Provisions Of 'Income-Tax Law' Useful For
Non-Residents

 

1.

Different classes of residential status prescribed under the Income-tax Law for an individual

2.

Different classes of residential status prescribed under the Income-tax Law for a Hindu Undivided Family (HUF)

3.

Different classes of residential status prescribed under the Income-tax Law for a person other than an individual or a HUF

4.

Determination of the residential status of an Individual

5.

Determination of the residential status of a HUF

6.

Determination of the residential status of a company

7.

Determination of the residential status of person other than an individual, HUF and company

8.

Incomes which are charged to tax in India

9.

Incomes which are deemed to be received in India

10.

Incomes which are deemed to accrue or arise in India

11.

Meaning of business connection

 

In this part you can gain knowledge about various provisions of Income-tax Law and Foreign Exchange Management Act, 1999 (FEMA) which are useful to a non-resident. The first part deals with provisions of Income-tax Law and the second part deals with the provisions of FEMA.

 

1.       Different classes of residential status prescribed under the Income-tax Law for an individual

For the purpose of Income-tax Law, an individual may have any one of the following residential status:

 

(1)       Resident and ordinarily resident in India

 

(2)       Resident but not ordinarily resident in India

 

(3)       Non-resident

 

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.

 

2.       Different classes of residential status prescribed under the Income-tax Law for a Hindu Undivided Family (HUF)

For the purpose of Income-tax Law, an HUF may have any one of the following residential status:

 

(1)       Resident and ordinarily resident in India

(2)       Resident but not ordinarily resident in India

(3)       Non-resident

 

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the HUF would be a resident and ordinarily resident and in the next year it may become non-resident or resident but not ordinarily resident and again in the next year its status may change or may remain same.

 

3.       Different classes of residential status prescribed under the Income-tax Law for a person other than an individual or a HUF

For the purpose of Income-tax Law, a person other than an individual or a HUF, i.e., company, partnership firm, etc., may have any one of the following residential status:

 

(1)       Resident

(2)       Non-resident

 

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the taxpayer would be a resident and in the next year the taxpayer may become non-resident and again in the next year the status may change or may remain same.

 

4.       Determination of the residential status of an Individual

To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident.

 

Step 1 given below will ascertain whether the individual is resident or non-resident; and step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident in India.

 

Step 1:            Determining whether Resident or Non-Resident

Under the Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy any one or may satisfy both the conditions):

 

1)         He is in India for a period of 182 days or more in that year; or

 

2)         He is in India for a period of 60 days or more in the year and for a period of 365 days or more in immediately preceding 4 years.

 

 

If an individual does not satisfy any of the above conditions then he will be treated as non-resident in India.

 

Note : Condition given in (2) above will not apply to an Indian citizen leaving India for the purpose of employment or to an Indian citizen leaving India as a member of crew of Indian ship or to an Indian citizen/person of Indian origin coming on a visit to India. A person is said to be of Indian origin, if he or any of his parents or grand-parents (maternal or paternal) were born in undivided India. In other words, these persons will be resident in India only if they are in India for a period of 182 days or more during the relevant year.

 

Step 2:            Determining whether Resident and Ordinarily Resident or Resident but Not Ordinarily Resident

A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies both the following conditions:

 

1)         He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.

 

2)         His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

 

A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.

 

In short, following test will determine the residential status of an individual:

 

1.         If the individual satisfies any one or both the conditions specified at step 1 and satisfies both the conditions specified at step 2, then he will become resident and ordinarily resident in India.

 

2.         If the individual satisfies any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2, then he will become resident but not ordinarily resident in India.

 

3.         If the individual satisfies none of the conditions specified at step one, then he will become non-resident.

 

5.       Determination of the residential status of a HUF

To determine the residential status of a HUF, the first step is to ascertain whether the HUF is resident or a non-resident. If the HUF turns to be a resident, then the next step is to ascertain whether it is resident and ordinarily resident or is resident but not ordinarily resident. Step 1 given below will ascertain whether the HUF is resident or non-resident and step 2 will ascertain whether the HUF is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the HUF turns to be a resident in India.

 

Step 1: Determining whether resident or non-resident

 

For the purpose of Income-tax Law, anHUF will be treated as resident in India, if the control and management of the affairs of the HUF is located (partly or wholly) in India.

 

Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident

 

A resident HUF will be treated as resident and ordinarily resident in India during the year if its manager (i.e. karta or manager) satisfies both the following conditions:

 

(1)       He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.

