Income Tax for NRI – Taxable income, Deductions and Exemptions

Chapter XII-A of the Income Tax Act was inserted by Finance Act 1983 with an object to provide concessional rate of taxation to encourage them to invest their foreign exchange earnings in assets and source of Income in India. It deals with the situations where the gross total income of a non-residents includes income from investment or income by way of long-term capital gain or both.  The following sections are covered under this chapter:

Section 115C: 

This is the definition section of this chapter starts with “unless the context otherwise requires”. This section defines the term which are used in this chapter.

Section 115D:

This section covers the situation or transaction in which this section can be invoked. It also says that no deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non-resident Indian. 

Section 115E: 

This section is about rate of tax which is to be applied on the  gross total income of a non-resident Indian when the total income includes any income from Investment or income from long term capital gain of an assets other than a specified assets; or income by way of long term capital gains, the tax payable by him shall be at the rate of 20% if the income is from Long Term Capital Assets other than a specified assets and at the rate of 10% if the income is by way of long term capital gain from specified assets. 

Section 115F: 

This is an exemption clause when the capital gain on transfer of long tern capital gain on transfer of foreign exchange assets are not charged to tax. This section deals with the situation where any long term capital gain arises from the transfer of foreign exchange assets and the assessee has within a period of six months after the date of such transfer invested the whole or any part of the net consideration in any specified assets or in any saving certificates referred to in Sec10(4B) of the Income Tax Act. 

Section 115G: 

It gives the relief to a non-resident Indian from filing of return. It shall not be necessary for a non-resident Indian to furnish u/s 139(1) a return of his income if, his total income in respect of which he is assessable under this Act during the previous year consisted only of the investment income or income from long term capital gain or both and the tax deductible under the provision of chapter XVII-B has been deducted from such income. 

Section 115H: 

It covers the situation when the benefit under this chapter is to be available even after the assessee becomes resident.  Where a non-resident Indian in any previous year becomes resident, he may furnish to the AO a declaration in writing along with his return of Income u/s 139. The provision of this chapter shall continue to apply to him in relation to the investment income derived from any foreign exchange asset being an asset of the nature referred to in sec 115C and if he does so, the provisions of this chapter shall continue to apply to him in relation to such income for that assessment year and for every subsequent assessment year until the transfer or conversion into money of such assets.

Section 115I: 

It says that applicability of Chapter XII-A is optional and a non-resident Indian may elect not be governed by the provisions of this chapter for any assessment year by furnishing his return of income for that assessment year u/s 139 declaring therein that the provision of this chapter shall not apply to him for that assessment year and his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act. The important term used in this chapter Non-resident Indian. It is defined in Sec 115C(e) that an individual, being a citizen of India or a person of Indian Origin who is not a resident.  The expression investment income means any income derived from a foreign exchange asset. Foreign exchange assets mean any specified assets acquired or purchased with or subscribed to in convertible foreign exchange. 

The question raised before the AAR in the case of V. Ravi Narayanan that:

1. whether the NRO deposit acquired with convertible foreign exchange can be treated as a foreign exchange asset under section 115C; 2. whether the interest on such NRO deposit can be treated as investment income under section 115C and is taxable at 20 per cent as per section 115E and; 3. at what rate tax is required to be deducted at source by the person responsible for paying such interest. The AAR ruled that, the NRO deposit to be made by the applicant with convertible foreign exchange in a banking company, which is not a private company, shall be treated as ‘foreign exchange asset’ under clause (b) of section 115C. The income by way of interest earned from the said NRO deposit shall be treated as ‘investment income’ under clause (c) of section 115C and shall be liable to be taxed at the rate of 20 per cent under section 115E. The banks paying interest on the NRO deposit of the applicant are required to deduct tax at source at the rate of 20 per cent.  Another interesting question raised before AAR in the case of Dr. Virindra Kumar Raina that whether during the period of applicant’s return to India for an indefinite period and taking up employment in India, the applicant can deposit in NRO account from his foreign currency (US$) till he becomes Resident? The AAR ruled that this will depend on the then prevailing regulations/instructions of RBI.     

Author: CA Sachin Sinha