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NRI means an individual, being a citizen of India or a Person of Indian Origin (PIO) who is not a resident as per the provisions of the Act.

The meaning of the term ‘Resident’ can be referred under the FAQ 2 of Chapter 13 on Residential Status and a person shall be deemed to be of PIO if he, or either of his parents or any of his grand-parents, was born in undivided India.

Such NRI can avail the benefits of special regime if his Gross Total Income consists of the below:

 i. Investment Income from specified foreign exchange asset

and/or

ii. LTCG relating to specified foreign exchange asset.

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The following assets purchased in convertible foreign exchange are defined as Specified Foreign Exchange Asset:

- 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 (No such assets has been notified by Central Government till now)

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Investment Income means income (viz. interest, dividend etc.) earned from above mentioned specified foreign exchange assets.

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Note: Taxability of Market Linked Debentures is not covered in the above table as the same is recently introduced and is at a very nascent stage.

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In case of below example:

Computation of Capital Gain including Foreign Exchange Inflation Adjustment is as below:

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No deduction of Chapter VI-A shall be allowed against investment income/ LTCG from Specified Assets.

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Suppose a NRI has following sources of income in India during FY 2023-24

Computation of total income for FY 2023-24 as per normal provisions is outlined in below table. Further, for the purpose of the above example we have computed the tax rates under Old tax regime:

Based on the above table, computation of tax liability as per normal provisions is as under:

Computation of total income for FY 2023-24 as per Special provisions:

Based on the above table, computation of tax liability as per Special provisions is as under:

Note 1: 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 under normal provisions.

In the above case, the tax liability of NRI for FY 2023-24  as per normal provisions is Rs. 2,41,800/- and as per special provisions is Rs. 2,31,400/-. As the special provisions are more beneficial to NRI, he should opt for special provisions of the Act.

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Provisions of special regime of taxation as mentioned in this chapter are optional for NRIs. NRI may elect not to be govern by special provisions in case normal provisions are found to be more beneficial for him/her.

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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.

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The NRI may opt for special regime for taxation, even when he becomes a Resident of India in relation to the investment income derived from any foreign exchange asset (other than shares of an Indian company) till the time of transfer / conversion (otherwise than by transfer) into money of such assets.

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NRI Upon returning to India for good is required to inform the authorized bank about the change in Residential Status from NRI to Resident as per Foreign Exchange Management Act, 1999 (FEMA) (refer Chapter 4 on Returning Indian) and accordingly, re-designate his NRO bank account to Resident Rupee account. Further, the exact timeline for such re-designation is not prescribed under FEMA. However, one is required to inform the authorized bank immediately upon return to India.

Considering the above, once the NRO account is re-designated to Resident Rupee account, the tax rate of 20% under special regime may not be availed by Mr. A, for investment income derived from such Resident Rupee account.

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The following incomes are specifically excluded for benefit of tax under Special provisions for an NRI Individual who has now become a resident of India:

a.    LTCG from specified assets as mentioned in FAQ 3;

and

b.    Investment income from Shares in an Indian company

The benefit of tax on other income from Specified Assets under the said Special provisions may be available to NRIs who become Resident of India, till the conditions as explained in FAQ 11 are complied.

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The individual wiling to be governed by special regime after he has become a resident of India can continue to do so by furnishing a declaration in writing to his/her Assessing officer alongwith his return of income.

Such declaration is available under Income-tax Returns (ITR) forms itself and the individual is just required to tick on “Yes” option to claim benefit under Section 115H to be governed under Special regime.

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LTCG arising to NRI from specified asset are exempt from tax if the net sale consideration (i.e. full value of consideration reduced by expenditure incurred wholly and exclusively in connection with transfer in simple words sale value less any expense incurred for such transfer) is invested in another specified asset within a period of 6 months from date of transfer of the original specified asset.

If the new asset is transferred or converted (otherwise than by transfer) into money within a period of 3 years from the date of acquisition, then the exemption claimed earlier shall be taxable in the year in which the new asset is transferred or converted (otherwise than by transfer) into money.

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As the new asset purchased is a specified asset and is purchased within 6 months from date of transfer of original specified asset, Mr. A will be eligible for exemption as explained in FAQ 15 above. However, the amount of capital gain which will be exempt shall be as under:

Exemption = Cost of new asset * Capital gains/Net Sale consideration of original asset

In the above case, capital gains on transfer is as under:

*For the purpose of this example, indexation benefit and/or other benefits (if any) is ignored.

Exemption = Rs. 50* Rs. 50 / Rs. 100 = Rs. 25

Accordingly, the exemption will be restricted to Rs. 25 and Mr. A has to pay tax on balance Rs. 25.

Updated 10/2023