There are over 30 million non-resident Indians (NRIs) across the Middle East, U.S., UK, Canada, Singapore and other countries. Most NRIs have some income or assets in India such as bank deposits, shares of listed companies, immovable properties, jewellery and business ventures in India. With such income or assets, there arise tax filing requirements and tax liabilities in India.
Also, NRIs may be tax residents of countries where India has double taxation avoidance agreements, (DTAAs) which may entitle them to tax exemption or liable to tax at lower rates or claim credit for Indian taxes in their home countries.
Here’s a brief overview on determination of residential status of NRIs, scope of taxation, applicability for return filing and special tax rates applicable to NRIs.
Determination of Residential Status of NRIs
The Finance Act 2020 and Finance Act 2021 have seen amendments for the residential status for individuals. Here’s how the amended criteria for determining the residential status for NRIs looks like.
Till the end of FY 2019-20 (i.e. financial year-ended March 31, 2020), NRIs (covers Indian citizens and Persons of Indian Origin) included those individuals who, being outside India, visited India for less than 182 days in a financial year. The Finance Act 2020 reduced this period to 120 days in cases where the total income (except foreign sourced income) of such visiting individuals, being Indian citizen or person of Indian origin, during the financial year is more than INR 15 lakh.
Accordingly, visiting NRIs whose total income (except foreign sourced income)) is up to INR 15 lakh during the financial year will continue to remain NRIs if the stay does not exceed 181 days, as was the case earlier.
As such, besides monitoring the number of days present in India, the visiting NRIs are also required to keep a tab of their Indian taxable income. This is because once the taxable Indian income exceeds INR 15 lakh, then provisions related to stay exceeding 120 days will be applicable.
It may be noted that dividends distributed by Indian companies are now taxable in the hands of the shareholders and as such, would form part of the taxable income. On the other hand, since interest on FCNR and NRE deposits are exempt, it will not form a part of taxable income.
Further, an NRI whose taxable Indian income exceeds INR 15 lakh and stays in India for 120 days or more, then such an individual further needs to check whether his stay in India is for 365 days or more in the immediately preceding four financial years.
For instance, let us assume a non-resident visits India in FY 2022-23 (having specified total income in the financial year exceeding INR 15 lakh) and stays for say 130 days. Further, during the preceding 4 financial years (i.e., FY 2021-22, FY 2020-21, 2019-20, 2018-19) he was in India for a total of 365 days or more. In such a case, he will be treated as a resident individual for income tax purposes.
This may ring alarm bells for many NRIs, but in a relief they will be treated as “resident but not ordinarily resident (RNOR)”. This would be a relief as their foreign income (i.e., income accrued outside India) shall not be taxable in India.
RNOR Criteria Liberalised
An individual is treated as “resident but not ordinarily resident” (RNOR) if any of the following conditions are satisfied:
(a) an individual who has been a non-resident in India in nine out of 10 previous financial years preceding that year, or
(b) has during the seven financial years preceding that year been in India for a period of or periods amounting in all to, 729 days or less.
Further, we have noted above that due to the amendment made, an individual whose taxable Indian income exceeds INR 15 lakh and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual will still be treated as RNOR.
Indian Citizens, who are Global Non-Resident – Deemed Residential Status applicable based on Indian income criteria under Section 6(1A)
An individual being a citizen of India, shall be deemed to be a resident and not ordinarily resident in India in any financial year, if he is not “liable to tax” in any other country or territory (i.e. “ a stateless” individual) by reason of his domicile or residence or any other criteria of similar nature.
However, this provision will be applicable only if his total taxable Indian income during the financial year is more than INR 15 lakh. As such, any person exceeding the income threshold criteria and is not a resident of any country would be deemed as a RNOR in India and accordingly subjected to tax.
The said provision created a lot of ambiguity on the meaning to be given to the term “liable to tax”. The Finance Act, 2021 defined that the term “liable to tax” in relation to a person and with reference to a country, means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country.
Till FY 2019-20, there was no such provision in the Income-tax Act. It is pertinent to note that this provision of determining residential status for a stateless individual shall not be applicable for Overseas Citizen of India (OCI) card holders or foreign citizens or PIOs.
