Taxation

The reasonable performance of Indian Economy during the Global Economic Crisis made it a major investment destination. NRIs can play a prominent role in this regard.

NRIs enjoy a special status under present income tax laws. Only the income earned in India is taxable. In other words, income earned from foreign countries such as overseas business income, overseas bank interest incomes are not taxable in India.

Taxes are imposed either directly or indirectly and NRIs need to be aware of them.

There are various taxes like

• Income tax
• Wealth tax
• Property tax
• Gift Tax and
• Taxes on transfers/ mutation / succession etc.

1. Provisions for NRIs under Tax Laws:

Double Tax Avoidance Agreements:

For the benefits of NRIs India has entered into Double Tax Avoidance Agreements with many countries. Taxation of income earned in India is determined on the basis these agreements. Agreements of this nature contain many provisions of low tax rates for incomes like fee of technological services, royalties and dividends. If the tax rate as per the Tax Treaty is lower than the tax rate as per the income tax provisions or for any other reason, the NRI does not wish to be governed by special provisions applicable to NRIs under the domestic tax law, he can opt out by giving a written declaration along with his return of income.

Investments in Indian companies and NRIs:

Debentures of Indian Public companies, shares and deposits of Indian Companies or Government Securities obtained by NRIs will get special tax treatments. The interest income from these investments is taxable at a flat rate of 20% and long-term capital gains on sale of these investments are taxable at a flat rate of 10%.

The sale of these investments is exempt from tax if the sale proceeds are reinvested in similar investments within six months. If the sale proceeds of these assets are partially reinvested, then the exemption is proportionate to the amount re-invested.

 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.

There is a special method of elimination of foreign exchange fluctuation in computing capital gains on the shares/debenture of an Indian company, acquired in foreign currency by nonresidents.

Wealth Tax:  

NRI is not subject to wealth tax with regard to assets held outside India. NRIs returning to India or in a state of loosing NRI status will not subject to wealth tax on assets held outside India if the following two conditions are satisfied:

• He/She has been in India for not more than 729 days during the preceding 7 financial years; or
• He/She has qualified as a non-resident for 9 out of 10 preceding financial years.

Special Exemptions in respect of Investment income of Non-Resident Indians:

Following investment, incomes arising to Non-resident Indians (NRIs) are exempted:-

• 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,
• 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 Laws. For this purpose, National Saving Certificate VI and VII issues are notified.
• 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 to the nominee or survivor of the NRI and to the donee, who gets a gift of such bonds from the NRI.

Therefore, tax incidence can be reduced by proper tax planning. NRIs should obtain a PAN Card in order to submit tax returns.