1. Non Resident Indian Status
An Indian citizen or a foreign citizen of India origin who stays abroad for employment/ carrying on business or vocation or under circumstances indicating an intention for an uncertain duration of stay abroad is a NON-RESIDENT INDIAN (NRI). (Those who stay abroad on business visit, medical treatment, study or such other purposes which do not indicate an intention to stay there for an indefinite period will not be considered as NRIs).
2. Who is an NRI?
An Indian residing abroad is popularly known as Non-Resident Indian (NRI). The NRI status is legally defined under the Foreign Exchange Management Act, 1999 (FEMA Act, 1999) and the Income-tax Act, 1961 for applicability of respective laws.
3. Non Residents under FEMA, 1999
The FEMA Act, 1999 provide definitions of non residents as under:
Person Resident outside India (NRI)
Section 2(w) provides that a person resident outside India means a person who is not resident in India.
Thus if a person comes as a tourist, or for any purpose (not for employment or business in India), AND, he comes for a fixed or certain period of time he will be a non-resident.
The term NRI, generally, means a non-resident who is either an Indian Citizen residing outside India and includes Foreign Citizen of Indian origin residing outside India.
Person resident in India
Section 2(v) provides that an individual person resident in India means:
3.2.1. An individual person
A person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include
- A person who has gone out of India or who stays outside India, in either case –
- for or on taking up employment outside India, or
- for carrying on outside India a business or vocation outside India, or
- for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.
- a person who has come to India or who stays in India, in either case, otherwise than –
- for or on taking up employment in India, or
- for carrying on in India a business or vocation in India, or
- for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.
The above definition is explained in simple terms for individuals hereunder:
- The residential status of a person leaving India will be determined if a person leaves India for the purpose of employment, business or for any other purpose that indicates his intention to stay outside India for an uncertain period; then he becomes a non resident from the day he leaves India for such purpose.
- The residential status of a person returning to India will be determined. If a person comes to India for the purpose of employment, business or for any other purpose that indicates his intention to stay in India for an uncertain period; then he becomes a resident from the day he comes to India for such purpose.
In the definition, stay for a period of 182 days is also stated. However, the period of stay does not affect determination of status as stated in (1) and (2).
3.2.2 Person other than individual
- any person or body corporation registered or incorporated in India.
- an office, branch or agency in India owned or controlled by a person resident outside India,
An office, branch or agency outside India owned or controlled by a person resident in India.
4. Meaning of Non-Resident under Income-Tax Act, 1961
The definition of a non-resident for the purpose of Indian Income-tax Act is different than that of FEMA 1999 or for that matter of Exchange Control purposes.
Liability to pay tax does not depend on the nationality or domicile of the tax payer but on his residential status.
The residential status is to be determined in following three broad categories:
- Residents in India.
- Resident but not ordinarily resident
Residential status is determined on the basis of physical presence for every year separately as per the provisions of Income-tax Act, 1961 explained in the following paragraphs.
4.1 Basic conditions for a Resident as per Income-tax Act.
A Resident is one who during a Financial Year (F.Y.), which is from April to March, satisfies any one of the following 2 basic conditions:
An individual is said to be a resident in India if he fulfils any of the following two conditions:
he is present in India for a period of more than 182 days or more during previous year, or
if he is present in India for a period of 60 days or more during previous year AND at least 365 days or more during the 4 years prior to the previous year.
The stay in India need not be continuous.
In case an individual does not satisfy any of the above two basic conditions, then he is said to be a non-resident.
Exceptions permitted in the basic conditions
In the following two cases, an individual needs to be present in India for a minimum of 182 days or more in order to become resident in India:
- An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India or an Indian citizen leaving India during the previous year as a member of the crew of an Indian ship.
- An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of the parents or an of his grandparents was born in undivided India).
5. Additional conditions for Resident and Ordinarily Resident
Under Section 6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two conditions in addition to basic condition for a resident:
- Resident in India at least 9 out of 10 previous year prior to the previous year; AND
- In India for 730 days or more during 7 yeas prior to the previous year.
In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfied at least one of the basic conditions for a resident and the two additional conditions said above.
6. Meaning of Resident but Not Ordinarily Resident (RNOR)
In the case of an individual who is a resident, it is to be further determined whether he is an ordinary resident or not an ordinary resident.
A person is said to be Resident but not ordinary resident (RNOR) if he satisfies any of the following additional conditions:
(a) If he has been a non-resident in India in nine out of the 10 previous years preceding the relevant previous years; OR
(b) If he has been in India for 729 days or less in the seven immediately preceding the relevant previous year. lf' none of the above two conditions are satisfied, then a person is said to be an ordinary resident.
An individual who is non-resident for 9consecutive years, shall remain RNOR for 2 subsequent years and as such his foreign income is not taxable in India while his status is that of RNOR. The status of RNOR renders certain income of such individual non- taxable as explained in Tax liability of NRls.
A person who is returning to India after 9 years of stay outside India (and who was non-resident for each of the 9 years wider the Income Tax Act, 1961), shall remain RNOR for a period of two years only.
7. Residential status of HUF
A Hindu Undivided Family (HUF) is said to be resident in India if control and management of its affairs is wholly or partly situated in India during the relevant previous year.
8. Residential status of other than an Individual & HUF
In case of other than an individual and HUF, the residential status depends upon the place from which its affairs are controlled and managed.
As per Section 6(2), a partnership firm or an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident if control and management of their affairs are situated wholly outside India.
