Guide to .. Tax Management ,Tax Planning and Tax Saving
 

Deductions Allowed to NRIs in the Computation of Total Income and Tax Payable

  1. Tax Benefit Regarding Life Insurance Premium, PPF Contributions, Nscs, Tuition Fees, etc.

  2. Deduction For Donations To Certain Funds And Charitable Institutions

  3. Deduction In Respect Of Profits And Gains From A New Industrial Undertaking Or Infrastructural Facility

  4. Five-Year Tax Holiday To Hospitals At Certain Locations Sec. 80-1B (IIC)

  5. Tax Holiday To Enterprises Providing Telecommunication Services, Industrial Parks, New Hotels And Having Commercial Production Of Mineral Oil

  6. Five Year Tax Holiday For New Industrial Undertakings In Industrially Backward Areas & Districts

  7. Liberalisation Of Tax Holiday Provision For Infrastructure, Telecom Services, Power Generation, Special Economic Zones, Industrial Parks, etc. [ Section 80-IA]

  8. Ten Year Tax Holiday In Respect Of Certain Undertakings In Himachal Pradesh, Sikkim, Uttaranchal And N.E. States — Section 80-IC

  9. Five-Year Tax Holiday For Hotels In Districts Having A World Heritage Site — Sec. 801D

  10. Tax Holiday For Hotel And Convention Centres In NCT Of Delhi And Other Areas — Section 801D

  11. Deduction’ In Respect Of Medical Insurance Premia — Section 80D

  12. Additional Deduction For Health Insurance Premium Paid For Parents — Section 80D

  13. Deduction Of Repayment Of Loan For Higher Studies — Section 80E

  14. Deduction In Respect Of Certain Undertakings In North Eastern States

  15. Other Deductions Like Depreciation, Etc. To Nonresident Indians

1.Tax Benefit Regarding Life Insurance Premium, PPF Contributions, Nscs, Tuition Fees, etc.

A deduction as per Section 80C from income upto Rs. 1,50,000 for payments made by an Individual or Hindu Undivided Family in respect of any one or more of the following [without any sub-limit for any Investment] is allowed:

