Special Provisions Relating To Taxation Of Income Of Non-Resident Indians

Are there special provisions given under the Act governing taxation of income earned by a NRI?

Ans. With respect to NRIs, the Act provides for special regime for computation of income. NRI has an option to be governed either under the normal regime or the special regime. Under special regime, tax rates are specified for certain nature of income earned.

What is the definition of NRI who can claim the benefits of special provisions?

Ans.

NRI means an individual, being a citizen of India or a PIO who is not a resident as per the provisions of the Act. The meaning of the term ‘Resident’ and ‘PIO’ can be referred under the FAQ a. and h. respectively of Chapter 12: Residential Status. 
Such an individual can avail the benefits of special regime if his Gross Total Income consists of the below:
i. Investment Income (defined in FAQ c. below)
        and/or
ii. LTCG

What is the manner in which income shall be taxed under special provisions?

Ans. Manner in which income of a NRI shall be taxed under special regime is provided below subject to relief under DTAA, if any:-

 

Sr.No.

Nature of Income

For assets specified and purchased in convertible foreign exchange (Note 1)

For assets other than specified

A

B

A

B

1

LTCG on sale of shares of Indian Company*

 

 

 

 

 

Listed

NA

10%

v

20%

 

Unlisted Shares

v

20%

 

2

STCG on sale of shares of Indian Company*

 

 

Listed (STT paid on sale)

NA

15%

NA

15%

 

Unlisted Shares

Slab Rates (Max 30%)

Slab Rates (Max 30%)

 

3

LTCG on sale of Debentures of Indian Public Limited Company*

NA

10%

NA

20%

 

4

STCG on sale of Debentures of Indian Public Limited Company*

NA

Slab Rates (Max 30%)

NA

Slab Rates (Max 30%)

 

 

 

 

 

 

5

Investment Income (other than Dividend on Shares on which Dividend Distribution taxes have been paid) – (Note 2)

NA

20%

NA

Slab Rates (Max 30%)

 

6

Dividend on Shares on which Dividend Distribution taxes have been paid

NA

Exempt

NA

Exempt

A: Applicability of inflation adjustment (indexation benefit)
B: Tax Rate Applicable and shall be increased by applicable rate of surcharge and Health and Education Cess on income tax
Note 1 – Specified Assets purchased in convertible foreign exchange
- Shares in an Indian company
- Debentures of an Indian public limited company
- Deposits with an Indian public limited company
- Central Government securities
- Other assets as may be specified by Central Government
Note 2 - Investment Income 
Investment Income means income other than Dividend Income earned from above mentioned specified foreign exchange assets.
*Note 3 Eligible for Foreign Exchange Inflation Adjustment to above Capital Gains income.



A specimen of how tax would be computed for a NRI having multiple sources of income earned for FY 2018-19 under the normal and special regime under the Act:

Ans.

Suppose a NRI has following sources of income in India during FY 2018-19:

Sr. No.

Particulars

Amount

(Rs.)

Amount

(Rs.)

1

Income from House Property located in India (computed)

 

4,00,000

2

Dividend from Indian Companies

 

75,000

3

Interest on debentures of Indian Company (Subscribed in convertible foreign exchange)

4,00,000

 

 

Less: Interest on loan taken for purchase of debentures

(50,000)

3,50,000

4

Interest Income from NRO Deposits

 

6,00,000

 

TOTAL

 

14,25,000


Computation of total income for FY 2018-19 as per normal provisions:

Particulars

Amount

(Rs)

Amount

(Rs)

Tax Rates (%)

House Property Income

 

4,00,000

Slab Rates

Dividend

75,000

Exempt

Not Applicable

Interest on debentures of Indian Company

4,00,000

 

 

Slab Rates

Less : Expenditure

(50,000)

3,50,000

Interest Income from NRO Deposits

 

6,00,000

Slab Rates

Total Income

 

13,50,000

 


Based on the above table, we compute the tax on total income as per normal provisions:

Particulars

Income

(Rs.)

Tax Amount (Rs.)

Tax on income as per slab rates

 

13,50,000

(4,00,000+3,50,000+

6,00,000)

 

2,17,500

Add: Health and Education Cess at 4%

 

8,700

Total Tax Liability

 

2,26,200

Computation of total income for FY 2018-19 as per special provisions:

 

Particulars

Income

(Rs.)

Tax Amount (Rs.)

Tax on income as per slab rates 

4,00,000

7,500

Tax on Interest income on debentures @ 20%

4,00,000

80,000

Tax on Interest income on NRO deposit @ 20%

6,00,000

1,20,000

Add: Health and Education Cess at 4%

 

8,300

 

 

2,15,800

Note: No expenditure is allowed to be deducted from interest earned on debentures as per special provisions of the Act and hence interest amount of Rs. 50,000 incurred for purchase of debentures is not deducted. However, same is allowed as deduction in normal computation.
In the above case, the tax liability of NRI for FY 2018-19  as per normal provisions is Rs. 2,26,200/- and as per special provisions is Rs. 2,15,800/-. As the special provisions are more beneficial to NRI, he should opt for special provisions of the Act.

When is a NRI who has opted for special provisions,not required to file his ROI?

Ans.

NRI is not required to file his ROI if his total income consists only of:-
i. Investment income from specified asset
ii. LTCG from specified asset
        AND tax on both incomes has been deducted at source as per provisions of the Act. 

Mr. A is a Non-Resident of India for several past FYs. He has been earning interest income on NRO deposits. He has opted for special regime available for NRIs and hence, has paid taxes for the past FYs at 20% on such income. In FY 2018-19, Mr. A becomes a Resident of India. Is he eligible to tax the income earned henceforth from such investments at 20%?

Ans. The special regime for taxation of NRI shall continue to apply to Mr. A, even when he becomes a Resident of India for such income derived from NRO deposits. The same shall be applicable until the transfer / conversion (otherwise than by transfer) into money of such assets i.e., on maturity or closure of the deposit by premature withdrawal.

In the above question, if Mr. A earned investment income from shares in Indian Company, is that eligible for the special regime after he becomes a Resident?

Ans. No. The said investment income from shares is specifically excluded. Hence, the special regime rates shall apply to the same only when Mr. A was a Non-Resident.

When is LTCG arising from a specified asset exempt from tax under the special regime of taxation?

Ans. LTCG arising to NRI from specified asset are exempt from tax if the net sale consideration is invested in another specified asset within a period of 6 months from date of transfer of the original specified asset.