A Simplified Non Resident Tax Planning In India
As per the Income Tax Act, 1961 Non-Residents (NRs) are liable to pay income tax in respect of their income in India, depending on the residential status of the individual for the relevant financial year.
1. Determining the Residential Status of the Individual –
As per section 6 of the Income Tax Act, an individual is said to be a resident in India, if he satisfies any of the following conditions:
a) If he has been in India for a period of 182 days or more during the previous year; or
b) If he has been in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the relevant previous year.
In Clause (b) 60 days shall read as 182 days for an individual being citizen of India or a person of Indian origin, who is outside India and comes on a visit to India during the previous year and for an Indian citizen who is a crew member of Indian ship.
(Budget 2020 proposal: This 182 days is replaced with 120 days for an individual being citizen of India or a person of Indian origin, who is outside India and comes on a visit to India during the previous year)
P.S. An individual is said to be a Person of Indian Origin (PIO) if he, or either of his parents, or any of his grand-parents were born in undivided India.
If an individual doesn’t meet any of the above conditions, he is an Non-Resident.
2. Non Resident TaxPlanning –
An NR is liable to pay income tax only in respect of income earned/accrued or received or deemed to earned/accrued or received in India. The rules relating to NR taxation in India are considerably different from those applicable to residents in India.
a) Income from Salary:
Income from salary shall be deemed to arise in India, if it is received in relation to the services rendered in India. Even if income for the services rendered in India, is received outside India, it shall be taxable in India. The place of receipt of income becomes irrelevant under such circumstances. In case of Government employees, income from rendering of services outside India, shall be deemed to arise in India and thus is taxable. However, diplomats and ambassadors are exempt from tax.
b) Income from House Property:
The income from house property of an NR situated in India, shall be computed in the same manner as for a resident. Income under this head shall be taxed at slab rates as applicable to the NR. An NR is allowed to avail the standard deduction of 30%, deduct property taxes paid and the benefit of deduction of interest is also available, if he has taken a home loan. NRs can also avail the benefits of deductions available u/s 80C.
P.S. The tenant paying rent to the NRI is liable to deduct TDS @ 30% and submit the required forms online to the income tax department. In case TDS is to be deducted at a lower rate, the liability to obtain certificate from AO, for such lower deduction lies on the NRI.
c) Income from Other Sources:
Interest income from savings bank account and fixed deposits held in Indian banks shall be taxable in India. Interest earned on NRO accounts is also taxable. Interest income earned on FCNR and NRE accounts are tax-free.
d) Income from Business and Profession:
As per the Act, income from any business and profession controlled or set-up in India is taxable. If the Place of Effective Management of the business is in India, the entire income from such business shall be taxable in India at the prescribed rates.
e) Income from Capital Gains:
Capital gains arising from transfer of any capital asset (including shares and securities) situated in India is taxable in the hands of an NRI. However, NRIs can avail the benefits of exemptions u/s 54, 54F and 54EC on long-term capital gains arising on transfer of house property in India.
3. Special Provisions Relating to Investment Income and Long-term Capital Gains:
As per Sec 115E, where the total income of an NRI includes—
(i) any income from investment or income from long-term capital gains of an asset other than a specified asset;
(ii) 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 (i), if any, included in the total income @ 20%;
The amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (ii), if any, included in the total income @ 10%; and
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 (i) and (ii).]
P.S. If an NRI invests in certain Indian assets, he is liable to be taxed @20%. And if the special investment income is the only income the NRI has earned during the financial year and TDS has been deducted on such income, then the NRI is not required to file his income tax return.
4. Deductions Available to an NRI –
The Income Tax Act allows various deductions to an NRI that they can claim benefits of. Deductions are allowed u/s 80C, 80D, 80E, 80G, 80TTA, along with other deductions.
Certain deductions such deductions u/s 80CCG, 80U, 80DD, 80DDB, are not available to an NRI. NRIs can also not claim deduction u/s 80C for investments in PPF, NSCs, senior citizen savings scheme and 5 year deposit scheme held with post office.
5. Double Tax Avoidance Agreement (DTAA)-
There is a lot of scope for Non Resident tax planning in India in view of India has entered into Double Tax Avoidance Agreement with certain countries in order to save individuals from the burden of double taxation. An NRI can seek DTAA relief under either of the two methods: Exemption method or Tax Credit method.
6. Due Date for Filing of ITR –
The due date of filing of return by an NRI is 31st July of the relevant assessment year.
Many tax incentives are available for Non-Residents under Income Tax Act in India. We, DSRV and Co. LLP, do have experience on Non Resident Tax Planning in India for our clients.