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

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

Ans.

Yes. The Act provides for various special regime of taxation for NRIs, of which this Chapter covers one of the Special provisions in Section 115C to Section 115I housed under Chapter XIIA of the Act. Under the said special regime, specific tax rates are provided for certain nature of income earned by NRIs which are explained in the ensuing paragraphs.

Further, for the purpose of this Chapter, we have covered only the above mentioned sections and have not included the other special regime of taxation provided for NRIs under the Act. However, the same are covered and/or touched upon in this Booklet at appropriate places.

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

Ans.

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.

3. What is specified foreign exchange asset?

Ans.

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)

4. What is investment income under Special Regime?

Ans.

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

5. What is the manner in which income from specified foreign exchange assets as referred in FAQ 3 above shall be taxed under special provisions and under normal provisions?

Ans.

Manner in which income from specified foreign exchange assets of a NRI shall be taxed under special regime is provided below subject to relief under DTAA, if any:-

 

Sr.No.

Nature of Income

Under Special Provisions

Under Normal Provisions

Rate

 Foreign exchange fluctuation available

Indexation available

Rate

 Foreign exchange fluctuation available

Indexation available

I

LTCG on Shares of Indian Company

a

Listed (STT is paid):

10%

Yes

No

10%

(Upto Rs. 1,00,000 exempt)

No

No. But grandfathering available, provided Shares are acquired prior to 31 January 2018

b

Listed (STT is not paid and not covered under exceptions for STT payment)

10%

Yes

No

10%

Yes

No

c

Unlisted Shares:

10%

Yes

No

10%

No

No

 

 

 

 

 

 

 

 

 

 

 

II

LTCG Debentures of Indian Public Limited Company

a

Listed : Debentures other than Market Linked Debentures

10%

Yes

No

10%

Yes

No

b

Unlisted: Debentures other than Market Linked Debentures

10%

Yes

No

10%

No

No

 

 

 

 

 

 

 

 

III

Investment Income

a

Interest Income

20%

NA

NA

Slab Rates

NA

NA

b

Dividend Income

20%

NA

NA

20%

NA

NA

 

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.

6. How to compute Capital Gain including Foreign Exchange Inflation Adjustment?

Ans.

In case of below example:


Nature of Asset

Debenture of Listed Indian Public Limited Company

Date of purchase

01.06.2021

Cost of investment (Amount in Rs.)

5,00,000/-

Currency in which investment was made

USD

Date of transfer (Sale)

30.08.2023

Sale price (Amount in Rs.)

10,00,000

SBI Telegraphic Transfer (TT) buying rate as on date of purchase

75

SBI TT selling rate as on date of purchase

79

SBI TT buying rate as on date of transfer

85

SBI TT selling rate as on date of transfer

89


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


Particulars

 Amount in Rs.

 TT buying Rate (A)

 TT selling Rate (B)

 Average (A+B)/2

 Amount in USD

Remarks

Sale value

   10,00,000.00

        85

        89

         87

       11,494.25

Average of SBI TT Buying and selling Rates as on date of transfer

Less: Purchase Value

     5,00,000.00

        75

        79

         77

        6,493.51

Average of SBI TT Buying and selling Rates as on date of purchase

Capital Gain in USD - (C )

 

 

 

 

         5,000.75

 

Capital Gain in Rs. - (C*A)

 

          85

 

 

   4,25,063.44

SBI TT buying rate as on date of transfer

7. Whether deduction under Chapter VI-A shall be allowed against investment income/ LTCG from Specified Assets?

Ans.

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

8. How tax would be computed in respect of below income earned under the normal and special regime for NRI under the Act?

Ans.

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

 

Sr. No.

Particulars

Amount

(Rs.)

Amount

(Rs.)

a

Income from House Property located in India (computed after applicable deductions)

 

4,00,000

b

Dividend from Indian Companies (Subscribed in convertible foreign exchange)

 

75,000

c

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

d

Interest Income from NRO Deposits

(Subscribed in convertible foreign exchange)

 

6,00,000

 

TOTAL

 

14,25,000

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:

 

Particulars

Amount

(Rs)

Amount

(Rs)

Tax Rates (%)

House Property Income

 

4,00,000

Slab Rates

Dividend

 

75,000

20% u/s 115A

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

 

14,25,000

 


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

 

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

Tax on Dividend income @ 20%

75,000

15,000

Total tax liability excluding health and education Cess (A)

 

2,32,500

Add: Health and Education Cess at 4% on (A) (B)

 

9,300

Total Tax Liability (A+B)

 

2,41,800

 

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

 

Particulars

Amount (Rs.)

Tax Rates (%)

House Property Income

4,00,000

Slab Rates

Dividend

75,000

20 (flat rate)

Interest on debentures of Indian Company (Refer Note 1)

4,00,000

20 (flat rate)

Interest Income from NRO Deposits

6,00,000

20 (flat rate)

Total Income

14,75,000

 

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

 

Particulars

Income

(Rs.)

Tax Amount (Rs.)

Tax on income as per slab rates 

4,00,000

7,500

Tax on Dividend income @ 20%

75,000

15,000

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

Total tax liability excluding health and education Cess (A)

 

2,22,500

Add: Health and Education Cess at 4% on (A) (B)

 

8,900

Total Tax Liability (A+B)

 

2,31,400

 

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.


9. Are provisions of special regime of taxation mandatory for NRIs?

10. When a NRI who has opted for special provisions is 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.

 


11. Whether benefit of special regime of taxation will be available to NRI even after becoming resident of India?

Ans.

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.

12. 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 2023-24, Mr. A becomes a Resident of India. Is he eligible to tax the income earned henceforth from such investments at 20%?

Ans.

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.

13. Which type of incomes are specifically excluded for benefit of tax under special provisions in case of NRI who has now become a Resident of India?

Ans.

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.

14. How can an individual who was a non-resident of India in earlier years but has become a resident in FY 2023-24 continue to be taxed under special regime?

Ans.

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.

15. 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 (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.

16. What is the amount of capital gain which is exempted from tax for Mr. A in the below example?

Ans.

Date of transfer of original specified asset

30th October, 2023

Date of purchase of new specified asset

25th February, 2023

Sale consideration of original specified asset

Rs. 120

Cost of acquisition of original specified asset

Rs. 50

Expense incurred for transfer of original specified asset

Rs. 20

Cost of new specified asset

Rs. 50


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:

 

Particulars

Amount

Sale consideration

Rs. 120

Less: expenses incurred for transfer

(Rs. 20)

Net sale consideration

Rs. 100

Less: Cost of acquisition

(Rs. 50)

Capital Gains*

Rs. 50

 

*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