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Indian Income Tax Made Easy! Basic Definitions and Rules for NRIs (Part 2)

This article is made possible by TaxMunshi, an online provider of Indian Income Tax Returns (ITR) preparation and filing services. Click here to learn more.

Calculating the NRI income
To simplify the calculation of the net income of a non-resident from her/his gross receipts in India, the law provides for taxation of the income of the non-resident on ‘Gross income basis’, which means that the tax liability is determined on the basis of gross receipts without going into the question of expenses incurred in earning those receipts. Such ‘Gross receipt basis’ taxation operates in two ways:

By laying down the rate of tax to be applied on gross receipts
The rates are determined at a figure lower than the general rate of tax applicable to total income as it takes account of the possible expenses in earning the income. Such provisions are:-

i. Tax on dividend (other than dividend from domestic companies), interest, royalty, fee for technical services and income from Units
ii. Tax on income and capital gain in respect thereto from units purchased in foreign currency by off shore funds
iii. Income and capital gain in respect thereto from Bonds and shares purchased in foreign currency or acquired in resulting or amalgamated company as a result of de-merger or amalgamation
iv. Tax on income other than dividend of Foreign Institutional Investors from Securities & Capital gains arising from their transfer
v. Income of sportsman or Sports association

By laying down a percentage to be applied on gross receipts to determine the net income
The tax is then calculated at the normal rate of tax on such presumptive income. Such provisions are:-
i. Profits of shipping business
ii. Profits of business of providing services etc. to be used in the business of prospecting, exploration or production of mineral oils
iii. Profits from operation of aircraft
iv. Profit from business of civil construction etc. in certain turnkey power projects

The scheme of Advance Ruling has been introduced in Chapter XIX-B in the Income Tax Act, which enables non-residents entering into a transaction with residents or non-residents to obtain, in advance, a binding ruling from the Authority for Advance Rulings on issues which could arise in determining their tax liabilities. Such Advance Ruling helps non-residents in planning their income tax affairs well in advance, apart from avoiding tedious and expensive litigation.

 

Tax Exemptions from Property Investments

Income from House Property
Income from House Property is the annual value of House Property, of which the assessee is the owner. House property consists of buildings or land. The land may be in the form of a compound housing the building. Any rent received from standalone vacant plot is not assessable as “Income from House Property”. One self-occupied House Property or part of such property owned by an individual and used for personal use, but not let out, in the previous year, will not be taxable. From the assessment year 2002-03, Income from House property is classified as: Let out Property (L.O.P.), and Self Occupied Property (S.O.P).

The following two deductions are available from the income under the head “Income from house property” under the Income tax Act, 1961.

Standard Deduction: 30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.

Interest on Borrowed capital: Interest on borrowed capital is permitted as deduction if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.
OR
When more than one property is occupied for own residential purposes: Where the person has occupied more than one house for her/his own residential purposes, only one house (according to her/his choice) is treated, as self-occupied and all other houses will be “deemed to be let out”.

 

Tax Exemptions from Other Assets and Investments

Dividend Income All dividends, received from domestic companies are exempt from tax under the I.T. Act, 1961. Income received in respect of units of specified Mutual Funds and the Unit Trust of India is exempt from tax.

Interest Income
Any income arising on a deposit with a Bank or any financial institution will be treated as Interest income and will be chargeable under the head “Income from other Sources”. Interest income may be treated as investment income and chargeable at a special rate under certain specified situations.

Capital gains
A ‘gain’ or the excess of ‘sale price over’ cost that arises on transfer of a capital asset is taxed under the head ‘Capital Gains’.

         A capital asset held for 36 months or more (12 months or more for certain shares or units) is treated as a long-term capital asset, and gain resulting from its transfer is called long-term capital gain subject to tax at the rate of 20% (10% in certain cases) plus surcharge, if applicable, and education cess.

         Long-term capital gains arising on sale of equity shares in company or units of equity oriented fund are not chargeable to tax Short-term Capital gains arising on sale of equity shares in company or units of equity-oriented funds are chargeable to tax @ 10%.

         Capital gain amount received on the transfer of bonds or Global Depository Receipts made outside India by a non-resident to another non resident will not be liable to Capital gain tax in India.

         Short-term Capital gains arising on sale of equity shares in company or units of equity-oriented funds are chargeable to tax @ 10%.

Gifts

Any sum of money received, in excess of Rs.25, 000/- from a person would be taxed in the hands of the recipient. However, gifts received on the occasion of the marriage or from a relative or under a will or by way of inheritance or in contemplation of death of the payer, would not be subject to tax.

 

Source: TaxMunshi's Desk (Blog)


Indian Income Tax Made Easy! Basic Definitions and Rules for NRIs (Part 1)

This article is made possible by TaxMunshi, an online provider of Indian Income Tax Returns (ITR) preparation and filing services. Click here to learn more.

Income tax is a charge on Income earned in a financial year which starts on 1st April of a calendar year and ends on 31st March of the following calendar year. Under the Indian Income-tax Act, the word “income”, in addition to the common person’s understanding of the term, also refers to certain items of receipts and accruals which ordinarily would not have been treated as income in common parlance. Section 14 classifies the various income sources under the following categories:

1. Salary
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources

 

Income by location is classified as

Indian Income is that income which accrues to an assessee in the taxable territories of India.