  1. Payment for Life Insurance Premium.

  2. Payment for Deferred Annuity Plan.

  3. Deferred Annuity payable by Government.

  4. Contribution to Public Provident Fund.

  5. Contribution to Provident Fund set upby Central Government.

  6. Contribution to Recognized Provident Fund.

  7. Contribution to Recognized Superannuation Fund.

  8. Subscription to any security or deposit notified by Government.

  9. Subscription to Savings Certificates.

  10. Subscription for Unit-Linked Insurance Plan, 1971.

  11. Contribution for Unit Linked Insurance Plan of LIC Mutual Fund.

  12. Payment for Annuity Plan of LIC or any other insurer.

  13. Subscription to units of Notified Mutual Funds.

  14. Contribution to Notified Pension Fund of Mutual Fund.

  15. Pension fund set up by National Housing Bank.

  16. Subscription to Deposit Scheme of Public Sector Company engaged in providing long-term finance for house.

  17. Tuition fees of two children in India.

  18. Payment of installment for self-financing for a residential property or repayment of loan.

  19. Subscription to equity shares or debentures as approved (for infrastructure).

  20. Subscription to any units of Mutual Fund as approved by the Central Board of Direct Taxes.

  21. Five-year Bank Fixed Deposit with conditions (from A.Y. 2007-08).

  22. Notified Rural Bonds issued by NABARD

  23. Account under the Senior Citizens Saving Scheme, 2004.

  24. Five-year time deposit in Post Office.

NRI Tax Planning & Tax Saving

2. Deduction For Donations To Certain Funds And Charitable Institutions

Under the provisions of Section 80G. a non-resident Indian, like any other taxpayer, is entitled to a deduction of the qualifying amount of donation in computing his total income. The important Funds which qualify for such deduction are Jawaharlal Nehru Memorial Fund or the Prime Minister’s Relief Fund or the Prime Minister’s National Relief Fund or the Indira Gandhi Memorial Trust, etc or any other Fund or any institution exempt under Section 80G. Contribution to the Prime Minister’s National Relief Fund, the P.M. Armenia Earthquake Relief Fund, the Africa (Public Contributions — India), a University or any approved educational institution of national eminence, the Zila Saksharta Samiti, the National Blood Transfusion Council, etc., N.F. for Communal Harmony, National Illness Assistance Fund, C.M./L.G. Relief Fund, National Sports Fund (from A.Y. 1999-2000) contribution to the Government, certain approved institutions, etc., for family planning and the Fund for Technology Development and application set up by the Central Government (from the A.Y. 2000-2001), donations for Kargil jawans (from the A.Y. 2000-2001) and the National Trust for Welfare of persons with Autism, Cerebral Palsy Mental Retardation and Multiple Disabilities (from the A.Y. 2002- 2003) is entitled to deduction @ 100% of the donation. In all other cases the rate of deduction is 50% of the donation. As regards the maximum eligible deduction there is no limit regarding donation to the National Defence Fund or Jawaharlal Nehru Memorial Fund or the Prime Minister’s National Relief Fund or the Prime Minister’s Drought Relief Fund or the Prime Minister’s Armenia Earthquake Relief Fund or the Africa (Public Contributions-India) Fund or the National Children’s Fund or the Indira Gandhi Memorial frust or the Rajiv Gandhi Foundation or the National Foundation for Communal Harmony or National Illness Assistance Fund or a University or an approved educational institution or any Zila Saksharta Samiti or the National Blood Transfusion Council or any State Blood Transfusion Council or any fund set up by a State Govt. to provide medical relief to the poor or to Army, Naval or Air Force Welfare Funds. In respect of all other donations like donation to a charitable institution exempt under Section 80G, the maximum amount of donation eligible for deduction is 10% of the gross total income (as reduced by any other sum on which income tax is not payable under the Income Tax Act and any sum in respect of which the assessee is entitled to deduction under Chapter VI-A of the I.T. Act, as discussed in this Session), whichever is less. No deduction is allowed on donation in kind.

3. Deduction In Respect Of Profits And Gains From A New Industrial Undertaking Or Infrastructural Facility

Under the provisions of Section 80-IB a partial tax holiday is allowed in respect of the profits and gains of a new industrial undertaking set up on or after 1.4.1991 and before 1.4.1995, or an approved hotel which starts functioning from that date. In the case of companies, 30% of the profits derived from new industrial undertakings, etc., is deductible from the gross total income for a period of ten years; in the case of other assessees (including non-residents) 25% of such profits will be deductible for a like period. The benefit of “tax holiday” is admissible to all small-scale industrial undertakings irrespective of the type of their manufacturing activity. An industrial undertaking is regarded as a small-scale industrial undertaking if the aggregate value of the plant and machinery installed, on the last day of the previous year, for the purpose of the business of the undertaking does not exceed 60 laths. In the case of other industrial undertakings it is allowed only if the new industrial undertaking is not engaged in the production of articles listed in the 11th schedule to the Income Tax Act. There are certain other requirements for the eligibility for this deduction.

A 10-year tax holiday for any enterprise which builds, maintains or operates any infrastructure facility such as roads, highways, express ways, water treatment system, solid waste management, new bridges, airports, inland waterways and inland ports and rapid rail transport systems on BOT or BOOT or similar other basis on or after 1.4.1995 would be allowed under Section 801A. Likewise, SSI industrial units, commencing production on or after 1.4.95 and any time before 31.3.2002 would also be allowed partial tax holiday of 25% or 30% for 10 years out of an initial period of 15 years.

A five-year tax holiday under Section 80-lB of the Income Tax Act, 1961, to approved companies engaged in scientific and industrial research and development activities on commercial lines is allowed. This incentive shall be available to any company that has as its main objective, activities in the areas of scientific and industrial research and development and which has been accorded approval by the prescribed authority, namely, Secretary, Department of Scientific and Industrial Research. This tax holiday shall be available to any company, whether new or existing, which is accorded approval by the aforesaid prescribed authority at any time before 1.4.2007. The 100% deduction for a five- year period, shall commence from the assessment year relevant to the previous year in which the approval by the prescribed authority is accorded to such a company.

