Taxes for Non Resident Indians (NRI)

The subject of taxes usually arouses different sentiments for readers. For some it means complete clarity of what is due to the government; for others it can be very confusing. Taxation laws are very complex and it becomes all the more difficult if you are a Non Resident Indian.

The good and the ugly of taxes payable by NRIs

The good part is that you can pay taxes on your Indian income in the U.S. India and the United States has a tax treaty for which NRIs get credit in U.S. for tax paid in India. Under some circumstances, it is not necessary to pay taxes in both the countries. This is called the Double Tax Avoidance Agreements. This is to protect the taxpayers from paying double taxes.
Another good part is that if the income of the non-residents governed by Section 115A and 11 SAC consists only of

  • the income from interest,
  • dividend, or,
  • income from units covered by these sections
and the tax has been deducted at source, the non-resident Indian is not required to file the return of income. The rule is simple: if the tax is deducted at source, you do not have to file for taxes!

That being said, the tough part is to assess what part of your income is taxable in India. In this article the taxes on investment income for interest and dividend for NRIs is discussed in detail.

Income of NRIs

According to the Chapter II of the Income Tax Act, a person who is non-resident (in India and lives elsewhere) is liable to tax on that income only which is earned by him in India. Many people would argue that when they are not living in India why does a tax liability arise. Remember that income is considered earned in India in the following two conditions -

  • It is directly or indirectly received in India; or
  • It accrues in India or the law construes it as having accrued in India.

Some examples of income earned in India are given below:

  • income from business as a result of any business connection in India (refer Chapter X)
  • income from salaries if the services are rendered in India. If you are on a project in U.S. earning salary for the rest period/leaves, the salary will be regarded as earned in India and is taxable
  • income from dividend paid by an Indian company even if you get paid outside India
  • income from property in India, for example, rent from an apartment you own in India
  • income from any asset or source if such asset or source is in India;

Income from Interest for NRIs

According to the Income Tax Department in India, there is a specific treatment of income arising from interest, dividend, rents or leasing income, capital gains, etc for NRIs. Interest income of certain non-residents is charged to tax at a fixed rate on the gross receipts without deduction of any expenses incurred to earn this income or for that matter, a deduction referred to in Chapter V. The tax liability varies for the tax payer depending on whether he is individual, company or any other person. The non-resident persons and the rate of tax on interest income are:-

(i) Foreign companies in respect 20% of interest received from the Government or Indian concern on borrowing in foreign currency [Sec. 115A].

20%

(ii) Non-corporate non-residents in 20% respect of interest received from the Government or Indian concern on borrowing in foreign currency [Sec. 115A].

20%

(iii) Non-residents in respect of 10% interest on Bonds of an Indian company if the Bonds are issued in accordance with scheme notified by the Central Government and the same are purchased by them in foreign currency or acquired as a result of demerger or amalgamation. Foreign currency convertible Bonds and ordinary shares (Through Depository Receipt Mechanism) Scheme, 1993 is the one notified for this purpose [Sec. 115AC].

10%

iv) Notified Foreign institutional 20% investors in respect of income from securities listed in a Recognized Stock Exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 [Sec. 115 AD]

20%

Exemptions on Interest Income for NRIs

According to the information on Income Tax Department of India, the following exemptions apply:

  • Interest on the notified securities and interest as well as premium on redemption on any notified bonds issued by the Central Government is exempt. For this purpose 4%% National Defence Loan, 1968 and 4 3/4% National Defence Loan, 1972 have been notified as exempt [Section 10(4)].
  • Interest on deposits in the Non-Resident (Non-repatriable) Rupees Deposits Scheme.
  • Interest on deposits in N.R. (external) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973. This exemption is available to a person who is a person resident outside India within the meaning of Sec. 2(q) of the Foreign Exchange Regulation Act, 1973. This exemption is also available to one who has been permitted by the Reserve Bank of India to maintain such account [Sec.1094)(ii)]
  • Interest income of a bank incorporated outside India authorized to perform central banking function on any deposit made by it with any scheduled bank if such deposit is approved by the Reserve Bank of India [Sec. 10(15)(iii)(a).]
  • Interest income in respect of moneys borrowed outside India if the interest is payable by-
    • Government or a local authority [Sec.10(15)(iv)(a)].
    • Industrial undertakings in India on moneys borrowed by them under a loan agreement entered into with any financial institution in a foreign country which is approved by the Central Government. [Sec. 10(15)(iv)(b)].
    • Industrial undertakings in India on any moneys borrowed or debt incurred by them in a foreign country in respect of purchases outside India of raw materials or components or capital plant and machinery to the extent to which the interest is calculated at the rate approved by the Central Government. For this purpose, the purchase of capital plant and machinery would include its purchase under a hire purchase agreement or a lease agreement with an option to purchase such plant and machinery [Sec. 10(1 5)(iv)(c)].
    • Industrial undertakings in India on any moneys borrowed in foreign currency under a loan agreement approved by the Central Government to the extent to which the interest does not exceed the amount of interest calculated at the rate approved by the Central Government [Sec.10(15)(iv)(f)
    • Industrial Finance Corporation of India or the Industrial Development Bank of India or the Export-Import Bank of India or the National Housing Bank or the Small Industries Development bank of India or the Industrial Credit and Investment Corporation of India to the extent to which the interest does not exceed the amount of interest calculated at the rate approved by the Central Government [Sec. 10(15)(iv)(d)].
    • Any other financial institution established in India or a banking company on any moneys borrowed by them under a loan agreement approved by the Central Government where the moneys are borrowed either for the purpose of advancing loans to industrial undertakings in India for purchase outside India of raw materials or capital plant and machinery or for the purpose of importing any goods which the Central Government may consider necessary to import in the pubic interest. The exemption is, however, allow able to the extent to which the interest does not exceed the amount of interest calculated at the rate approved by the Central Government (Sec. 10 (15) (iv) (e)
    • Industrial undertaking on money borrowed in foreign currency under a loan agreement approved by Central Government having regard to the need for industrial development in India. The exemption is to the extent of interest calculated at the approved rate [Sec. 10(15)(iv)(f)].
    • A Scheduled bank on deposits in foreign currency if such deposits are approved by the Reserve bank [Sec. 10(15)(iv)(fa)].
    • An Indian public company carrying on the business of providing long-term finance for construction or purchase of house in India for residential purposes on any moneys borrowed by it in foreign currency under a loan agreement approved by the Central Government. The exemption is limited to the extent to which the interest does not exceed the amount of the interest calculated at the rate approved by the Central Government. It is necessary that such a company is eligible for deduction under Section 36(1)(viii) of the Act [Sec. 10(15)(iv)(g)].

NRI taxes on dividend earned/income from units

  • For the dividend declared, distributed or paid by an Indian company that is accrued to non residents, there are provisions of taxation of such incomes.
  • Gross Receipts
    There is usually a flat rate on gross receipts (which means no expenses incurred for earning such income are deducted).
  • T.D. S.
    Please check if the company/person responsible for making any payment (except dividend declared after 1.6.97) to you a non-resident individual or a foreign company should deduct tax at source at the prescribed rate at the time of credit of such income to the account of the payee or the deductions are to be made at the time of payment only.
    This rate for tax deducted at source (T.D.S.) is usually the rate specified in the Finance Act of the relevant year or the rate specified in the avoidance of double tax agreement, whichever is beneficial to the non- resident taxpayer.
  • Examples
    A non-Corporate non-resident will have to pay 20% tax after the assessment year 1995-96 in respect of dividend or income from Units of a notified mutual fund or the Unit Trust of India purchased in Foreign currency [Sec. 115A]
    For dividend from shares of an Indian Company which are issued in accordance with a scheme framed and notified by the Central government and which are purchased by a Non Indian resident in foreign currency the taxpayer will have to pay 10%

For more information on Double Tax Avoidance Agreements, please visit
http://www.incometaxindia.gov.in/publications/9_Income_Tax_For_NRI/Chapter012.asp

For more details on the Income Tax Department of India and rules related to NRIs please visit
http://www.incometaxindia.gov.in/publications/9_Income_Tax_For_NRI/toc.asp