In the previous series, we discussed the basic rules of non-resident Indian taxation in India mainly focusing on his/ her residential status, the Income Tax Return and other related compliances. In this series, my main thrust would be on their tax incidence, i.e. on what incomes does a non-resident Indian should pay tax on.
Incidence of tax on a tax payer depends on the following:
- Resident status of the taxpayer
- The place and time of accrual or receipt of income
As an NRI, a common question that one may have is whether the income he/ she earns abroad is taxable in India. Before going further, as discussed above, please note that a taxpayer’s taxation for a year depends upon his/ her residential status in that year.
Tax incidence in case of Non-residents:
As per the Income Tax Act, 1961, a resident taxpayer is taxed on his/ her global income while a non-resident is taxed on the income earned or received in India or deemed to receive or earn in India.
In other words, if an income is sourced in India, it is taxable irrespective of whether the assessee is an Indian resident or a non-resident. If the assessee is an Indian resident, then his income is taxable irrespective of whether it was sourced in India or sourced outside India. When the assessee is non-resident, his income is taxable only if sourced in India. If a non-resident gets income sourced outside India, then the government of India has no jurisdiction to tax the same.
I have summarized below the tax incidence for easy reference:
|Nature of Income||Taxability in the hands of Non-resident|
|Income which accrues or arises in India||Taxed|
|Income which is deemed to accrue or arise in India||Taxed|
|Income which is received in India||Taxed|
|Income which is deemed to be received in India||Taxed|
|Income accruing outside India from a business controlled from India or from a profession set up in India||Not taxed|
|Income other than above (i.e., income which has no relation with India)||Not taxed|
What is income deemed to be received in India?
We all understand when income is received in India. However, what may be conflicting is the term “deemed”. The Income Tax Act, 1961 states that the following incomes are treated as incomes deemed to be received in India:
- Interest credited to recognised provident fund account of an employee in excess of 9.5% per annum.
- Employer's contribution to recognised provident fund in excess of 12% of the salary of the employee.
- Transferred balance in case of reorg anisation of unrecognised provident fund.
- Contribution by the Central Government or other employer to the account of the employee in case of notified pension scheme referred to in section 80CCD .
Incomes deemed to accrue or arise in India:
Similarly, the Act states that the following incomes are treated as incomes deemed to accrue or arise in India:
- Capital gain arising on transfer of property situated in India
- Income from business connection in India
- Income from salary in respect of services rendered in India
- Salary received by an Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case
- Income from any property, asset or other source of income located in India
- Dividend paid by an Indian company
- Interest received from Government of India
- Interest received from a resident is treated as income deemed to have accrued or arisen in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and used by resident for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India
- Interest received from a non-resident is treated as income deemed to accrue or arise in India if such interest is in respect of funds borrowed by the non-resident for carrying on any business/profession in India
- Royalty/fees for technical services received from Government of India
- Royalty/fees for technical services received from resident is treated as income deemed to have accrued or arisen in India in all cases, except where such royalty/fees relate to business/profession/other source of income carried on by the payer outside India
Royalty/fees for technical services received from non-resident is treated as income deemed to have accrued or arisen in India if such royalty/fee is for business/profession/other source of income carried by the payer in India.
I have explained below one such income in detail:
Capital gains tax from transfer of property:
- Long Term Capital Gains, i.e. if NRI is selling the property in India after holding it for more than 3 years: Long term capital gain tax would be 20% plus applicable surcharge and education cess
- Short Term Capital Gains, i.e. if NRI is selling the property in India after holding it for less than 3 years: Short Term Capital Gain Tax would be 30% plus applicable surcharge and education cess
TDS under section 195:
As per section 195, the following payments does not require tax deduction at source:
- Interest referred under sections.195LB/LC/LD
- Salary payment
- Dividend payment u/s.115-O
Other than the above-mentioned payments, all other payments are covered under this section.
TDS should be deducted at the time of credit or payment whichever is earlier. Furthermore, no threshold limit is prescribed and tax should be withheld from the entire amount.
In case of sale of property by NRI, it is mandatory for buyer to deduct TDS before making the payment to the non-resident Indian at the rate of 20% in case of LTCG and at the rate of 30% in case of STCG. If the purchaser defaults and does not make TDS at the time of registration of the deed – he will be liable to pay the capital gains.
- If the purchaser is making payment to the Non-Residents abroad, he should necessarily furnish an undertaking in Form No. 15CA along with a certificate from a Chartered Accountant in form No. 15CB.
- Form No. 15CA should be uploaded electronically on the website of the I.T. Department and signed printout is to be submitted to the Authorized Dealer Bank.
- Form No. 15CA & 15CB are compulsory for any remittances to be made abroad.
- If the purchaser has made the payment to the seller in India, seller will be required to file form No. 15CA/15CB while remitting his money abroad.
- Form No. 15CA/15CB require that the remitter has paid due taxes in India as per the Income Tax Act or the relevant DTAA.
- Authorized Dealers are not permitted to remit money abroad without obtaining 15CA/15CB from the remitter.
Relief under the Double Taxation Avoidance Agreement: DTAA provisions override the general provisions of the Act. Taxpayer can opt for provisions of Treaty or the Act, whichever is more beneficial.
TDS Refund by NRI’S
- If the non-resident Indian’s country of residence has a Double Taxation Avoidance Agreement with the Indian government i.e. lower rate of TDS or NIL rate is allowed, then the NRI would need to submit a tax residency certificate from the country of his residence, which would certify him/ her to be a tax paying resident in that country and that tax on his/ her income is paid in that country.
- If the non-resident Indian’s total income in India is less than basic exemption limit, then, he/she can apply for non-deduction of tax certificate with the Income Tax Department.
- In case of transfer of property situated in India, the non-resident Indian may re-invest his/ her capital gains by either buying another house in India under section 54 or invest in capital gains bonds under section 54EC. The Non-resident Indian would need to submit an affidavit stating that he/ she would invest the capital gain amount in capital gain bonds. For property purchase he/ she can produce allotment letter or payment receipts.
Income exempt in India
- The earnings made while abroad are completely tax free considering that the non-resident Indian does maintain the non-resident status.
- Most NRIs have bank accounts in India – either non-resident external accounts or foreign currency non-resident account. No taxes are to be paid on the interest arising out of these bank accounts.