The benefit of tax holiday under Section 80-TA, to other infrastructure facilities like water supply projects, irrigation systems, sanitation and sewerage systems has also been extended.

The Finance Act, 2002 had, with effect from the A.Y. 2003-2004, provided the grant of deduction under Section 80-IA(2) to an undertaking which develops and operates or maintains and operates a Special Economic Zone. Besides, separate audit for undertakings claiming deduction under Sections 80-IA and 80-lB has also been made mandatory for companies and co-operative societies.

The deduction allowed at 100% of the profits for ten assessment years of a scientific research and development company would be so allowed even where the approval by the prescribed authority is received before 31.3.2012.

4. Five-Year Tax Holiday To Hospitals At Certain Locations Sec. 80-1B (IIC)

The Finance Act 2008 has, w.e.f. the A.Y. 2009-20 10 made an amendment in Section 80-lB by inserting a new clause (11C) therein. The tax benefit of 5-year tax holiday would be extended to hospitals located anywhere in India otherwise than the excluded area, if the hospital is constructed and starts functioning between 1.4.2008 and 31.3.2013. It will be for five consecutive assessment years beginning from the initial assessment year. The excluded area would mean an area comprising the urban agglomeration of Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore and Ahmedabad, the districts of Faridabad, Gurgaon, Ghaziabad, Gautam Budh Nagar and Gandhinagar and the city of Secunderabad.

5. Tax Holiday To Enterprises Providing Telecommunication Services, Industrial Parks, New Hotels And Having Commercial Production Of Mineral Oil

A new provision has been made to provide for 100% deduction from the profits and gains of an assessee engaged in the business of providing tele-communication services for the initial five assessment years. A deduction of 25% (30% in the case of companies) from such profits and gains will be allowed for a further period of five years. Thus, the total period of tax holiday will be 10 years. This deduction will be allowed to an undertaking which begins to provide the telecommunication services at any time during the period beginning on 1.4.1995 and ending on 31st March, 2005.
Another amendment relates to the extension of the tax holiday to industrial parks notified for this purpose, in accordance with any scheme framed by the Central Government. Vide Notification No. S.O. 193(E) dated 30.3.1999 an Industrial Park/Industrial Model Town Scheme has been notified. This tax holiday will encourage investments in industrial infrastructure. Those industrial parks which start operating during the period beginning on 1st April, 1997 and ending on 3 1.3.2009 will be eligible for 100% deduction for 10 assessment years.

Another amendment relates to the deduction equal to 50% of the profits of hotels which are located in a hilly or rural area or a place of pilgrimage or where tourism infrastructure needs to be developed. This will be allowed for a period of ten assessment years to hotels which start functioning at any time during the period from 1.4.1997 to 31.3.2001. In respect of hotels located at any other place, the deduction shall be 30% of the profits. However, the hotels located in the metropolitan cities of Calcutta, Chennai (Madras), Delhi and Mumbai (Bombay) will not be eligible for this tax deduction. This amendment will be effective from the A.Y. 1998-99 and subsequent years. Such hotels must be owned by a limited company only, having a paid up capital of not less than 5 lakh. Profits of agro-based industries, meat and meat products or poultry or marine or dairy products would also be exempt u/s 80IB (IIA).

From the A.Y. 1998-99 an undertaking having commercial production of mineral oil in the North-Eastern States of India would be eligible to 100% tax holiday for a period of initial seven assessment years, provided the refining does not begin on or after 1.4.2009.

The Finance Act, 1999 had extended the benefit of tax holiday for undertakings setting up new transmission lines on or after 1.4.1999 but before 1.4.2003 to profits derived tberefrom as are available from power generation undertakings. Industries in notified areas in NorthEast States would enjoy full tax holiday for ten assessment years, under new Section IOC inserted by the Finance Act, 1999 from the A.Y. 1999- 2000 and under Section 801C inserted by the Finance Act, 2003 from the AY. 2004-2005.

