All NRIs want to know about tax

Mumbai: The recent spurt in economic growth in India has seen a number of Non Resident Indians (NRI) returning to India. NRIs do enjoy special benefits while computing their India Income Tax. It is helpful to know these beneficial provisions so as to reduce tax incidence by proper tax planning.

In this article, we have tried to cover those points which are applicable to NRIs and which must be taken care of while planning for India taxes and filing India tax returns.

Who qualifies as a NRI for India Income Tax purposes?To be eligible for the ‘NRI’ status, a person should be a non-resident under the Income Tax Act and should either be a citizen of India or a person of Indian origin. A person is of Indian origin if he or his parents or grand parents were born in Undivided India.

A person who has been in India for 60 days or more during a financial year and 365 days or more during the preceding four financial years qualifies as a ‘Resident’ of India.

Considering the fact that NRIs may end up staying in India for longer periods while visiting relatives or to take care of India property and investments, the 60 days period is relaxed to 182 days.

NRIs based outside India can continue to enjoy non-resident status in India if their presence in India is more than 60 days but less than 182 days, even if their stay in India during the past four financial years is 365 days or more.

Income earned and received outside India is not taxable in IndiaNRIs are taxable on income accrued or received in India. Income earned and received outside India such as overseas business income, overseas bank interest incomes, etc. is not taxable in India.

Once income is earned and received outside India, it is not taxable in India if at a later date, the money is sent to India. However any income earned, subsequently, on the amounts brought into India will be subject to tax in India.

If a NRI comes back to India and loses his NRI status, he will not be subject to tax in India on his world-wide income if either of the following two conditions are satisfied:

• He has been in India for not more than 729 days during the preceding seven financial years; or
• He has qualified as a non-resident for nine out of 10 preceding financial years.

A NRI coming back to India after a long stay outside India may be exempt from tax on his worldwide income for the first two years of his stay in India, if any of the above conditions are satisfied. Similarly, if in any particular financial year, his stay in India exceeds 182 days and he loses his NRI status for that year, his income outside India will still not be taxable if any of the above two conditions are satisfied and his tax status will be that of a ‘Not Ordinarily Resident’.

Tax Treaty BenefitsNRIs can explore beneficial provisions available under various ‘Double Taxation A ance Agreements’ (Tax Treaty) that India has entered into with various countries. These tax treaties often provide lower tax rates and exemptions in addition to those available under the domestic tax provisions.

To give an example, if a NRI is a tax resident of the US as well as of India, the tax treaty between India and US may become applicable to him. The NRI may be taxable in India on interest income at domestic tax rates. However, the tax treaty limits the maximum rate of tax applicable on interest income in India for US tax residents to 15 per cent.

Investments in Indian companies/Government Securities in foreign exchange are taxable at lower ratesShares of any Indian company, debentures of any Indian public company, deposits with any public company or any security of the Central government, which are purchased with foreign currency, are given special tax treatment. The interest income from these investments is taxable at a flat rate of 20 per cent and long-term capital gains on sale of these investments are taxable at a flat rate of 10 per cent. The sale of these investments is exempt from tax if the sale proceeds are reinvested in similar investments within six months. If the sale proceeds of these assets are partially re-invested, then the exemption is proportionate to the amount re-invested.

NRIs are not required to file any tax returns in India if the income comprises of investment incomes discussed in the previous paragraph and taxes have been withheld at source from such incomes. If the tax rate as per the Tax Treaty is lower than the tax rate as per the income tax provisions or for any other reason, the NRI does not wish to be governed by special provisions applicable to NRIs under the domestic tax law, he can opt out by giving a written declaration along with his return of income.

Elimination of Foreign Exchange Fluctuation in computing capital gainsThere is a special method of elimination of foreign exchange fluctuation in computing capital gains on the shares/debenture of an Indian company, acquired in foreign currency by non-residents. The purchase price and sale price are converted back into foreign currency as per the rate of exchange prevailing on the date of purchase/sale. Capital gains are determined in foreign currency and converted into Indian Rupees at the rate of exchange on the date of sale. However, in such cases, the benefit of indexation on account of inflation is not available.

Interest earned by NRIs on Non Resident External (NRE) bank account is exempt from taxHowever, interest in Non Resident Ordinary (NRO) bank account is taxable. A NRI returning to India and having NRE/NRO bank accounts is required to report his return to his bankers, who shall then convert these accounts to resident bank accounts. The interest income earned on resident bank accounts is taxable.

Wealth Tax is not applicable on assets held outside India by NRIsA NRI is not subject to wealth tax in respect of assets held outside India. A NRI returning to India and/or losing his NRI status will not be subject to wealth tax on assets held outside India if either of the following two conditions are satisfied:

• He has been in India for not more than 729 days during the preceding 7 financial years; or
• He has qualified as a non-resident for 9 out of 10 preceding financial years.

Permanent Account Number (PAN) Tax Returns are not accepted without PAN. Therefore, if a tax return is to be submitted, NRIs must obtain a PAN.

Advance RulingsWhile 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 rulings of the AAR are binding both on the tax authorities and the applicant NRI.

Whilst NRIs do enjoy some privileges under the Indian Income Tax Act, the Government may do well to create more attractive and tax saving schemes for NRIs and thereby attract foreign exchange inflow into the country.

The authors, Gaurav Taneja and Sonu Soni Iyer, are senior tax professionals with Ernst & Young