SPECIAL PROVISIONS FOR NON-RESIDENT INDIANS
The taxation of non-resident Indians is not the same as taxation of residents. There are special provisions in the Income Tax Act which govern the taxation of non-resident Indians. In addition to the provisions in the Act, there exits a number of double taxation avoidance treaties which also govern special taxation procedures which are to be applied to the non-residents.
Double taxation relief
All the provisions in respect of the tax treatment of income are subject to Double Treaties entered into by India with various countries. The provisions of the relevant taxation treaty or the domestic law whichever is beneficial to the tax payer would be applicable.
Special concession for capital gains on shares and debentures
The first proviso to Section 48 contains special concession for computation of capital gains arising to a non-resident on transfer of shares and debentures in Indian companies.
As per the said provision, the original cost, expenditure on transfer and sale consideration are converted into foreign currency in which the investment was made. Such conversion takes place at the prescribed rates. The capital gain is calculated in the foreign currency and is reconverted into Indian Rupees. As a result of this, loss or gain which may arise on account of fluctuations in foreign currency exchange rates gets eliminated.
Special considerations for NRIs
Chapter XIIA of the Income Tax Act contains special provisions for computation of certain types of incomes of non-residents. This chapter contains seven sections, namely 115C to 115J. Each one of these sections are discussed below:
Certain definitions – Section 115C
Section 115C contains certain definitions for the purposes of Chapter XIIA. These are:
Convertible foreign exchange: Means foreign exchange which for the time being is treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the FERA and any rules made thereunder.
Foreign Exchange Asset: Any specified asset acquired/ purchased/ subscribed by the assessee in convertible foreign exchange.
Investment income: Any income other than dividends referred to in Section 115-O derived from a foreign exchange asset.
Long-term capital gains: Income chargeable under the head “Capital Gains” relating to a capital asset begin a foreign exchange asset which is not a short term capital asset.
Non-resident Indian: An individual being a citizen of India or a person of Indian origin who is not a resident.
Specified Assets: the following are specified assets for the purposes of Chapter XIIA:
Shares of an Indian company.
Debentures/ deposits with an Indian company, not being a private company.
Any security of the Central Government.
Other notified assets.
Computation of total income and tax thereon
Section 115D deals with the computation of total income of non-residents. As per Section 115D(1) in computing the investment income of non-resident Indian, no deduction is to be allowed under any provision of the Act in respect of any expenditure or allowance thereabout. Section 115D(2) specifically provides that the deductions allowable under Chapter VI-A are not to be allowed to a non-resident Indian assessee with reference to his investment income and/or long-term capital gains. As per Section 115E, the investment income is to be taxed at the rate of 20% and the long-term capital gains is to be taxed at the rate of 10%.
Exemption for long-term capital gains – Section 115F
Capital gains arising on transfer of a specified asset is exempt from the levy of any tax on the fulfillment of the following conditions:-
The asset transferred must be a long-term asset.
The net consideration must be reinvested in certain specified assets.
The reinvestment is to be made within 6 months of the transfer.
If only a portion of the net consideration is reinvested, then the proportionate exemption is allowed.
New asset must be held for a minimum period of three years.
Option not to file income-tax return – Section 115G
A non-resident Indian need not furnish a return of income if he satisfies the following two conditions:-
His total income consists only of investment income or income by way of long-term capital gains or both; and
Such income has been subjected to TDS.
Continuance of benefits after the non-resident becomes a resident: Section 115H.
Chapter XIIA continues to apply to a non-resident even after he becomes a resident if he furnishes a declaration along with his return of income to that effect.
Option to opt out of Chapter XII-A – Section 115-I
A non-resident Indian may elect not to be governed by the provisions of Chapter XIIA for a particular assessment year. He will have to submit a written declaration to this effect to the assessing officer with his return of income. His total income for that particular assessment year will be computed and taxed in accordance with the other provisions of the Act.
