Taxation of Non Residents (NRI)

Taxation of Non Residents

Meaning of Non Residents:

Section 2(30) – Non-resident means a person who is not a resident in India. (For definition of resident refer section 6.)

Types of non-residents:

1. Non-resident Indians -

1. Means an individual, being citizen of India or any of his grant parents, was born in undivided India.
2. Non-residents Indians can only be individuals.

2. Any other non-resident person – i.e. Foreign Nationals (other than individuals of Indian Origin) or Foreign Companies or Overseas financial organizations (offshore funds) or foreign institutional investors etc.

However includes following not ordinary residents also as not- resident:

1. Section 92 - relating to computation of income from international transactions having regard to arm’s length price.
2. Section 93 – avoidance of income tax by transactions resilting in transfer of income to non-residents.
3. Section 168 – Executors

Non- resident assessee in India is liable to pay tax on the following incomes:

1. Incomes received or deemed to be received in India
2. Incomes which accrue or arise in India or are deemed to accrue or arise in India

Income of non-resident shall be deemed to accrue or arise in India and shall be included in the total income of the non-resident, whether or not –

1. The non-resident has a residence or place of business or business connection in India, or
2. The non-resident has rendered services in India

Incomes – exempt for non-residents:

1. Interest on notified securities or bonds (not notified after 01/06/2002)
2. Interest on notified saving certificates (issued before 01/06/2002)
3. Tax payable on royalty or fees for technical service on behalf of foreign company – agreement entered before 01/06/2002
4. Tax payable on certain income – agreement entered before 01/06/2002
5. Tax payable on income from leasing of aircraft – agreement between 31/03/97 to 01/04/99 or after 31/03/07
6. Income of foreign companies providing technical services related with security of India
7. Remuneration or fees received under approved programmes
8. Interest to foreign banks on deposits with scheduled banks (with RBI approval)
9. Interest payable by Govt. / FIs on money borrowed n=by it or debts owed by it before 01/06/2001 to sources outside India
10. Any payment made by Indian company to acquire an aircraft on lease from foreign Govt. or enterprise under an agreement entered before 01/04/2007

Income which are taxable:

1. Income chargeable at flat rate – income from certain specified assets/sources – u/s 115AD, 115AB, 115AC,  115AD, 115BBA (chapter XII)
2. Income covered under chapter XIIA – section 115C to 115I

 Rule 10 – In any case in which AO is of opinion that the actual amunt of income accruing or arising to any non-resident cannot be definitely ascertained, then amount of income may be calculated:

1. at a particular % of turnover as the AO may consider to be reasonable
2. in the proportion of these receipts bears to total receipts, the amount of which bears the same proportion to profit and loss
3. other manner which may deem fit to AO

Assessment of Non-residents:

The following two courses are open to AO:

1. He can proceed against non-resident company/person itself or himself.
2. He can make the assessment on non-resident company / person through a agent

Who may be regarded as agent?

1. Who is employed by or on behalf of no-resident
2. Who has any business connection with no-resident
3. Directly or indirectly, through whom non-resident is in receipt of any income
4. Who is trustee of non-resident

And includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India.

Taxability of non-resident artist or performer in India:

1. Performance without consideration – no tax
2. Live performance, live telecast or broadcast – taxable
3. Consideration paid to acquire copyright of performance in India for subsequent sale abroad – not taxable
4. Consideration paid to the artist for acquiring the licence for broadcast or telecast overseas – not taxable
5. Consideration paid to acquire copyright of performance in India for subsequent sale in India – taxable
6. Consideration paid to the artist for acquiring the licence for broadcast or telecast in India – taxable
7. The portion of endorsement fees which relates to the artist’s performance in India  - taxable

Where the total Income of the assessee being an entertainer, who is not a citizen of India, and is non-resident, includes any income received or receivable from his performance in India shall be taxable at special rate of 20% as per section 115 BBA, subject to provision of DTAA, if any.

Income of non-residents from certain specified assets/ sources:

1. Tax on dividend / interest income of non-resident including foreign company – section 115(1)(a):

1. Dividends (other than dividend referred to in section 115-O) –  20%
2. Interest received from Govt. / Indian concern on money borrowed or debt incurred in foreign currency ( other than those mention in clause (iii) to (vi) below  - 20%
3. Interest received from a infrastructure fund referred to in section 194LB read with section 10(47) – 5%

4. Interest of nature and extent referred to in section 194LC – 5%

   - Refers to income by way of interest payable by the specified company or a                             business trust

i) In respect of money borrowed by it in foreign currency from a source outside India

1. Under a loan agreement – between 01/07/2012 to 01/07/2020, or
2. Under a long term infrastructure bond – between 01/07/2012 to 01/10/2014, or
3. Under a long term bond including long term infrastructure bond – between 01/07/2012 to 01/10/2014, as approved by central Govt.

ia)  in respect of money borrowed by it from a source outside India by way of issue of rupee-denominated bond before 01/07/2020 and

ii) To the extent to which such interest does not exceed the amount of interest calculated at the rate approved by central Govt.