Scope of Taxation
The scope of taxation i.e. the category of income of NRIs which would be subjected to tax in India will depend upon his residential status for the relevant FY. As opposed to the global income being subjected to tax in case of a resident and ordinarily residents, a non-resident would be subjected to tax only on the following income:
(i) Income received or deemed to be received in India
Any income received by such non-resident in India would be subjected to tax in India. Further, any non-resident person in India may generate certain income which could be deemed to be received in India. The concept of “receipt” of income refers to the first occurrence, when the recipient gets the money under his control i.e. say receipt in a bank account in India. Similarly, an income can also be deemed to be received in India and it would also be considered as Income of the non-resident which would be taxable in India.
As per Section 7 of the IT Act, Contribution in excess of 12% of salary to recognised provident fund by the employer or interest in excess of 9.5% pa in such fund, employer contribution under any pension scheme specified under Section 80CCD (such as Atal Pension Yojana or National Pension Scheme), etc shall be deemed to be received in India.
(ii) Income accruing or arising or deemed to accrue or arise in India
Any income which has its situs or source in India would be taxable in case such income accrued to any non-resident and as such may include the following income:
- Income derived from any business connection in India.
- Income from any property, asset or source of income in India such as rental income from a property situated in India.
- Capital gain on the transfer of a capital asset (such as shares, immovable property etc.) situated in India.
- Salary income where the services are rendered in India.
- Dividend income from Indian companies even though this may have been received outside India.
- Royalty or fees for technical services received from a resident is treated as income deemed to have accrued or arisen in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.
- Interest received from a resident is treated as income deemed to have accrued or arisen in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and used by resident for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.
In addition to the aforementioned incomes, RNOR would also be subjected to tax on any income accruing or arising outside India from any Business controlled in India or profession set up in India which would not be taxable in case of a non-resident.
Tax Exemption Available to NRIs
It is pertinent to note that any interest earned on any non-resident external (NRE) and foreign currency non resident (FCNR) would be tax exempt. However, interest derived from an NRO account by a non-resident would be still taxable.
- Remuneration received by foreign diplomats or consulates and their staff subject to certain conditions.
- Remuneration received by an employee of a foreign enterprise for services rendered by him during his stay in India, subject to the following (also referred to as the “short stay exemption”):
- the foreign enterprise is not engaged in any trade or business in India
- his stay in India does not exceed in the aggregate a period of 90 days in such financial year and
- such remuneration is not liable to be deducted from the income of the employer chargeable under the IT Act.
- Remuneration received by or due to any such NRI individual for services rendered in connection with his employment on a foreign ship where his total stay in India does not exceed in the aggregate a period of 90 days in the financial year.
- Interest on notified bonds arising to a non-resident Indian provided that such bonds are purchased by a NRI in foreign exchange and the interest and principal received in respect of such bonds, whether on their maturity or otherwise, is not allowable to be taken out of India and subject to certain other conditions.
The above mentioned are few of the tax exemptions which can be availed by the NRIs. Apart from these, NRIs can avail certain other exemptions based on the nature of investment and income.
Basis of Charge and Furnishing of Tax Return
The NRIs can opt for the old tax regime or the default new tax regime which provides for concessional tax rates with restrictions on certain deductions and exemptions.
The tax rates in below table for FY 2023-24 applicable for NRIs would be the same as applicable to the residents:
The aforementioned tax rates would be further enhanced by applicable surcharge and health and education cess @ 4% as follows:
Requirement for furnishing tax return
NRIs whose total income (before availing any available deduction under Chapter VI-A and exemptions under Section 54 series such as Section 54, 54F, 54EC, etc.) exceeds the basic exemption limit of INR 250,000 under old regime or INR 300,000 under new regime, would be required to furnish their tax returns in India on or before July 31 of the year after the end of the relevant financial year.
Non-residents are not required to provide disclosure in schedule FA on foreign assets or financial interest and income outside India in their income tax return.
In accordance with Section 115A of the IT Act, a non-resident whose total income includes income in the nature of dividend, interest, royalty or Fees for Technical Services (FTS) is not required to furnish income tax return in India provided taxes have been withheld on such income at the rates prescribed under section 115A of the IT Act.
Special optional tax regime for non-residents under Chapter XII-A of the IT Act
Chapter XII-A of the IT Act provides for an optional tax regime wherein the income derived from certain specified foreign exchange (‘FOREX’) assets would be taxed at special rates subject to certain restrictions on availing certain deductions and tax benefits.