As per Section 6(3), an Indian company is always resident in India. A foreign, Company is resident.in India only if, during the previous year, control and management of its affairs is situated wholly in India. Where part or whole of control and management of the affairs of a foreign company is situated outside India, it shall be treated, as a non- resident company.
As per Section 6(4), every other person is resident in India if control and management of his affairs is, wholly or partly, situated within India during the relevant previous year-.On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India.
9. Non resident status under the Income Tax/Wealth Tax Act
The term non-resident is negatively defined under section 6 of the Income-tax Act. An individual who is not a resident under the Income-tax Act is a non-resident (generally, termed NRI).
The status of a person as a resident or non-resident depends on his period of stay in India. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March (known as previous year under the Income-tax Act). The definition is explained in simple terms as under.
If an individual who satisfies understated both the conditions of Section 6 of the Income Tax Act, then he becomes a non-resident.
He is not in India for 182 days or more during the relevant previous year.
He is not in India for 60 days or more during the previous year and he is not in India for 365 days or more during the 4 years prior to the previous year.
If yes, then he is a non-resident (so check the next condition).
If yes, then he is a non-resident.
If a person is not satisfying any of the above conditions to become non-resident, check whether following assists to become a non-resident.
In the case of an individual on visit to India or a member of the crew of an Indian ship or a person leaving India for employment outside India, the requirement of stay in India of 60 days in condition 2 above is extended to 182 days.
10. Residential status under Companies Act, 1961
Schedule XIII of the Companies Act, 1961 deals with conditions to be satisfied for the appointment of a managing or whole-time director or a manager of the Company without the approval of the Central Government.
Explanation to Clause (e) of Part I of the Schedule provides that a resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India for taking up employment in India or for carrying on a business or vocation in India.
11. Comparison of residential status under Income Tax Act, FEMA & Companies Act.
Since the criteria for determining an individual's residential status differs under FEMA and Income-tax Act, it is possible that an individual can be regarded as a resident under the Income-tax Act and a non-resident under FEMA, and vice versa.
Under the Income-tax Act, an individual's residential status is determined for a particular year and is relevant to determine the taxability of income earned in that year. Under FEMA, the residential status is not only to be determined for a particular point of time, it is an ongoing process and is relevant for determining whether an individual can undertake a particular transaction at that particular point of time.
A person who qualifies to be a non-resident under the Income-tax Act, 1961 will also he considered a non-resident for the purposes of application of FEMA, but a person who is considered to be non-resident under FEMA may not necessarily be a non-resident under the Income-tax Act. For instance a resident Indian goes abroad to conduct a business in December 2011. Under the Income-tax Act, he will be regarded as resident during financial year 2011-12 as period of stay in India is more than 182 days. However, under FEMA, he will-be regarded as non-resident the moment he leaves the country for business purposes.
Under the Companies Act, 1956 a resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person. Therefore, a person who has come to stay in India for taking up employment or for carrying on a business or vocation may not be eligible to be appointed as a managerial person of a company, without approval of the Central Government, till the time he has stayed in India for a continuous period of twelve months even though he will be treated as resident under FEMA the day he arrives in India for taking up employment or for carrying on business or vocation as would indicate his intention to stay for an uncertain period and under Income-tax Act upon his stay in India for at least 182 days in the previous year.
12. Person of Indian Origin (PIO)
FEMA defines a person of India Origin (PIO) as a person, being a citizen of any country
(a) who at any time held an Indian passport, or
(b) a person who himself or either of his parents or any of his grand parents were citizens of India by virtue of the Constitution of India or the Citizenship Act, 1955, or
(c) spouse of an Indian citizen, or
(d) spouse of a person covered under (a) or (b) above. However, the citizens of Bangladesh, Pakistan, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan are not considered as PIO even if they satisfy the above conditions under FEMA for different purposes under different regulations.
13. Status of NRIs Returning to India
Status of non-residents on temporary visits/ stay in India shall be as under:
(a) If visit/ stay in India is without any intention to stay in India for an uncertain period, shall continue to be treated as 'non-residents' during their stay in India.
(b) He will continue to get all the benefits/advantages that are available to non residents. Non-resident accounts/ investments etc. would continue without any change.
(c) He will not be required to surrender foreign exchange available with them.
14. Key points to be consider while determining the residential status of an individual.
(i) Residential status is always determined for the Previous Year because the assessee has to determine the total income of the Previous Year only. In other words, as the tax is on the income of a particular Previous Year, the enquiry and determination of the residence qualification must confine to the facts obtaining in that Previous Year.
(ii) If a person is resident in India in a Previous Year in respect of any source of income, he shall be deemed to be resident in India in the Previous Year relevant to the Assessment Year in respect of each of his other sources of Income.
(iii) Relevant Previous Year means, the Previous Year for which residential status is to be determined.
(iv) It is not necessary that the stay should be for a continuous period.
(v) It is not necessary that the stay should be at one place in India.
(vi) Both the day of entry and the day of departure should be treated as the day of stay in India.
(vii) Presence in territorial waters in India would also be regarded as stay in India.
(viii) A person is said to be of Indian Origin if he or either of his parents or any of his grand parents was born in undivided India.
(ix) Official tours abroad in connection with employment in India shall not be regarded as employment outside India.
(x) A person may be resident of more than one country for any Previous Year.
(xi) Citizenship of a country and residential status of that country are two separate concepts. A person may be an Indian national/Citizen but may not be a resident in India and vice versa.