5. Interest of nature and extent referred to in section 194LD – 5%

- refers to the interest payable by any person to a person being a Foreign Institutional Investor or a qualified Foreign Investor on or after 01/06/2013 but before 01/07/2020 in respect of investment made in

i) a rupee denominated bond of an Indian company; or

ii) A Govt. security

Provide the rate of interest in case of clause (i) shall not exceeds the rate as may be notified by Central Govt. in this behalf.

6. Distributed income being Interest referred to in section 194LBA(2) – 5%

- Refers to distributed income by business trust referred in section 115UA being of the nature referred to in section 10(23FC)(a). this is exempt for business trust but taxable in the hands of unit holders who receives interest.

7. Income received in respect of units, purchased in foreign currency, or a mutual fund specified u/s 10(23D) of the Unit Trust of India – exempt u/s 10(35)
8. On balance Income – special rates / normal rates

2. Tax on income by way of royalty / fees for technical services received by a non-resident / foreign company – section 115A(1)(b) – other than income referred in section 44DA(1)

1. On the income by way of royalty and fees for technical services received in – pursuance of an agreement made after 31/03/1976 – 10%
2. On the income covered under section 115A(1)(a) – 20%
3. On the balance income -     special rates / normal rates

Consequential provisions due to special rate of tax under section 115A(1)(a) and (b):

1. No deduction of any expense or allowance
2. No deduction under chapter VIA (section 80C to 80U) – except in case of income by way of royalty and fee for technical services
3. No return of income necessary in some cases, if following conditions are satisfied:

1. Total income of the assessee consist only of such dividend and interest mentioned in clause (a) of this section, and
2. The tax deductible at source has been deducted from such income

4. Set off in carry forward and set off of losses allowed from incomes mentioned u/s 115A but unabsorbed depreciation not allowed

Note:

1. No special provision regarding capital gain on the transfer of above income earning capital assets u/s 115A: so long term capital gain shall be taxable as per provisions of section 112, which may be 20% or 10% as the case may be, plus applicable surcharge and education cess.
2. In case of non-resident individual, initial exemption of Rs. 250000/- shall not be applicable in respect of income referred to in section 115A or long term capital gain referred to in section 112 although it is applicable for other income.

Section 115AB – Tax on income from units purchased in foreign currency or capital gain arising from their transfer:

This section is applicable only in case of overseas financial organisations also known as off shore funds.

1. Income in respect of units purchased              -    exempt w.e.f. AY 2004-05.

2. Long term capital gain on transfer of above units   -   10%

(exempt w.e.f. from AY 2005-06 if it is equity oriented and subject to STT as per section 10(38), however section 10(38) is withdrawn w.e.f. AY 2019-20)

3. On balance income                      -         special / normal rate

Consequential provisions due to special rate of tax under section 115AB:

1. No deduction of any expense or allowance
2. Second proviso to section 48 not applicable  i.e. indexation. First proviso regarding conversion of sale consideration and cost etc. in foreign currency for computation is not applicable as the same is applicable for shares and debentures of an indian company.
3. No deduction under chapter VIA (section 80C to 80U) – but available to the extent of any other income.
4. No exemption from filing of return
5. Carry forward and set off of losses allowed from incomes mentioned u/s 115AB but unabsorbed depreciation not allowed.

Section 115AC – Tax on income from bonds or global depository receipts (GDR) purchased in foreign currency or capital gain arising from their transfer:

1. Interest income of bonds / GDR purchased           10%

2. Long term capital gain on transfer of above          10%

3. On balance income                               special / normal rate

Consequential provisions due to special rate of tax under section 115AB:

1. No deduction of any expense or allowance
2. Both proviso to section 48 not applicable  i.e. conversion and indexation
3. No deduction under chapter VIA (section 80C to 80U) – but available to the extent of any other income.
4. filing of return is not necessary if:

1. the total income consist of only interest, and
2. TDS has been deducted on this

5. Carry forward and set off of losses allowed from incomes mentioned u/s 115AC but unabsorbed depreciation not allowed.
6. Transfer of bonds / GDRs by a non-resident to another non-resident is not a transfer.
7. The provision of this section shall apply in case of GDRs / bonds acquired in due to amalgamation / merger.