6. Five Year Tax Holiday For New Industrial Undertakings In Industrially Backward Areas & Districts

The Finance Act 1993 with effect from the Assessment Year 1994-95, had provided that any new industrial undertaking located in an industrially backward State or Union Territory as specified in the 8th schedule or set up in any part of India for the generation and distribution of power will be completely exempt from income tax to the extent of 100% of the profits and gains derived from such industrial undertaking for the initial five assessment years. Of course such new industrial undertaking or power plant should begin manufacturing or producing articles on or after 1.4.1993 and before 1.4.2000, later on increased to 3 1.3.2002. Thus, a power plant can be set up in any part of India so as to become eligible for a 5-year tax holiday. But a new industrial undertaking to be eligible for a complete tax holiday for the first five years must be located in an industrially backward area as specified in the 8th schedule which broadly relate to Arunachal, Assam, Goa, Manipur, Meghalaya. Mizoram, Nagaland, Sikkim, Tripura, Union Territory of Andaman & Nicobar Islands, J&K, Pondicherry, Lakshadeep, D. & N. Haveli, etc.

A good deal of tax saving can be achieved through proper tax planning by starting a new industrial undertaking in the industrially backward areas or a new power plant in any part of India.
From the Assessment Year 1995-96 similar tax holiday would be available on a new industrial undertaking in any notified very Backward District manufacturing, etc. between 1.10.1994 to 3 1.3.2002. Vide Notification No. S.O. 440(E) dated 15.6.1999, 52 Category “A” and 70 Category “B” Districts have been notified [see (1999) 238 ITR 14 St.]. Likewise, the Income Tax (Amendment) Act, 1998 also made more changes.

The Finance Act 2002 had further extended the period from 31.3.2002 to 31.3.2004 by which if any new industrial undertaking is set up in a backward State or backward District, then it will be eligible to the tax holiday as it allowed to other industries set up earlier, namely 100% tax holiday for five years and 25% or 30% for the balance five years.

7. Liberalisation Of Tax Holiday Provision For Infrastructure, Telecom Services, Power Generation, Special Economic Zones, Industrial Parks, etc. [ Section 80-IA]

The Finance Act 1993 with effect from the Assessment Year 1994-95, had provided that any new industrial undertaking located in an industrially backward State or Union Territory as specified in the 8th schedule or set up in any part of India for the generation and distribution of power will be completely exempt from income tax to the extent of 100% of the profits and gains derived from such industrial undertaking for the initial five assessment years. Of course such new industrial undertaking or power plant should begin manufacturing or producing articles on or after 1.4.1993 and before 1.4.2000, later on increased to 3 1.3.2002. Thus, a power plant can be set up in any part of India so as to become eligible for a 5-year tax holiday. But a new industrial undertaking to be eligible for a complete tax holiday for the first five years must be located in an industrially backward area as specified in the 8th schedule which broadly relate to Arunachal, Assam, Goa, Manipur, Meghalaya. Mizoram, Nagaland, Sikkim, Tripura, Union Territory of Andaman & Nicobar Islands, J&K, Pondicherry, Lakshadeep, D. & N. Haveli, etc.

A good deal of tax saving can be achieved through proper tax planning by starting a new industrial undertaking in the industrially backward areas or a new power plant in any part of India.
From the Assessment Year 1995-96 similar tax holiday would be available on a new industrial undertaking in any notified very Backward District manufacturing, etc. between 1.10.1994 to 3 1.3.2002. Vide Notification No. S.O. 440(E) dated 15.6.1999, 52 Category “A” and 70 Category “B” Districts have been notified [see (1999) 238 ITR 14 St.]. Likewise, the Income Tax (Amendment) Act, 1998 also made more changes.

The Finance Act 2002 had further extended the period from 31.3.2002 to 31.3.2004 by which if any new industrial undertaking is set up in a backward State or backward District, then it will be eligible to the tax holiday as it allowed to other industries set up earlier, namely 100% tax holiday for five years and 25% or 30% for the balance five years.