15. Key points to be considered by NRIs.
(i) Previous Year is period of 12 months from Ist April to 31st March. Number of days stay in India is to be counted during this period.
(ii) Both the Day of Arrival into India and the Day of Departure from India are counted as the days of stay in India (i.e. 2 days stay in India).
(iii) Dates stamped on Passport are normally considered as proof of dates of departure from and arrival in India.
(iv) It is advisable to keep several photocopies of the relevant passport pages for present and future use.
(v) Ensure that date stamped on the passport is legible.
(vi) Keep track of number of days in India from year to year and, check the same before making the next trip to India.
16. Indian Students Studying Abroad – Revision in the Residential Status
The RBI has vide circular No. (DIR Series) 45, dated 8-12-2003 clarified that the definition of residential status in terms of section 2(v)(i) FEMA. 'person resident in India' means—
1. a person residing in India for more than one hundred and eighty-two days during the course of 'the preceding financial year but does not include –
(A) a person who has gone out of India or who stays outside India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.
2. It is observed from the representations that when students leave India for prosecuting a course of specified duration, such stay outside India, exceeds the period officially intended for various reasons. While taking up studies, or further advance courses, students may have to take up job or seek scholarships to supplement income to meet their financial requirements abroad. As they have to earn and learn, their stay for educational purposes gets prolonged than what is intended while leaving India.
3. Furthermore, the purport of their argument is that though they are students, they are, in reality, not dependent for a dominant part of their expenses on remittances from their households in India. Often they are permitted to work and have to undertake certain related financial transactions. They urge, therefore, that the definition needs to be revised.
4. Having regard to the circumstances stated above, it is clear that on both counts viz. their stay abroad for more than 182 days in the preceding financial year and their intention to stay outside India for an uncertain period when they go abroad for their studies, they can be treated as Non-Resident Indians (NRIs).
5. As non-residents, they will in any case be eligible for receiving remittances from India, as follows:-
(i) up to USD 100,000 from close relatives from India on self-declaration towards maintenance, which could include remittances towards their studies also,
(ii) up to USD 1 million out of sale proceeds/balances in their account maintained with an AD in India,
(iii) All other facilities available to NRIs under FEMA,
(iv) educational and other loans availed of by students as resident in India which can be allowed to continue as per provisions of Notification No. 4/2000-RB, dated May 3, 2000.
6. It is clarified that these instructions do not dilute in any way the utilization of the existing foreign exchange remittance facilities to students in regard to their academic pursuits.
7. Necessary amendments to the Foreign Exchange Management Regulations, 2000 are being issued separately.
8. Authorized Dealers may bring the contents of their circular to the notice of their constituents concerned.
9. The directions contained in this circular have been issued under section 10(4) and section 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999).
17. Foreign citizen of Indian Origin
For the purposes of availing of the facilities of opening and maintenance of bank accounts, a foreign citizen (but not a citizen of Pakistan or Bangladesh) is deemed to be of lndian Origin, if he, at any time was an Indian citizen or either of his parents or any of his grandparents was a citizen of India. A spouse (not being a citizen of Pakistan or Bangladesh) of an NRI is also treated as an NRl for the above purposes. For investments in shares/securities in India, a foreign citizen (but not a citizen of Pakistan, Bangladesh or Sri Lanka is deemed to be of Indian Origin, subject to satisfaction of the other conditions above. For investments in immovable properties, a foreign citizen (but not a citizen of Pakistan, Bangladesh; Afghanistan, Bhutan, Nepal or Sri Lanka) is deemed to be of Indian Origin, if he, at any time, was an Indian citizen or his father or paternal grandfather was an Indian citizen.
The definition of a NRI is significant from the perspective of FEMA, Investment and Taxation of India. The definition of a NRI under the Income Tax Act is different from that under FEMA.
Under Section 115C(e) of the Income Tax Act, a NRI is defined as 'An individual being a citizen of India or a person of India origin (PIO) who is not a resident'. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India.
The term NRI is defined under FEMA rules and regulations as ‘A person resident outside India who is either a citizen of India or is a person of Indian origin (PIO).’
However, the term PIO is defined differently in different regulations and therefore the term NRI will have different meaning under different regulations i.e. the terms NRI & PIO are contextual. Under the Foreign Exchange Management (Deposit) Regulations, 2000, which deal with banking accounts in India by NRIs, the term PIO is defined as below:
A Person of Indian Origin (PIO) is a citizen of any country other than Bangladesh or Pakistan, if –
(a) he at any time held an Indian passport; or
(b) he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or
(c) he is spouse of an Indian citizen or a person referred to in ‘a’ or ‘b’.
This is the most common definition adopted under most regulations. Significantly, Foreign Exchange Management (Acquisition and Transfer of immoveable property in India) Regulations, 2000 exclude clause (c) above and further restrict clause (b) to paternal relationships i.e. father and grandfather only. In Foreign Exchange Management (Transfer or issue of security by a person resident in India) Regulations, 2000 that govern investments in companies, stock market and other instruments as also Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000 the term excludes a citizen of Sri Lanka.
18.1 Basic concepts under FEMA
Residential status and nature and nature of transaction i.e. capital account transaction (e.g. purchase/sale of shares, property) or current account transaction (e.g. remittance of income on shares, property) are the cornerstones of FEMA. The golden rule of FEMA is, "All capital account transactions other than those permitted are prohibited while all current account transactions other than those prohibited are permitted". Under FEMA, certain types of transactions do not require RBI permission while others either require prior approval of RBI/Government or it is mandatory to inform RBI of the same. Although total capital account convertibility does not exist under FEMA, there is full convertibility to the extent of USD 1 million per calendar year for NRIs See Repatriation for details.