 

(2)       His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

 

A resident HUF whose manager (i.e. karta or manager) does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.

 

In short, following test will determine the residential status of a HUF :

 

1.         If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies both the conditions specified at step 2, then the HUF will become resident and ordinarily resident in India.

 

 

2.         If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies none or only one condition specified at step 2, then the HUF will become resident but not ordinarily resident in India.

 

3.         If the control and management of the affairs of the HUF is located wholly outside India, then the HUF will become non-resident.

 

6.       Determination of the residential status of a company

A company incorporated in India will always be considered as resident of India.

 

A company other than an Indian company (i.e., a foreign company) is said to be resident in India during a year, if its place of effective management, in that year, is in India.

 

Place of effective management means of place where key management and commercial decision that are necessary for conduct of the business of an entity as a whole are in substance made.

 

7.       Determination of the residential status of person other than an individual, HUF and company

Every person other than an individual, HUF and company is said to be resident in India during the year, if the control and management of its affairs for that year is located wholly or partly in India.

 

8.       Incomes which are charged to tax in India

The following chart highlights the tax incidence in case of different persons:

 

Nature of Income

Residential Status

ROR (*)

RNOR(*)

NR(*)

Income which is accrues or arises in india

Taxed

Taxed

Taxed

Income which is deemed to accrues or arises in india

Taxed

Taxed

Taxed

Income which is received in India

Taxed

Taxed

Taxed

Income which is deemed to be received in india

Taxed

Taxed

Taxed

Income accruing outside India from a business controlled from India or from a profession set up in India

Taxed

Taxed

Taxed

Income other than above (i.e.,income which has no relation with India)         

Taxed

Not Taxed

Not Taxed

 

(*) ROR means resident and ordinarily resident.

 

RNOR means resident but not ordinarily resident.

 

NR means non-resident.

 

9.       Incomes which are deemed to be received in India

Following incomes are treated as incomes deemed to be received in India:

 

1.         Interest credited to recognised provident fund account of an employee in excess of 9.5% per annum.

 

2.         Employer’s contribution to recognised provident fund in excess of 12%.

 

3.         Transferred balance in case of reorganisation of unrecognised provident fund.

 

4.         Contribution by the Central Government or other employer to the account of the employee in case of notified pension scheme referred to in section 80CCD.

 

10.     Incomes which are deemed to accrue or arise in India

Following incomes are treated as incomes deemed to accrue or arise in India:

 

1.         Capital gain arising on transfer of property situated in India.

 

2.         Income from business connection (to be discussed in later part) in India (*).

 

3.         Income from salary in respect of services rendered in India.

 

4.         Salary received by an Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case.

 

5.         Income from any property, asset or other source of income located in India.

 

6.         Dividend paid by an Indian company.

 

7.         Interest received from Government of India.

 

8.         Interest received from a resident is treated as income deemed to accrue or arise in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and is used for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.

 

9.         Interest received from a non-resident is treated as income deemed to accrue or arise in India if such interest is earned in respect of funds borrowed by the non-resident for carrying on any business/profession in India.

 

10.       Royalty/fees for technical services received from Government of India.

 

11.       Royalty/fees for technical services received from resident is treated as income deemed to accrue or arise in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.

 

12.       Royalty/fees for technical services received from non-resident is treated as income deemed to accrue or arise in India if such royalty/fees is received for business/profession/other source of income carried on by the payer in India.

 

In case of non-resident, being a person engaged in business of banking any interest payable by the permanent establishment in India of such non-resident to the head-office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India.

 

11.     Meaning of business connection

Business connection shall include following business activities carried out by a person acting on behalf of a non-resident:

 

1.         If such person has and habitually exercises authority in India to conclude contracts on behalf of the non-resident (it will not include cases where authority is limitedto contract for purchase of goods or merchandise on behalf of such non-resident); or

 

2.         If such person has no authority to conclude contracts but he habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

 

3.         If such person habitually secures orders in India mainly or wholly for the non-resident or for other non-residents under the same management.

 

No business connection shall be deemed to have been established, if the business is carried on through an independent broker, general commission agent or other agent (i.e., a broker or commission agent who is not working mainly or wholly for such non-resident or other non-residents under same management), provided such person is working in his ordinary course of business.

 

Only so much of income which accrues or arises due to such business connection is deemed to be income accruing or arising from India and not the entire income of the non-resident.

 
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