8. Ten Year Tax Holiday In Respect Of Certain Undertakings In Himachal Pradesh, Sikkim, Uttaranchal And N.E. States — Section 80-IC

Such undertakings or enterprises which manufacture or produce any article or thing, not being those specified in the 13th Schedule, and which commence operation in any Export Processing Zone, IIDC or IGC or TE or IP or STP, etc. as notified by Board would be allowed 100% deduction of the profits of the undertaking for 10 years in the States of Sikkim and North Eastern States. For the States of Uttaranchal and Himachal Pradesh, the deduction would be 100% of the profits of the undertaking for 5 assessment years and thereafter 25% (30% for companies) for the next 5 assessment years. Similar deduction would be available to thrust sector industries as specified in he 14th Schedule as per the Finance Act, 2003 w.e.f. the A.Y. 2004-2005.

9. Five-Year Tax Holiday For Hotels In Districts Having A World Heritage Site — Sec. 801D

Section 80-ID of the Income-tax Act provides for a five year tax holiday to new hotels of two, three and four star categories and convention centres. It is a requirement that such hotel must be constructed and has started or starts functioning at any time during the period beginning on the 1st day of April,2007 and ending on the 31st day of March, 2010. Further, such convention centre must be constructed at any time during the above specified period. The tax holiday is available to profits derived from the business of hotels or convention centres for five consecutive assessment years beginning from the initial assessment year. For availing the above benefit, the hotel or convention centre should be located in the specified area. The specified area has been defined as the National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad.

With a view to promoting tourism and to attract tourists to certain World Heritage Sites in India, the scope of tax benefits available in this section has been extended also to new two-star, three-star or four-star category hotels located in specified districts having a World Heritage Site. Such hotels are required to be constructed and start functioning at any time during the period beginning on the 1st day of April, 2008 and ending on the 31st day of March, 2013. Specified districts having a World Heritage Site are the districts of Agra, Jalgaon, Aurangabad, Kancheepuram, Pun, Bharatpur, Chhatarpur, Thanjavur, Bellany, South 24 Parganas (excluding areas falling within the Kolkata Urban Agglomeration on the basis of the 2001 census), Chamoli, Raisen, Gaya, Bhopal, Panchmahal, Kamrup, Goalpara, Nagaon, North Goa, South Goa, Darjeeling and Nilgiri.

Other conditions:

The deduction will not be allowed for an existing unit split or transferred to a new unit.
The assessee should submit along with the return an audit report in such form as prescribed.
The convention centres should have the minimum area and facilities as prescribed.
The CBDT has prescribed the audit report form and the specifications of the convention centres. A new Rule 18DE has been inserted in the Income Tax Rules. The prescribed specifications for the convention centre are that it should have a minimum covered plinth area of 25000 sq.mtrs, should have a minimum seating capacity of 3000 and should have at least 10 convention halls. In addition the facilities mandatorily required are:

  1. Modern public address system, slide and power point projection system and LCD projector or Video screening facility. (What is a power point projection system? Power point is a Microsoft programme - the LCD projector can easily be used for this.)

  2. Documentation centre with computers and printers, telephone with STD/ISD facilities, E-mail, photocopy and scanning facility along with trained operators to provide these facilities.

  3. Completely centrally air-conditioned.

  4. Adequate parking facility and other public conveniences as per tile local building regulations and should also fulfill all local building regulations in respect of fire and safety.

In computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or section bAA, in relation to the profits and gains of the undertaking.

No further deduction allowed under section 80IA/80IB/80IC/10A or 10B A new form No. 10CCBBA has been prescribed for filing the audit report.

10. Tax Holiday For Hotel And Convention Centres In NCT Of Delhi And Other Areas — Section 801D

100% deduction of the profits and gains derived from the business of convention centres and 2-star, 3-star and 4-star category hotels in NCT of Delhi and districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad, constructed and functioning between April, 2007 and 31 July, 2010 for a five year period beginning from the initial assessment year would be allowed. This amendment is made by the Finance Act, 2007 and would be effective from the A.Y. 2008-2009

11. Deduction’ In Respect Of Medical Insurance Premia — Section 80D

An NRI, like a resident individual is entitled to a deduction upto Rs. 25,000 ( Rs. 50,000 for a senior citizen) in respect of medical insurance premia for health of the assessee or his spouse or dependent parents or dependent children from the A.Y. 2016-2017.