Section 115AD – Tax on income Foreign Institutional Investors from securities or capital gain arising from their transfer:

This section is applicable only in case of Foreign Institutional Investors. Securities do not include mutual funds covered u/s 10(23D) or unit trust of India.

1. Income in respect of securities mentioned above    20%
2. Income by way of interest referred in section 194LD    5%
3. Short term capital gain on transfer of above         30%

(As per section 111A, short term capital gain shall be taxable @15% is STT is paid and on deduction under chapter VI shall be allowed).

4. Long term capital gain on transfer of above          10%

(exempt if it is equity oriented and subject to STT as per section 10(38), however section 10(38) is withdrawn w.e.f. AY 2019-20)

5. On balance income                               special / normal rate

Consequential provisions due to special rate of tax under section 115AB:

1. No deduction of any expense or allowance
2. Both proviso to section 48 not applicable  i.e. conversion and indexation
3. No deduction under chapter VIA (section 80C to 80U) – but available to the extent of any other income.
4. No exemption from filing of return.
5. Carry forward and set off of losses allowed from incomes mentioned u/s 115AD but unabsorbed depreciation not allowed.

Proviso to Section 115AD(1)(iii):

Income arising from the transfer of a long term capital assets referred to in section 112A, income tax @ 10% shall be calculated on such income exceeding Rs. 1 lakh.

Section 115BBA – Tax on Non-resident sportsman or sports associations or non-resident entertainer:

Sub Section (1)(a) – applicable to non-resident sportsman who is not a citizen of India and is a non-resident:

1. Income by way of participation in India in any game (other than covered u/s 115BB), or
2. Advertisement, or
3. Contribution of articles relating to any game or sports in India

Chargeable @ 20%.

Sub Section (1)(b) – applicable to non-resident sports association or institution:

Amount guaranteed to be paid or payable to such association or institution (other than covered u/s 115BB) or sports played in India shall be taxable @20%.

Sub Section (1)(c) – applicable to non-resident entertainer who is not a citizen of India and is a non-resident:

Any income received or receivable from his performance in India  - taxable @20%.

.Non-resident Indian  -  special provisions as per chapter XIIA of Income Tax

Section 115C(c) – Investment Income

• Means any income derived from a foreign exchange asset (other than dividend referred to in section 115-O)

Section 115C(b) – Foreign exchange asset

• Means any specified asset as given below which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange.

Section 115C(f) – Specified asset means

1. Shares in Indian company
2. Debenture issued by an Indian Company which is not private company
3. Deposit with an Indian Company which is not private company
4. Any security of the Central Govt. as defined in Section 2(2) of public deposit Act, 1956
5. Such other assets as the central Govt. may notify

Section 115E – Tax on investment income and long term capital gain of non-resident Indians:

1. Any investment income; or            20%
2. Income by way of long term capital gains from a foreign specified asset    10%

(exempt if it is equity oriented and subject to STT as per section 10(38), however section 10(38) is withdrawn w.e.f. AY 2019-20)

3. On balance income         as applicable

Other special provision-

1. No deduction of any expense or allowance
2. First proviso to section 48 applicable but second proviso to section 48 not applicable 
3. No deduction under chapter VIA (section 80C to 80U) – but available to the extent of any other income.

Section 115F – Capital Gain on transfer of foreign exchange assets not to be charged in certain cases

Non-resident Indian can claim exemption in respect of Capital Gain on transfer of foreign exchange if following condition is satisfied:

• Invested within a period of 6 months after the date of such transfer, the whole or any part of the net consideration in any of the specified assets mentioned in section 115C(f) above.

Quantum of deduction:

1. If cost of new assets is not less than the net consideration of original asset, then the whole of such capital gain shall be exempt
2. If the cost of new assets is less than the net consideration of original asset, then capital shall be exempt in proportion as the new assets cost bears to net consideration of original asset.

The exemption shall be withdrawn if the new asset is transferred or converted into money within a period of three years from the date of acquisition.

Section 115G - No return of income necessary in some cases, if following conditions are satisfied:

1. Total income of the assessee consist only of such dividend and interest mentioned in clause (a) of this section, and
2. The tax deductible at source has been deducted from such income

Section 115H – benefit of this chapter continues even after assessee becomes resident

Where a non-resident Indian, in respect of total income of any subsequent assessment year, becomes assessable as resident in India in any previous year, he, may if he so opts, continue to be governed by the provisions of this chapter in respect os the investment income of all the above foreign exchange assets except shares of an Indian Company, until the transfer or conversion (other than by transfer) in to money of such assets.

If the non-resident decides to opt this, he will need to furnish to the AO a declaration in writing along with his return.