18.2 Residential status under FEMA
Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income-tax Act. Under the Income-tax Act, residential status is determined based only on the number of days of stay in India. Under FEMA, residential status is primarily determined based on the intention of the person.
‘A’ would be a non-resident under FEMA as soon as he goes out of India for employment/business outside India irrespective of the duration of his stay in India. Accordingly, 'A' would be outside the ambit of FEMA as far his transactions outside India are concerned (e.g. he can freely invest or carry on business abroad out of his earnings abroad).
18.3 Benefits associated with the NRI status
Apart from various types of investments in India, which 'A' can make, there are several other advantages of the NRl status, which are outlined below:
‘A’ can freely acquire immoveable properties abroad out of earnings abroad. He can invest anywhere in the world. He can start any business abroad. He can become trustee beneficiary of a trust set up abroad. He can retain all these even on his return to India and need not even intimate RBI about his foreign assets.
‘A’ can set up family trusts abroad for education of his children/maintenance of his family members. Such trusts can also be Asset Protection Trusts where the assets held by the trust are free from attachment by the creditors.
‘A’ can bring 10 kgs. of gold and 100 kg of silver (on payment of prescribed duty) once in six months of his visit to India.
‘A’s foreign income is not liable to tax in India.
‘A’ can enjoy several tax concessions in India on his assets in India.
‘A’ can seek Advance ruling from Advance Ruling Authority on taxability (income tax) of transactions.
‘A’ can avail the benefits of the Double Tax Avoidance Agreements (DTAAs) entered into by India with several countries which attempt to minimize double tax on the same income (i.e. if tax is payable in India by NRIs on their income in India, credit for tax payable is available against tax payable in foreign country on such income). Also tax on dividends, royalty, fees for technical services earned in India by NRIs are offered concessional tax treatment under most DTAAs. Further, in few cases, tax may not be payable at all on such income if the NRI is a tax resident of a treaty country.
‘A’ can vote in the general election of the country for electing the central government of the country.
There are special reserve seats for children of NRIs for Engineering! IIT/ Medical/ MBA courses in certain institutions in India provided the fees are paid in foreign exchange.
Even in case of Initial Public Offerings (IPO’s), there are special quotas for NRI.
18.4 Who qualifies as a NRI for Indian Income Tax purposes?
To be eligible for the ‘NRI’ status, a person should be a non-resident under the Income Tax Act and should either be a citizen of India or a person of Indian origin. A person is of Indian origin if he or his parents or grand parents were born in Undivided India.
A person who has been in India for 60 days or more during a financial year and 365 days or more during the preceding four financial years qualifies as a 'Resident' of India. Considering the fact that NRIs may end up staying in India for longer periods while visiting relatives or to take care of India property and investments, the 60 days period is relaxed to 182 days. NRIs based outside India can continue to enjoy non-resident status in India if their presence in India is more than 60 days but less than 182 days, even if their stay in India during the past four financial years is 365 days or more.
Deputation abroad for more than six months makes a person NRI.
18.5 Income Tax implications
For the purposes of levy of tax, the Income-tax Act in India has classified the status of an individual assessee into three viz,
Resident and ordinarily resident (ROR) Resident but not ordinarily resident (R but NOR).
The residential status of an Individual is determined based on the number of days of stay in India. Financial year (FY) is April to March.
* Not to a resident going outside Indiafor employment, a resident who leaves India as a member of crew of an Indian ship, an Indian citizen or person of Indian origin who is abroad and comes to Indiafor a visit i.e. if such a person stays in India for less than 182 days, he would be a non-resident.
In the case of a ROR, his global income is taxed in India. Normally a returning Indian would be assessed as RNOR on his return to India (See FAQs of the website of RBI for returning Indians for more details).
In the case of a Non-resident, only the income earned or received in India is taxed in India. Accordingly, income earned outside India by 'A' would not be taxable in India.
India has contracted Double Tax Avoidance Agreements (DTAAs) with various countries. Taxability of A's Indian income would be decided as per the provisions of these DTAAs. Most of these DTAAs contain provisions for-lower rates of tax in case of incomes like dividend, royalties, fees for technical services etc. Provisions of some DTAAs provide interesting opportunities for efficient tax planning. For instance, the DTAA with Macedonia is going on and the terms and conditions are yet to be finalized 'by the Central Government. Structuring of likely income in India therefore requires a ‘case to case’ study depending on facts of each case.
Frequently Asked Questions
PERSONS OF INDIAN ORIGIN
1. NRI STATUS
Q.1 Mr. Snowwhite is an Executive and undertake export promotion tours very frequently. In last financial year he was in Australia for nearly 201 days. He wants to claim the NRI status. Whether as a banker will you consider him as a NRI?
Ans: No. Since Mr. Snowwhite is employed in India and he is undertaking the tours for expanding his company’s business and has not gone to Australia for taking up employment or carrying on business outside India for an uncertain period. He, therefore, cannot claim the NRI status.
Q.2 Mr. Snowwhite has gone to Australia to play cricket and represent India. The duration of the matches on account of certain reasons is extended up to 7 months. Now Snowwhite wants to claim the NRI status. Can he be treated as NRI since he is more than 182 days abroad?
Ans: No. Mr. Snowwhite has gone for a fixed period to play in Australia and not for uncertain period.