However, the deduction for medical treatment of handicapped dependent u/s 88DD or for terminal ailments u/s 80DDB or u/s 80U for blind persons, etc. is not allowed to NRIs as it is deductible for residents only.

12. Additional Deduction For Health Insurance Premium Paid For Parents — Section 80D

An amendment is made by the Finance Act 2015 w.e.f. the A.Y. 2016- 2017 to provide that an additional deduction upto Rs. 25,000 to an individual would be allowed on any payment made for health insurance premia on the life of his parent or parents (whether dependent or not). If the parent is a senior citizen, the deduction would be allowed upto Rs. 50,000.

13. Deduction Of Repayment Of Loan For Higher Studies — Section 80E

The entire amount of interest paid by an individual or his parent or spouse or guardian during the previous year on a loan for pursuing higher education taken from any financial institution or any approved charitable institution would be allowed as a deduction from the total income. However, no deduction would be allowed for repayment of the principal loan amount. This deduction would be allowed in eight years beginning from the year in which the payment of interest on loan begins. This amendment is made by the Finance Act, 2007 and is effective from the A. Y. 2008-2009. From, the A.Y. 2010-2011 higher education would mean any course of study after passing the Senior Secondary Examination or its equivalent.

14. Deduction In Respect Of Certain Undertakings In North Eastern States

The Finance Act, 2007 has inserted a new Section 801E which provides for deduction from the gross total income of an assessee of an amount equal to 100% for ten Assessment Years. This benefit will be available to any undertaking which had begun or begins, for the period 1 April 2007 and ending before 1st day of April, 2017 in any of the North Eastern States of India with the following activities.

  1. To manufacture or produce any eligible article or things;

  2. To undertake substantial expansion to manufacture or produce any eligible article or things;

  3. To carry on any eligible business

For the purpose of this section North Eastern States of India would mean the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura.This special deduction applies even in respect of substantial expansion which means increase in the investment in plant and machinery by the least twenty-five per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken.
The definition of eligible article or things means the article other than the following:

  1. Goods falling under Chapter 24 of the First Schedule of the Central Excise Tariff Act, 1985, which pertains to tobacco and manufactured substitutes;

  2. Pan masala as covered under Chapter 21 of the First Schedule to the Central Excise Tariff Act, 1985;

  3. Plastic carry bags of less than 20 microns as specified by the Ministry of Environment and Forests vide Notification Number S.O. 705(E), dated 2 September 1999 and S.O. 698(E), dated 17 June 2003, and

  4. Goods falling under Chapter 27 of the First Schedule of the Central Excise Tariff Act, 1985, produced by petroleum oil or gas refineries.

  5. Similarly, eligible business which is entitled to this deduction would mean the business of

  6. Hotel (not below two star category)

  7. Adventures and leisure sports including ropeways.

  8. Providing medical and health services in the nature of nursing home with a minimum capacity of twenty-five beds.

  9. Running an old-age home.

  10. Operating vocational training institute for hotel management, catering and food craft entrepreneurship development, nursing and para-medical, civil aviation related training, fashion designing and industrial training.

  11. Running information technology related training centre.

  12. Manufacturing of information technology hardware; and

  13. Bio-technology.

15. Other Deductions Like Depreciation, Etc. To Nonresident Indians

The deductions discussed in topics 4 to 9 are deductible from the gross total income of the non-resident Indians. However, there are certain deductions and allowances which are available to a non-resident Indian while computing the gross total income itself, such as depreciation and business expenditure which is incidental to trade or industry or profession. Such deductions have not been discussed in this book as they are outside its scope. It would suffice if the non-resident Indian remembers that ordinarily all business expenditure is allowed as a deduction in the computation of profits and gains of a business unless otherwise specifically prohibited by the Income Tax Act. As most non-resident Indians have investment income, a knowledge of the various deductions under Chapter VI-A and rebate of income tax. under Chapter VIII as explained above will suffice for the purposes of enabling the non-resident Indian to compute his total income.

 

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