NRI Taxation

This chapter has been divided in to four segments. In the first segment the rule of residential status has

been discussed i.e. how residential status (residential, non resident) is judged.

In the second segment it is discussed that how taxability of India income & foreign income differs based on residential status.

In the third segment, difference between Indian income & foreign income has been discussed.

In the fourth segment ADT agreement has been discussed.

Understanding ‘Residential Status’

Residential status means a status of a ‘person’ whether the person is Indian resident or non resident for that particular previous year for tax purpose. As it is clear that it is decided for every person & residential status may be different for different previous year.

Residential status is something different from citizenship.

Citizenship rights are governed by constitution of India, whereas residential status is decided as per rule of income tax act’ 1961.

Citizenship doesn’t vary every year whereas residential status is checked every year as it may vary every year.

An Indian citizen may be non resident in India or a foreign citizen can be Indian resident as it is being decided by place & time of residence in India.

Understanding ‘Residential Status’

individual

Resident Non-resident

Ordinary residentNon-ordinary

resident

Understanding ‘Residential Status’

An individual can be resident or non resident depending upon the basic condition. If an individual satisfies at least one of the two basic condition then the said individual is said to be resident in India otherwise Non resident. If an individual is said to be resident as per the basic condition then it is further checked whether he/she is ordinary resident or non ordinary resident based on additional condition. If the said individual satisfies both the additional condition then he/she is said to be ordinary resident other wise non ordinary resident.

Understanding ‘Residential Status’

Basic conditions: Basic condition no. 1: If an individual resides in India for at least 182

days during the relevant previous year.

Basic condition no. 2: If an individual resides in India for at least 60 days during the relevant previous year & 365 days during the 4 years immediately preceding the relevant previous year.

Exception to the basic conditions: Exception no. 1: From 1990-91 onwards if an Indian citizen leaves India

during the relevant previous year for the purpose of employment outside India or as member of the crew of Indian ship, then in the basic condition 2, 60 days will be replaced by 182 days

Exception no.2: From 1995-96 onwards if an Indian citizen or person of Indian origin who comes on visit to India, then in the basic condition no 2, 60days will be replaced by 182 days. (Person of Indian origin means if the assessee or either of his parents or either of his grand parents is born in undivided India.)

Understanding ‘Residential Status’

Additional Conditions: Additional condition.1: If assessee has been ‘resident’

in India ( as per basic conditions) for at least 2 years out of 10 previous years immediately preceding the relevant previous year.

Additional condition 2: If an assessee has been in India for 730 days or more in 7 years immediately preceding the relevant previous year.

Indian extends up to territorial waters. Territorial waters of India mean water extending up to 12 nautical miles in to the sea from the coast line. So as soon as in individual crosses into the Indian territorial waters it is said that he/she is India.

Taxability of Indian income & foreign income based on the residential status

Income Ordy resident Non ord Non residentresident

Indian Income Taxable Taxable Taxable

Foreign IncomeIf business or professionsetup in India or controlled from India

Taxable Taxable Not Taxable Otherwise

Taxable Non-Taxable Not Taxable

Definition of Indian Income & foreign income

Indian Income:

An income either accrues or arises in India

Or received in India

Or both accrue & received in India.Or Income either deemed to accrue or arise India

Or deemed to received in India

Or both deemed to accrue or arise in India or received in India.

Definition of Indian Income & foreign income

Income deemed to accrue or arise in India. Income from a business connection in India

Transaction through a branch in India. Transaction through an agent in India. Transaction through any subsidiary company in India. Transaction through the BPO.

Income from any property, asset, source of income in India.

Income from transfer of capital asset in India. Income from salary if services rendered in India Dividend paid by Indian company Any interest, royalty, technical fee paid by

government of India.

Definition of Indian Income & foreign income

Income deemed to receive in India. Annual accretion to the balance of provident

fund in India. Contribution by the central govt. in the

pension fund of employee Recovery against any deduction earlier

allowed from the income. Recovery from the bad debts.

ADT agreement

ADT means ‘avoidance of double taxation’. If a person is resident in India then the

income earned in India or outside India is taxable in India. Moreover the same income may be taxable in the country where it is earned. If that is so the income earned outside India then it is taxed twice (in India & outside India)

ADT agreement

To avoid the double taxation govt of India has ADT agreement with many countries. So relief is given as per the agreement between two countries.

If there is no ADT agreement between two countries then benefit is given arbitrarily by govt. of India.

ADT agreement

If there is no ADT agreement then relief is given by the following formula

Step1-Calculate the average rate of tax outside India.

Step-2 Add Indian income with foreign income and calculate tax & rate of tax on such income.

Relief is given on the foreign income at rate lower of the step-1 & step-2

Thank you