As annexure to the chapter, please refer to the following sections of I.T. Act, 1961:
Relevant extracts from Income-tax Act, 1961
SPECIAL PROVISIONS RELATING TO CERTAIN INCOMES OF NON-RESIDENTS
In this Chapter, unless the context otherwise requires, --
- “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
- “foreign exchange asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;
- “investment income” means any income derived *[other than dividends referred to Section 115-O] from a foreign exchange asset;
- “long-term capital gains” means income chargeable under the head “Capital gains” relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset;
- “non-resident Indian” means an individual, being a citizen of India or a person of Indian origin who is not a “resident”.
Explanation: A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India;
- “specified asset” means any of the following assets, namely:-
- shares in an Indian company;
- debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);
- deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);
- any security of the Central Government as defined in clause (2) of Section 2 of the Public Debt Act, 1944 (18 of 1944);
- such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.
Special provisions for computation of total income of non-
- No deduction in respect of any expenditure or allowance shall be allowed under any provisions of this Act in computing the investment income of a non-resident Indian.
- Where in the case of an assessee, being a non-resident Indian,--
- the gross total income consists of investment income or income by way of long-term capital gains or both, no deduction shall be allowed to the assessee under Chapter VI-A and nothing contained in the provisions of the second proviso to Section 48 shall apply to income chargeable under the head “Capital gains”;
- the gross total income includes any income referred to in clause (a), the gross total income shall be reduced by the amount of such income and the deductions under Chapter VIA shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.
Tax on investment income and long-term capital gains.
Where the total income of an assessee, being a non-resident Indian, includes –
- any income from investment or income from long-term capital gains of an asset other than a specified asset;
- income by way of long-term capital gains, the tax payable by him shall be the aggregate of –
- the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent;
- the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent;
- the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b).
Capital gains on transfer of foreign exchange assets not to be charged in certain cases.
- Where, in the case of an assessee being a non-resident Indian, any long-term capital gains arise from the transfer of a foreign exchange asset (the asset so transferred being hereafter in this Section referred to as the “original asset”), and the assessee has, within a period of six months after the date of such transfer, invested the whole or any part of the net consideration in any specified asset, or in any savings certificates referred to in clause (4B) of Section 10 (such specified asset, or such savings certificates being hereafter in this Section referred to as the “new asset”), the capital gain shall be dealt with in accordance with the following provisions of this Section, that is to say, --
- if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
- if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset bears to the net consideration shall not be charged under section 45.
Explanation: For the purposes of this sub-section, --
- “cost”, in relation to any new asset, being a deposit referred to in sub-clause (iii), or specified under sub-clause (v) of clause (f) of Section 115C, means the amount of such deposit;
- “net consideration”, in relation to the transfer of the original asset, means the full value of the consideration received or accruing as a result of the transfer of such asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
- Where the new asset is transferred or converted (otherwise than by transfer) into money, within a period of three years from the date of its acquisition, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head “Capital gains” relating to capital assets other than short-term capital assets of the previous year in which the new asset is transferred or converted (otherwise than by transfer) into money.
Return of income not to be filed in certain cases.
It shall not be necessary for a non-resident Indian to furnish under sub-section (1) of Section 139 a return of his income if—
- his total income in respect of which he is assessable under this Act during the previous year consisted only of investment income or income by way of long-term capital gains or both; and
- the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.
Benefit under Chapter to be available in certain cases even after the assessee becomes resident.
Where a person, who is a non-resident Indian in any previous year, becomes assessable as resident in India in respect of the total income of any subsequent year, he may furnish to the Assessing Officer a declaration in writing along with his return of income under section 139 for the assessment year for which he is so assessable, to the effect that the provisions of this Chapter shall continue to apply to him in relation to the investment income derived from any foreign exchange asset being an asset of the nature referred to in sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) of clause (f) of Section 115C; and if he does so, the provisions of this Chapter shall continue to apply to him in relation to such income for that assessment year and for every subsequent assessment year until the transfer or conversion (otherwise than by transfer) into money of such assets.
Chapter not to apply if the assessee so chooses.
A non-resident Indian may elect not to be governed by the provisions of this Chapter for any assessment year by furnishing his return of income for that assessment year under section 139 declaring therein that the provisions of this Chapter shall not apply to him for that assessment year and if he does so, the provisions of this Chapter shall not apply to him for that assessment year and his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act.