Q.3 Miss Snowwhite got the admission to do MS in Computers in CaliforniaUniversity in USA for initial period of two years. After six months she wrote to Bank of India, Kalbadevi Branch that she is now NRI and therefore bank should designate her S.B. Account into NRO account and also she sought to open NRE account. Can she claim the NRI status even though it is clear that she has gone for studies abroad for a fixed period of 2 years?
Ans: Under the provisions of FEMA, she cannot claim the NRI status since she has not gone abroad for an uncertain period. However, Reserve Bank of India vide it’s A.P. (DIR Series) Circular No.45 dated 8th December, 2003 has treated her as a NRI as Reserve Bank feels that Miss Snowwhite’s stay is more than 182 days and she is likely to do some job to help her in paying the fees etc.
Q.4 Mr. Snowwhite has taken up British citizenship even though his wife and children are in Mumbai. He travels very often to India to meet his wife and children and is always in India for more than 200 days. Will he be treated as Resident or Non-Resident?
Ans: Mr. Snowwhite will be treated as Non-Resident since he has no intention to stay in India for an uncertain period.
Q.5 Miss. Snowwhite is a registered Nurse. She accompanies a patient to US for medical attention. The patient remains in the US hospital for more than 8 months so also she. Can she or the patient claim the NRI status.
Ans: No. Both the patient as well as nurse has gone from India to receive medical attention. They have not gone to USA for taking up employment in hospital. Therefore both cannot claim NRI status.
Q.6 Mr. Snowwhite is a foreign citizen and has taken up employment in India as a regular faculty member in the K.C.LawCollege, Mumbai. However, he regularly visits his hometown abroad and many times is out of India for more than 183 days. Can he claim the NRI status?
Ans: No. He is resident of India since his stay in India for taking up employment is for uncertain period.
Q.7 Which income of non-resident attract the tax liability?
Ans: Following income of a non-resident attract the tax liability:
(a) Any income, which is received or is deemed to be received in India in financial year i.e. April to March.
(b) Any income, which accrues or arises or is deemed to accrue or arise to him in India during financial year.
Q.8 Which income of non-resident does not attract the tax liability?
Ans: Following incomes do not attract the tax liability:
(a) Income earned outside India even though it is remitted to India.
(b) Income accrues, or arises to him outside India not connected his business profession in India etc.
Q.9 State the types of income, which are payable outside India are deemed to arise in India?
Ans: Following incomes which are payable outside India are deemed to arise in India:
(a) dividend paid by an Indian company.
(b) interest payable on money borrowed and brought into India and
(c) royalty and technical service fees where the royalty is payable in respect of any right or fees are payable in respect of technical services used for business or profession in India.
Q.10 Whether it is compulsory for Non-Resident Indian to file the Income-tax Return?
Ans: No. It shall not be necessary for NRIs to furnish the Return of Income if their only source of income is investment income and tax has been deduced at source.
2. INCOME TAX
I. Applicability of Income Tax
Q.1 What is income tax?
Ans: It is a tax imposed by the Government of India on any body who earns income in India. This is levied on the strength of an Act called Income Tax Act which was passed by the Parliament of India.
Q.2 What do you mean by income earned in India?
Ans: Income earned in India is not limited to income earned within the geographical limits or boundaries of the country. Certain incomes are also deemed to have been earned in India although they may have been earned outside the country.
Q.3 Who administers the Income Tax Act?
Ans: The job of monitoring the Income Tax collection by the government is entrusted to a Department called Income Tax. This department functions under the Department of Revenue, Ministry of Finance, Government of India.
Q.4 What is the period for which a persons income is taken into account for purpose of Income Tax?
Ans: Income earned in the twelve months contained in the period from 1st Aril to 31st March (commonly called Financial Year [FY]) is taken into account for purposes of calculating Income Tax. Under the Income Tax Act this period is called a Previous Year.
Q.5 What is an Assessment Year?
Ans: It is the twelve month period 1st April to 31st March immediately following the previous year (refer answer-4). In the Assessment Year a person files his return for the income earned in the previous year. For example for FY: 2009-10 the AY is 2010-11.
Q.6 Who is supposed to pay Income Tax?
Ans: Any Individual or group of Individual or artificial bodies who/ which have earned income during the previous years are required to pay Income Tax on it. The IT Act recognizes the earners of income under seven (7) categories. Each category is called a Status. These are Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), Firms, Companies, Local authority, Artificial juridical person. When Companies pay taxes under the Income Tax Act it is called Corporate Tax.
Q.7 Is Income Tax Act applicable only to residents?
Ans: No. The Income Tax Act applies to all persons who earn income in India. Whether they are resident or non-resident.
Q.8 Who is a resident?
Ans: If an individual stays in India for 182 days or more in a year, he is treated as resident in that year regardless of the citizenship. If the stay is less than 182 days he is a non-resident.
Q.9 How can I know whether a company is resident or non-resident?
Ans: A company is considered as ‘resident’ if it is incorporated under the Indian Companies Act. A foreign company can also become a ‘resident’ if the control and management of its affairs is done entirely in India during the previous year.
Q.10 How is resident/ non-resident status relevant for levy of Income Tax?
Ans: In case of resident individuals and companies, their global income is taxable in India. However, non-residents have to pay tax only on the income earned in India or from a source/ activity in India.
Q.11 I am an Indian scientist, who had gone abroad on a government project. Should my return of income include income earned/ received abroad?
