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Impact of residential status on the taxability of income

Resident Income:Worldwide Income Taxable

NOR(not ordinary resident)
  •  Income received in India 
  • Income accruing or arising in India
  • Income deemed to accrue or arise in India
  •  Income from business or profession controlled wholly or partly in India
Not resident(NR)
  • Income received in India
  • Income accruing or arising in India
  • Income deemed to accrue or arise in India
Special provisions relating to NRs
1. Tax exempt incomes for NRs/NRIs
In following cases investment income is exempt from tax for NRs/NRIs :
  • Interest earned by a person resident outside India from non-resident external (NRE) accounts
  • Interest earned by an NR or NOR from foreign currency (non-resident) (FCNR) accounts
  • Interest on notified securities, bonds, annuity certificates and savings certificates issued by the Central Government 
  • Interest on bonds issued by local authorities and notified by the Central Government in the official gazette 
  • Dividends received from Indian companies and from specified mutual funds 
  • Long-term capital gains from the transfer of equity shares in a company or units of an equity oriented fund provided such transaction has been subjected to securities transaction tax.

2. Computation of capital gains in the case of NRs

  • Any income arising from the transfer of a capital asset is chargeable to tax under capital gains in the year of the transfer. Capital gains are specified as either short term or long term depending on the holding period of the capital assets.
  • Short-term capital gains are included in total income and are taxed at the progressive slab tax rate of an individual, except for short-term capital gains resulting from specified securities traded on a recognized stock exchange in India (and on which Securities Transaction Tax is paid), which are taxed at a fixed rate of 15% plus applicable cess. \
  • Gains by an NR on the sale of assets (i.e., shares and debentures of an Indian company) acquired in foreign currency are computed differently.
  • Capital gains are computed by converting the full value of consideration, expenses incurred in connection with the transfer, and the cost of acquisition in the same foreign currency as was initially utilized for purchase. This conversion takes care of exchange-rate fluctuations.
3. Relevant provisions relating to NRIs and PIOs
  • Further, separate tax provisions have been prescribed for NRIs under the act in respect of long-term capital gains (Para A) or investment income (Para B) derived from foreign exchange assets.
  • A foreign exchange asset is a specified asset acquired by an NRI out of convertible foreign exchange.
  • NRIs also enjoy other benefits such as exemption from filing their return of income and the continuation of benefits under the special tax regime discussed in Paragraphs C & D.
Specified assets are:
  • Shares, debentures and deposits of public companies
  • Shares of private companies
  • Securities notified by the Central Government
  • Other notified assets (no such asset has yet been notified).
A. Income from long-term capital gains
Where long term capital gains arise from transfer of specified assets, the applicable tax rate will be 10% (plus applicable cess) on net capital gains.

From gains on such transfers, only expenses incurred in connection with the transfer are allowed as a
deduction to determine net capital gain. The valuation under these provisions is not in foreign currency.
Therefore, exchange-rate fluctuations are not considered.

Capital gains arising on the transfer of specified assets are completely exempt from tax if the following
conditions are fulfilled:
  •  The asset transferred must be long-term capital assets
  • Net consideration must be invested in specified assets
  • Investment should be made within six months of the transfer
  • Where only a portion of net consideration is reinvested, proportionate exemption is allowed
  • New asset must be held for at least three years.
B. Investment income
No deductions are permitted from income earned on investments. However, this income is taxed at a
preferential rate of tax of 20% (plus applicable cess), as against the maximum marginal rate of 30% (plus
applicable cess).

C. Exemption from filing return of income
The due date for filing both income tax and wealth tax returns is 31 July, i.e., within four months of the end
of the fiscal year (31 March).

NRIs have the option of not filing a tax return if:
  • Their total income consists only of investment income and/or long-term capital gains 
  • Tax has been deducted at source on such income.

D. Continuation of special benefits
These provisions shall continue to apply to investment income even after NRIs become resident, provided
they furnish a declaration along with their tax returns.

NRIs may completely opt out of the special provisions mentioned above by filing a written declaration along
with their tax returns.

  • Special benefits relating to global depository receipts (GDRs)
There are special benefits relating to income from GDRs. The provisions apply to:
  • Interest and dividends 
  • Long-term capital gains on bonds or shares issued abroad by Indian companies and purchased inforeign currency.
The tax rate on gross income, plus applicable cess, is 10%. Gross income means that no deduction is
allowed for:
  • Business expenses
  • Expenses on transfer
  • Other expenses
  • Deduction on account of specified payments or income.
Transfers outside India between NRIs, inter se, are not subject to capital gains tax in India.
How to check residential status read here

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