World Income refers to income which accrues, arises or is being received outside India

NRIs are taxed only on their Indian income. Income earned outside India which is later remitted to India is not taxable in India. However, pension directly remitted to India by overseas employers after the employee’s permanent return to India would be taxable. Section 9 deals with income deemed to accrue or arise in India which refers to income from

  • Business connections in India or
  • From any property or asset in India
  • From a transfer of capital asset in India.
  • Any other source of income in India
  •  Income from salary is deemed to accrue or arise in India
  • If it is earned in India.
  • If it is income from services rendered in India
  • Salary received abroad by Indian nationals from Government of India for services rendered outside India
  • However, allowances and perquisites paid abroad are fully exempt under Section 10(7).

The following incomes which are payable outside India are deemed to arise in India:-

  • Dividend paid by an Indian company outside India.
  • Interest payable on money borrowed and brought into India.
  • Royalty and technical service fees payable in respect of any technical services used for business or profession in India. However, royalty and fees for technical services is exempt, where such royalty / fees earned is in respect of computer software supplied by a Non-resident manufacturer along with the computer or computer based equipment under an approved scheme.

Previous year and Assessment year
Income-tax is charged in the financial year following the year in which the income is earned. Accordingly, the financial year in which income is earned is known as “Previous year” and the financial year in which the charge on that income is due is known as “Assessment year”. It means income earned by any person from 1-4-2007 to 31-3-2008 for which the previous year is 2007-2008 will be taxed in the following financial year which is known as assessment year 2008-2009.

 

Who is an Assessee?
Under the Indian Income Tax Act, the entity on which Income Tax is levied is called an “Assessee”. An “assessee” is a “person” by whom any tax or any other sum ofmoney (such as interest, penalty, etc.) is payable under the Income Tax Act or in respect of whom any proceeding under the Act has been taken for the assessment of her/his income or loss. It also includes every representative assessee deemed to be an assessee under Chapter 15 of the Income Tax Act, 1961.

 

A “Person” as per the IT Act, 1961
As per Section 2(31) of the I.T. Act a “person” refers not only to an individual but also corporate bodies like companies or non-corporate bodies such as Partnership firms, Associations, societies, local authorities, civic or town planning bodies and even artificial entities like temple, deities etc. It also includes the Hindu Undivided Family (H.U.F.), a status enjoyed by Hindus in India who follow the joint family system owning joint property.

 

Residential Status
The residential status is crucial in determining the taxes an assessee is required to pay. Section 6 of the Income Tax Act defines the following categories liable to pay tax in India:

         Non-Resident (NRI)

         Resident

         Resident, but not ordinarily resident (RNOR)

NRIs and RNORs are liable to pay tax only on their “Indian income” while tax payers who are resident in India as per Income Tax Act are taxed on their “worldincome”.

The NRI, as per the IT Act, 1961
The definition of Non-Resident under FEMA is different from that given in the Income Tax Act. Chapter XI of the Act defines a non-resident Indian as an individual, being a citizen of India or a person of Indian origin, who is not a resident. A person is of Indian origin if (s)heor either of her/his Indian parents or any of her/his grand parents was born in undivided India. To avail of tax sops extended to NRIs, an individual must satisfy the following criteria

  • A person who has been in India for 60 days or more during a financial year and 365 days or more during the preceding four financial years qualifies as a ‘Resident’ of India. This has been relaxed and can be extended to 182 days. Not meeting this criterion qualifies the individual for a “non-resident” status.
  • NRIs based outside India can continue to enjoy non-resident status in India if their presence in India is more than 60 days but less than 182 days, even if their stay in India during the past four financial years is 365 days or more
  • Having been deputed overseas for over 6 months also qualifies an individual for NRI status.
  • The relaxation to 182 days applies to:
    • Indian crew members sailing overseas on Indian ships – their stay abroad is treated as employment outside India
    • In the case of Indian citizens as well as in the case of “Persons of Indian Origin” who are settled abroad but visit India for personal reasons.

The concession of extended stay is available only to Indian citizens or to “persons of Indian origin”. A “Person of Indian origin” is a person who is not an Indian citizen, but was born, or either of her/his parents or grandparents was born in India.

Any other company or Association of Persons is treated as non-resident when the control and management of its affairs is situated throughout the year wholly outside India.

It follows that in cases of non-Individual categories of persons, it is the control and management that determines whether that person is Non-resident or otherwise. If the control and management is in India, the status is Resident, if outside India, it is non-resident.

Income Tax Criteria for RNOR (Resident but Not Ordinarily Resident)

If a NRI comes back to India and loses her/his NRI status, (s)he will not be subject to tax in India on her/his world-wide income, for 2 years, if either of the following two conditions are satisfied:

1. (S)He has been in India for not more than 729 days during the preceding seven financial years; or
2. (S)He has qualified as a non-resident for nine out of 10 preceding financial years.

Similarly, if in any particular financial year, her/his stay in India exceeds 182 days and he loses her/his NRI status for that year, her/his income outside India will still not be taxable if any of the above two conditions are satisfied and her/his tax status will be that of a ‘Not Ordinarily Resident’ Indian.

Chapters VII to X of the Income Tax Act list the exemptions granted to non-resident Indians on their income in India.

 

Source: TaxMunshi's Desk (Blog)