Ans: It depends on your residential status. If you are a resident all incomes earned globally are taxable. Therefore, the same needs to be included in the return. However, if any tax is paid on that income in the foreign country, you will get credit for the same.
II. Questions Relating to Taxable Income
Q.12 What does the Income Tax Department consider as income?
Ans: The word “Income” has a very broad and inclusive meaning. In case of a salaried person, all that is received from an employer in cash, kind or as a facility is considered as income. For a businessman, his net profits will constitute income. Income may also flow from investments in the form of Interest, Dividend and Commission etc. In fact the Income Tax Act does not differentiate between legal and illegal income for purpose of taxation. Under the Act, all incomes earned by persons are classified into 5 different heads, such as:
Income from Salary.
Income from House Property.
Income from Business or Profession.
Income from capital gains.
Income from other sources.
Q.13 Are are receipts considered as income?
Receipts can be classified into two kinds.
(A) Revenue receipt.
(B) Capital receipt.
The general rule under the Income Tax Act is that, all revenue receipt are taxable unless a receipt is specifically exempted and all capital receipts are exempt from taxation unless there is a provision to tax it. Gifts and loans etc are in the nature of capital receipts not attracting tax.
Q.14 What are revenue and capital receipts?
Ans: In a simple language, all that one derives from a source is called revenue receipt. For ex., Salary from employment, Rent from property, Interest or Dividend from Investments, Profits from business. When an income is earned on account of transacting the source itself, it is called Capital receipt. For ex., Sale of land and building, business, investment etc.
Q.15 Is income tax levied on gifts received by a person?
Ans: Gift exceeding Rs.50,000 is taxable unless it is received from any person who is a relative or
on occasion of marriage or
under will or by inheritance or in contemplation of death of the payer.
Q.16 I own shares of various Indian companies and receive dividends. Is it taxable?
Ans: No. The dividend declared by Indian companies is not taxable in the hands of the share holders because tax on distributed profits have already been borne by the company.
Q.17 I am a religious preacher and earn money from preaching. Do I have to pay tax and file return?
Q.18 Can I claim deduction for my personal and household expenditure in calculating my income or profit?
Q.19 Most of my income is given away in charity and I am left with just enough to meet my personal requirement. What will be considered as my income?
Ans: What is done after the income is earned does not determine its taxation. However charitable contribution to approved institutions will give you the benefit of certain deductions from taxable income.
Q.20 My daughter stays in USA. She owns a house in India and has let it out. She has asked tenants to pay rent to me so that I can a lead decent life. She has not received any rent. Is she still liable to tax? What if she transfers the house to me?
Ans: Your daughter is the owner of the house and therefore she is liable to pay tax even though you receive the rent. If the house is transferred, then you would become the owner and you will have to pay tax on the rental income.
Q.21 My children living abroad send me Rs.20,000 per month for my maintenance. Would this be considered as my income?
Q.22 Is there any limit of income below which I need not pay taxes?
Ans: At the moment individual, HUF, AOP and BOI having income below rupees one lakh sixty through need not pay any income tax. For other categories (persons) such as cooperatives societies, firms, companies and local authorities no such exempted limits exits, so they have to pay taxes on their entire income. In cases of senior citizens aged above 65 years and women the exempted limit for the financial year 2009-10 are rupees two lakhs forty thousand and one lakh ninety thousand respectively.
Q.23 I am an agriculturist. Is my income taxable?
Ans: Your agricultural income is not taxable per se. However, if you have any other source of income like income from investments, property etc. while calculating tax on them, your agricultural income will be taken into account, so that you pay tax at a higher rate on that other income.
Q.24 What is agricultural income?
Ans: To consider an activity as agriculture the basic operation such as tilling, sowing, irrigating and harvesting should have been carried out. Thereafter what is sold in the market should be the primary product harvested. Receipt from such sale is considered as agricultural receipt. If however some further processing or modification were done to the harvested product to enhance its marketable value then such enhanced value would be considered as business income.
Q.25 Is income from animal husbandry considered as agricultural income?
Q.26 Do I have to maintain any records or proof of earnings?
Ans: For every source of income you have to maintain proof of earning and the records specified under the IT Act. In case, no such records have been laid down, you should maintain reasonable level of records with which you can support the claim of income.
Q.27 As an agriculturist, am I required to maintain any proof of earning and expenditure incurred?
Ans: Even if you have only agricultural income you are advised to maintain some proof of your agricultural earnings.
Q.28 I win a lottery or prize money in a competition. Am I required to pay taxes on it?
III. Questions Relating to Tax on Income
Q.29 How does the Government collect Income Tax?
Ans: Taxes are collected by three means:
(a) voluntary payment by persons into various designated Banks. For example Advance Tax and Self Assessment Tax.
(b) Taxes deducted at source (TDS) on your behalf from the payments receivable by you.
(c) Taxes collected at source (TCS) on your behalf at the time of spending. It is the constitutional obligation of every person earning income to compute his income and pay taxes correctly.
Q.30 How will I know how much Income Tax I have to pay?
Ans: The rates of income tax and corporate taxes are available in the Finance bill (commonly called budget) passed by Parliament every year.
Q.31 Does every person have to keenly follow the annual Finance bills?
Ans: You need not do so. You can take professional help or the help of Public Relation Officer (PRO) in the local Income Tax Department office. You may also take assistance from Tax Return Prepares (TRP).
Q.32 When do I have to pay the taxes on my income?
