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

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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)