In accordance with the provisions of the said Chapter, every NRI could elect to be taxed as per the said optional tax regime wherein any long-term capital gain would be taxed at the rate of 10% whereas investment income would be taxed at the rate of 20% provided the same is derived from any of the specified foreign exchange assets such as shares of Indian company, debentures and deposits with Indian public company, securities of Central Government, etc. Any other income derived by such non-resident would be subject to the normal rate of tax.
However, any NRI availing the special tax regime under this Chapter needs to take the following aspects into consideration:
a. Restrictions on availing certain deductions and exemptions
Certain benefits such as deduction benefit under Chapter VI-A as well as indexation benefit would not be available to such non-residents opting for special rates under this Chapter. Also, no deduction in respect of any expenditure or allowance shall be allowed in computing the investment income under this Chapter.
b. Exemption from furnishing the tax return
An NRI would not be liable to furnish his tax return under this Chapter if his total income consists only of the following incomes and tax has been deducted therefrom:
- Income from investment in forex assets
- Long-term capital gains arising from forex assets
c. Condition for availing the option under this Chapter
An NRI may choose not to opt for the applicability of this Chapter for a particular financial year provided he furnishes a declaration in this regard to the Assessing officer along with the tax return.
Further, the benefits under this Chapter would continue to apply to investment income derived from certain specified forex assets even after an NRI becomes a resident, as specified in section 115H of the IT Act. Also, such benefit would continue to apply in relation to such forex asset till the time of transferor conversion of such asset into money.
Capital Gains Taxation
NRIs are taxed on long term capital gains arising on sale of listed shares and unlisted shares at the rate of 10% plus applicable surcharge and cess without any indexation or foreign exchange fluctuation benefit.
Short-term capital gains on listed shares shall be taxed at the rate of 15% plus applicable surcharge and cess and in case of unlisted shares, the same would be taxed at applicable slab rates. The holding period for listed shares is 12 months to be considered as long-term capital asset and for unlisted shares, it is 24 months.
Other Aspects for NRI Taxation
Availing the Tax treaty benefit
In accordance with Section 90(2) of the IT Act, the treaty rate or the rate as per IT Act, whichever is beneficial to the NRI shall apply. However, for availing the benefit of the treaty rate, the NRI would be required to furnish certain specified documents such as tax residency certificate (TRC), Form 10F, non-permanent establishment (PE) declaration, etc.
Restriction of certain deductions/ exemptions
The provisions of the IT Act provide certain benefits pertaining to deductions and exemptions to residents. However, certain benefits are only restricted to residents and not applicable in case of NRIs. The below table provides an illustrative list of availability of deductions to non-residents:
Claiming of Foreign Tax Credit
In case a taxpayer has earned income from one country whereas he is a resident of another country, it may give rise to double taxation. This may be due to conflict between the residence rule (wherein the resident country would tax global income) and source rule (wherein the country of source would tax such income).
In such cases, the NRI may generally claim foreign tax credit in the resident country for taxes paid in the source country in accordance with the tax treaty between such resident and source country.
Application for Non-Deduction or Lower Tax Deduction
Section 195(2) of the IT Act provides for levy of withholding tax on payments made by payer to NRIs. In cases, where the person responsible for paying any such sum chargeable under this IT Act to a non-resident considers that the whole of such sum would not be income chargeable, such person can make application u/s 195(2) of the IT Act to AO to determine the income chargeable to tax.
Further, Section 197 also provides NRIs with an option to apply for lower or non deduction of tax u/s 195 of the IT Act. The instances can be said in case of transfer of immovable property in India or any other asset in India.
Capital Gains Taxation on Sale of Immovable Property in India
Further, long-term capital gains arising to NRIs from transfer of immovable property (where such transfer is after two years from the date of purchase) would be subjected to tax at the rate of 20%. However, in case of transfer of property up to two years from the date of purchase, short term capital gains arising from such transfer would be subject to tax as per the marginal slab rates applicable to the NRI.
Advance Ruling
A non-resident can apply before the Authority for Advance Ruling for determination of tax liability that may arise out of a transaction which has been undertaken by him or proposed to be undertaken by him in India. Such an application is generally made by the non-resident taxpayer where there is uncertainty on the tax implications and the NRI taxpayer intends to obtain certainty on taxation of those transactions.