Ans: Generally the tax on income crystallizes only on completion of the previous year. However, for ease of collection and regularity of flow of funds to the Government for its various activities, the Income Tax Act has laid down payment of taxes in advance during the year of earning itself. Taxes may also be collected on your behalf during the previous year itself through TDS and TCS. If at the time of filing of return you find that you have some balance tax to be paid after taking into account your advance tax, TDS & TCS, the short fall is to be deposited as Self Assessment Tax.
Q.33 What is the procedure for depositing tax?
Ans: A form called Challan available in the Income Tax department, in banks and on the IT department website should be filled up and deposited in the bank along with the money. Taxes can also be aid on-line.
Q.34 In the challan there are terms like Income Tax on companies & Income Tax other than companies. What do they mean?
Ans: The tax to be paid by the companies on their income is called corporate tax and in the challan it is mentioned as Income Tax on Companies. Tax paid by non-corporate is called Income Tax and in the callan it is identified as Income Tax other than Companies.
Q.35 How is advance tax calculated and paid?
Ans: It is paid in installments. The amount payable is to be calculated in the following manner:
The deposit of advance tax is made through challan by ticking the relevant column.
Q.36 What is regular tax and how is it paid?
Ans: Under the Income Tax Act every person has the responsibility to correctly compute and pay his due taxes. Where the Department finds that there has been understatement of income and tax due, it takes measures to compute the actual tax amount that ought to have been paid. This demand raised on the person is called Regular Tax. The regular tax has to be paid within 30 days of receipt of the notice of demand.
Q.37 What are the precautions that I should take while filling up the tax payment challan?
Ans: Clearly mention:
(i) Head of payment eg. Corporation Tax/ Income Tax.
(ii) Amount and mode of payment of tax.
(iii) Type of payment (Advance tax/ Self assessment/ Regular/Tax on Dividend).
(iv) Assessment Year.
(v) The unique identification number called PAN (Permanent Account Number) allotted by the IT department. (Since PAN related services have been outsourced, for further details on PAN please see the departmental website http://www.incometaxindia.gov.in/
Q.38 Do I need to insist on some proof of payment from the Baker to whom I have submitted the challan?
Ans: The filled up taxpayers counter foil will be stamped and returned to you by the bank. Please ensure that the bank stamp contains BSR (Bankers Serial Number Code). Challan Identification Number (CIN), and the date of payment.
Q.39 How can I know that the Government has received the amount deposited by me as taxes in the bank?
Ans: The NSDL website (http://www.tin_nsdl.com) provides online services called Challan Status Enquiry. You can also see your tax pass book, an online tax credit viewing facility in the same website.
Q.40 What is the procedure to be followed to view my Tax passbook/ Tax statement?
Ans: You must first register your PAN by logging into the online service called view tax credit in the NSDL website (http://www.tin_nsdl.com). Thereafter, your PAN registration must be authorized by visiting the nearest TIN (Tax Information Network) facilitation centre of NSDL or getting their representative to call upon you. These are paid services.
Q.41 What should I do if my tax payment particulars are not found against my name in your website?
Ans: For payments deposited by you into the bank you will have to contact your bankers if the credit has not been given even after three days. In case of TDS or TCS you will have to contact the concerned deductor/ collector after the due date for filing the quarterly TDS/TCS return by them is over.
Q.42 Is my responsibility under the Income Tax Act over once taxes are paid?
Ans: No. You are thereafter responsible for ensuring that the tax credits are available in your tax passbook, TDS/TCS certificates are received by you and that full particulars of income and tax payment along with necessary proof is submitted to the Income Tax department in the form of Return before the due date.
Q.43 What can I do to reduce my tax?
Ans: The tax can be reduced by making investment in approved schemes and also by making donations to approved charitable institutions.
IV. Questions Relating to “Return of Income”
Q.44 What is a return of income?
Ans: It is a prescribed form through which the particulars of income earned by a person in a financial year and taxes paid on such income is communicated to the Income Tax department after the end of the Financial Year. Different forms are prescribed for filing of returns for different Status and Nature of income.
Q.45 From where can I get a return form?
Q.46 How can I know which form is applicable for my income?
Ans: You should choose a return form according to your status and nature of income from the following:
For Individuals having Income from Salary/ Pension/ family pension & interest.
For Individuals and HUFs not having Income from Business or Profession.
For Individuals/ HUFs being partners in firms and not carrying out business or profession under any proprietorship.
For individuals & HUFs having income from a proprietary business or profession.
For firms, AOPs and BOIs.
For Companies other than companies claiming exemption under section 11.
For persons including companies required to furnish return under section 139(4A) or Section 139 (4B) or Section 139(4C) or Section 139 (4D).
Return for Fringe Benefits.
Where the data of the Return of Income/ Fringe Benefits in Form ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6 & ITR-8 transmitted electronically without digital signature.
Q.47 What documents are to be enclosed along with the return of income?
Ans: The new return form numbering 1 to 8 is annexure less. Hence no documents need to be attached.
Q.48 Where and how am I supposed to file my return?
Ans: A return is to be filed before your Assessing Officer. It may be filed physically or filed electronically.
Q.49 Who is an Assessing Officer?
Ans: He/She is an officer of the Income Tax department who has been given jurisdiction over a particular geographical territory or class of persons. You can find out from the PRO or from the departmental website http://www.incometaxindia.gov.in as to your jurisdiction.
Q.50 How is a return filed electronically?
