any tax that may be found due against him during the entire period of contract plus two years.
Provisions for NRIs
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 Asset1 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 Asset1 means any of the following assets acquired, purchased or subscribed to in convertible foreign exchange in accordance with Foreign Exchange Regulation Act :-
Shares in Indian company
Debentures issued by a public limited company
Deposits in a Public Ltd. Co.
Securities of the Central Government
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:-
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;
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.