NRI Taxation Consultancy
NRI Taxation
Consultancy
As an NRI, a common question you may have is whether there is a requirement to file Income tax returns in India. For this one needs to know if he has a taxable Income earned/accrued/ deemed to be accrued in India. In order to know whether any Income is earned/accrued/ deemed to be accrued in India, one needs to check his residential status.
Step 1: Determining whether resident or non-resident
The Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy any one or may satisfy both the conditions):
(1) He is in India for a period of 182 days or more in that year; or
(2) He is in India for a period of 60*/** days or more in the year and for a period of 365 days or more in 4 years immediately preceding the relevant year.
* The period of 60 days as mentioned in (2) above shall be substituted with 182 days.
- An Indian citizen and a person of Indian origin who visits India during the year,
- Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.
** The period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year.
Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
Note: For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
An Indian Citizen earning total income in excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident
A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies following conditions:
(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.
However, w.e.f., Assessment Year 2021-22, the Finance Act, 2020 has inserted the following two more situations wherein a resident person is deemed to be ‘Not Ordinarily Resident’ in India:
(a) An Indian Citizen or a person of Indian origin whose total income (other than income from foreign sources) exceeds Rs. 15 lakhs during the previous year and who has been in India for a period of 120 days or more but less than 182 days;
(b) An Indian Citizen who is deemed to be resident in India as per new section 6(1A).
A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.
Conclusion :
In short, following test will determine the residential status of an individual:
If the individual satisfies any one or both the conditions specified at step 1 and satisfies any of the conditions specified at step 2, then he will become resident and ordinarily resident in India.
If the individual satisfies any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2, then he will become resident but not ordinarily resident in India.
If the individual satisfies none conditions at step one, then he will become non-resident.
With effect from Assessment Year 2017-18, a company is said to be resident in India in any previous year, if:
(i) it is an Indian company; or
(ii) its place of effective management, at any time in that year, is in India.
For this purpose, the “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.
The concept of POEM is effective from Assessment Year 2017-18. The CBDT has issued the final guidelines for determination of POEM of a foreign company.
The final guidelines on POEM contain some unique features. One of the unique features is test of Active Business Outside India (ABOI). The guidelines prescribe that a company shall be said to engaged in ‘active business outside India’ if passive income is not more than 50% of its total income. Further, there are certain additional cumulative conditions to be satisfied regarding location of total assets, employees and payroll expenses.
The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
In cases of companies other than those that are engaged in active business outside India, the determination of POEM would be a two stage process, namely:—
1. First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.
2. Second stage would be determination of place where these decisions are in fact being made.
However, it has been provided that the POEM guidelines shall not apply to a company having turnover or gross receipts of INR 50 crores or less in a financial year vide CIRCULAR NO.8, DATED 23-2-2017.
Step 1: Determining whether resident or non-resident
For the purpose of Income-tax Law, a HUF will be treated as resident in India, if the control and management of the affairs of the HUF is located (partly or wholly) in India.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident
A resident HUF will be treated as resident and ordinarily resident in India during the year if its manager (i.e. karta or manager) satisfies both the following conditions:
(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.
A resident HUF whose manager (i.e. karta or manager) does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.
Conclusion
In short, following test will determine the residential status of a HUF :
If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (e. karta or manager) satisfies both the conditions specified at step 2, then the HUF will become resident and ordinarily resident in India.
If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (e. karta or manager) satisfies none or only one condition specified at step 2, then the HUF will become resident but not ordinarily resident in India.
If the control and management of the affairs of the HUF is located wholly outside India, then the HUF will become non-resident.
Incidence of Tax
Incomes liable to tax in India
Salary Income
Income from salary received in India or income for services rendered in India shall be subject to Indian tax laws. Hence if an NRI receives a salary towards services rendered in India, the income shall become taxable irrespective of the place of receipt. The rate of tax will be as per the slab rate applicable in the particular financial year.
In case the Government of India remits any salary or income to a citizen of India towards services rendered outside India, it will still be considered as income accrued in India and will be chargeable to tax even if the status of the individual is ‘Non-resident’ as per residency rules.
House property income
Rental income from the house located in India is taxable for an NRI owner of the house property. The determination of the taxable house property income shall be in similar lines as the resident. The benefit of standard deduction of 30%, deduction of property tax paid, and interest on a home loan is also allowed to the NRI. Section 80C deduction for principal repayment, stamp duty and registration charges paid on the purchase can also be claimed. House property income will also be taxable at individual slab rates applicable.
However, the tenant who pays rent to an NRI owner must remember to deduct TDS at 30% while paying rent.
Income from business & Profession
Any income earned by a Non-resident Indian from a business set up or controlled in India will be considered income accrued and therefore taxable in India.
Income from Other Sources
Other sources income like interest received in saving account and fixed deposits held in Indian banks shall be taxable in the hands of NRI. Interest on NRE and FCNR account is not liable for tax in India. However, interest earned in the NRO account is fully taxable. NRO account is opened in the name of NRI to manage income earned in India.
Capital Gains Income
Capital assets like house property, shares and securities, gold etc. which are of Indian origin, shall be taxable in India. If an NRI transfers any capital asset situated in India, he shall be liable to pay capital gain tax; the rules are the same as a resident.
Whether to file your return?
If you have a tax obligation in India, the domestic tax laws of India requires that you file your IT Return. You may need to file your Returns in India under the following circumstances :
- If you have an assessed income in India and is over and above the exemptions limit of taxable income which is Rs 2,50,000, thus resulting in a tax liability, you need to file tax return. Even if you have any short term or long term a capital gain which is below the exemptions limit you need to file tax return.
- If you have an assessed income in India and is over and above the exemptions limit of taxable income which is Rs 2,50,000, thus resulting in a tax liability, you need to file tax return. Even if you have any short term or long term a capital gain which is below the exemptions limit you need to file tax return.