Ans: Companies and firms are compulsorily required to file their return electronically, while for others it is still optional. For electronic filing of return you have to log on to the departmental website http://www.incometaxindia.gov.in and upload the information of income and taxes in the prescribed form. If you have digital signature the same can be appended and there would be no need to file a paper return. In case you do not have a digital signature you will be required to file a paper return quoting the provisional acknowledgment number received on completion of uploading.
Q.51 I am going out of India. Who will file my Income Tax return for this period?
Ans: You can authorize any person by way of a Power of Attorney to file your return. A copy of the Power of Attorney should be enclosed with the return.
Q.52 Will I be put to any disadvantage by filing my return?
Ans: No. On the contrary by not filing your return in spite of having taxable income, you will be laying yourself open to the penal and prosecution provisions under the Income Tax Act.
Q.53 What are the benefits of filing my return of income?
Ans: Filing of return is your constitutional duty and earns for you the dignity of consciously contributing to the development of the nation. This apart, your IT returns validate your credit worthiness before financial institutions and make it possible for you to access many financial benefits such as bank credits etc.
Q.54 Is it necessary to file return of income when I do not have any positive income?
Ans: If you have sustained a loss in the financial year, which you propose to carry forward to the subsequent year for adjustment against its positive income, you must make a claim of loss by filing your return before the due date.
Q.55 What are the due dates for filing returns of income/ loss?
Ans: The due dates are as follows:
Companies and their Directors
Other business entities, other than companies, if their accounts are auditable and their working partners
In all other case
Q.56 If I fail to furnish my return within the due date of filing, will I be fined or penalized?
Ans: Yes. This may take the form of interest if the return is not filed before the end of the assessment year. If the return is not filed even after the end of the assessment year, penalty may also be levied.
Q.57 Can a return be filed after the due date?
Ans: Yes. It may be furnished at any time before the expiry of two years from the end of the financial year in which the income was earned. For example, in case of income earned during FY 2006-07, the belated return can be filed before 31st March, 2009.
Q.58 So far I have never paid any tax. If I file a return this year will the IT department ask me about my earlier years income?
Ans: It is never too late to start honoring your constitutional obligations for payment of tax. The department may ask you to file return of income for earlier years if it finds that you had taxable income in those years.
Q.59 If I have paid excess tax how and when will it be refunded?
Ans: The excess tax can be claimed as refund by filing your income tax return. It will be refunded by issue of cheque or by crediting to your bank account. The department has been making efforts to settle refund claims within four months from the month of filing return.
Q.60 If I have committed any mistake in my original return, am I permitted to file a corrected return?
Ans: Yes, provided the original return has been filed before the due date and provided the department has not completed assessment. However, it is expected that the mistake in the original return is of a genuine and bona fide nature.
Q.61 How many times can I revise the return?
Ans: Theoretically a return can be revised any number of times before the expiry of one year from the end of the assessment year or before assessment by the department is completed; whichever event takes place earlier.
Q.62 Am I required to keep a copy of the return filed as proof and for how long?
Ans: Yes. Since legal proceedings under the Income Tax Act can be initiated up to six years prior to the current financial year, you must maintain such documents at least for this period.
Q.63 There are various deductions that have not been reflected in the Form 16 issued by my employer. Can I claim them in my return?
Q.64 Why is return filing mandatory even though all my taxes and interests have been paid and there is no refund due to me?
Ans: Amounts paid as advance tax and withheld in the form of TDS or collected in the form of TCS will take the character of your tax due only on completion of self-assessment of your income. This self-assessment is intimated to the department by way of filing of return. Only then does the government acquire rights over the prepaid taxes as its own revenue. Filing of return is critical for this process and, hence, has been made mandatory. Failure will attract levy of penalty.
Q.65 Am I liable for any criminal prosecution (arrest/ imprisonment etc.) if I do not file my Income Tax return even though my income is taxable?
Ans: Non-payment of tax attracts interests, penalty and prosecution. The prosecution can lead to rigorous imprisonment from 6 months to 7 years and fine.
V. Questions Relating to PAN
Q.66 What are the benefits of obtaining a Permanent Account Number (PAN) and PAN Card?
Ans: A PAN number has been made compulsory for every transaction with the Income Tax department. It is also mandatory for numerous other financial transactions such as opening of bank accounts, availing institutional financial credits, purchase of high-end consumer item, foreign travel, transaction of immovable properties, dealing in securities etc. a PAN card is a valuable means of photo identification accepted by all government and non-government institutions in the country.
Q.67 I have lost my PAN card but remember my number. Do I necessarily need to get a fresh card?
Ans: With you PAN you can continue to transact with the Income Tax Department. However, in respect of other agencies you may encounter constraints without a Pan card since it doubles as a photo identity card.
Q.68 I have been allotted two PANs. Which number should I use?
Ans: You may retain any one of the numbers and surrender the other through a letter addressed to your jurisdictional Assessing Officer.
Q.69 If I do not surrender the additional PAN number, is there any problem?
Ans: Yes. It is illegal to have two PANs and the penalty for such offence is Rs.10,000/-.
Q.70 By mistake I have been using different PANs for different purpose like one for my demat account and another for filing my Income Tax return and payment of taxes. How do I set this right?
Ans: It is advisable to retain only one PAN, preferably the one used for Income Tax purpose and surrender the other number immediately. The institutions where the latter number has been quoted should be informed of the correct PAN.
Q.71 Is it mandatory to file return of income after getting PAN?
Ans: No. Return is to be filed only if you have taxable income.