Monday, 1 September 2014

Special Provisions Applicable to Non-resident Indians

With a view to attract investment by Non-resident Indians (NRIs) and Indian Nationals living abroad, certain reliefs, exemp­tions and incentives have been provided in the scheme of income taxation. Chapter XIIA of the Income Tax Act contains special provisions relating to taxation of non-resident Indians. Non­resident Indian has been defined as an individual being a citizen of India or a person of Indian origin, who is not a resident. A person is considered to be of Indian origin if he or either of his parents or any of his grand parents was born in undivided India. All the special exemptions, deductions and concessions applica­ble to NRIs are dealt with in the succeeding paragraphs. These concessions are in addition to the concessions available to non­residents in general since NRIs form only a special class of non­residents.

Joint holdings of non-resident Indians
Non-residents of Indian nationality/origin may invest in shares either singly or jointly with their close relatives resident in India. The Reserve Bank of India permits such joint holdings with repatriation benefits, provided-
a.     the investment is made by sending remittances from abroad or out of funds held in the Overseas Investor's Non-resident (External) Account or FCNR account;
b.    the first holder of shares is the non-resident Indian who actually made the investment out of his funds; and
c.     the resident holder is closely related to the non resident investor.
Remittance/repatriation of capital/dividend will be allowed to the non-resident investor, i.e. the first holder. In the event of the joint resident holder inheriting shares, he/she will not be entitled to any remittance/repatriation facilities. The special tax incentives provided in the Act to non-residents of Indian origin are available only to them and not to the resident Indians.

 Special Exemptions in respect of Investment income of Non-Resident Indians
Following   investment  income  arising  to   Non-resident Indians (NRIs) are totally exempt :-
a.     The entire income accruing or arising to a NRI investing in the units of the Unit Trust of India is free of income tax provided the units purchased by them are out of the amount remitted from abroad or from their Non-resident (External) Account,
b.    Income arising from investment in notified savings certificates obtained by NRIs is exempt from tax provided  the  certificates  are  subscribed  to  in convertible foreign exchange remitted from a foreign country in accordance with Foreign Exchange Regulation Act. For this purpose National Saving Certificate VI and VII issues are notified.
c.     Income  from  NRI  Bonds  1988  and  NRI   Bonds (Second Series) purchased by NRIs in foreign exchange is exempt from tax. This exemption continues to be available to a Non-resident Indian even after he becomes resident and is available also to the nominee or survivor of the NRI and to the donee who gets a gift of such bonds from the NRI.

Concessional Tax Treatment of certain incomes of non-resident Indians
The income other than dividend and long term capital gains derived from any 'Foreign Exchange Asset1 by NRI is charged to tax at the flat rate of 20%. Long term capital gains arising on transfer of such assets are charged at the flat rate of 10%. The term 'Foreign Exchange Asset1 means any of the following assets acquired, purchased or subscribed to in convert­ible foreign exchange in accordance with Foreign Exchange Regulation Act :-
a.     Shares in Indian company
b.    Debentures issued by a public limited company
c.     Deposits in a Public Ltd. Co.
d.    Securities of the Central Government
e.    Any other notified asset.  

 In computing the total income of such persons from any foreign exchange asset, no deduction is allowed in respect of any expenditure or allowance under any provision of the Act. Further, where a NRI has income only from foreign exchange asset or income by way of long term capital gains arising in transfer of a foreign exchange asset, or both, and the tax deductible at source from such income has been deducted, he is not required to file the return of income as otherwise required under the Act.

It may further be noted that the special provisions mentioned as above, will continue to apply in relation to the investment income from 'foreign exchange assets' (other than shares of an Indian Comapany) even after the NRI becomes resident in India. If the NRI becoming a resident wishes to be assessed  under these provisions,  he is  required to file a declaration in writing along with the return of income. These special provisions will apply in relation to such income until the transfer or conversion of such assets into money.

Non-resident Indian may also elect not to be governed by these provisions for any assessment year by furnishing to the assessing officer the return of income for that assessment year and declaring therein that these provisions shall not apply to him for that assessment year. If he does so, then his total income and tax will be computed in accordance with the normal provisions of the Act.

Any long term capital gain arising to a NRI from the transfer of a foreign exchange asset, the net consideration of which is invested or deposited within a period of 6 months from the date of transfer in any specified asset mentioned at (a) to (e) of para 11.3 or in the National Saving Certificate VI or VII issue is dealt with as follows:-
a.     if the cost of the new asset is not less than the net consideration in respect of the original foreign ex­change asset, the whole of the capital gain will not be liable to tax;

b.    if the cost of the new asset is less than the net consideration in respect of the original foreign ex­change asset, proportionate amount of capital gain will be exempted from tax. The proportionate amount will be-  Capital gain x  (Cost of new assets / Net consideration of Transfer)

Simplified procedure of remittances
With a view to simplify the procedure for tax deduction at source and to avoid delay and inconvenience in the case of non­resident Indians wishing to remit the sale proceeds of foreign exchange assets, it has been provided that the non-resident Indians can remit such proceeds abroad or credit the same to their Non-resident (External) Account without having to obtain 'No Objection Certificate1 from the Income-tax authorities provided tax @ 10% on the long term capital gains relating to such assets is deducted by the authorised dealer, i.e. the bank concerned.

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