BLOG on Income Tax Management for - AY 2022-23 & 2023-24

Basic Aspects Of Tax Planning For NRIs (Non-Resident Indian)

The Direct Tax Laws which affect NRIs
Incomes of NRIs liable to Income Tax
How to Compute the Taxable Income of a Non-Resident Indian (NRI)
Income Tax Planning by an NRI Returning to India permanently
Wealth Tax Liability of an NRI ?

1. The Direct Tax Laws which affect NRIs

The most important direct tax laws which affect the non-resident Indian and his investments and income in India are:

(a) Income Tax Act 1961. This is the main enactment which deals with the levy, assessment, and collection of income tax on residents as well as non-resident persons in India. It is supplemented by certain rules known as Income Tax Rules 1962.

(b) Wealth Tax Act 1957. This Act regulates the levy and collection of wealth tax of individuals, Hindu undivided families and companies in India. This is also supplemented by certain rules made under this Act which are known as Wealth Tax Rules 1957.

(c) Gift Tax Act 1958. This Act concerns the levy and collection of gift tax on the gifts made by donors till 30 September 1998. It allows various types of exemptions, including certain special exemptions in respect of gifts made by non-resident Indians. From 1-10-1998 there is no Gift-tax

(d) Finance Act. Every year the Parliament passes a Finance Bill which lays down the rates of income tax for a particular financial year, known as the assessment year. The rates of wealth tax and gift tax are contained in the respective enactments, concerning wealth tax and gift tax. Amendments to the various direct tax laws are also .inserted through the Finance Act and sometimes through the Direct Tax Law Amendment Act or the Tax Amendment Act.

(e) Board Circulars. The Central Board of Direct Taxes, New Delhi, is the apex administrative body for the different tax laws in India. It issues circulars giving relief and granting tax concessions as also interpreting the provisions of the different direct tax laws for the guidance of the taxpayers. The circulars issued by the Central Board of Direct Taxes are known as Board Circulars and are binding on the different income tax authorities administering various direct tax laws.

(f) Notifications. The Government of India issues notifications and publishes them in the Official Gazette from time to time. Some of the notifications have the effect of granting special exemption from income tax to certain specific items. Sometimes, a notification lays down a particular date or amount concerning a particular tax provision or concession. Hence, it is necessary for a taxpayer to be in touch with the important notifications affecting his own facts and circumstances.

In this book we have dealt with the relevant provisions of the direct tax laws which are of particular importance for non-resident Indians in enabling them to adopt proper tax planning for saving their taxes. The new law concerning foreign exchange transactions, etc., is known as FEMA, i.e., Foreign Exchange Management Act 1999, and is not a part of direct tax laws.

2. Incomes of NRIs liable to Income Tax

Income tax is payable by a taxpayer whether a resident taxpayer or a non-resident taxpayer or a non-resident Indian on the total income computed by the Assessing Officer under the provisions of the Income Tax Act 1961. Under Section 5(2) of the Income Tax Act a nonresident is liable to pay income tax on the total income of a particular year derived from whatever source, which:

is received or is deemed to be received in India in such year by or on behalf of such persons, or
accrues or arises or is deemed to accrue or arise to him in India during such year.

The Authority for Advance Rulings in the case of Steffen, Robertson & Kirsten Consulting Engineers & Scientists v. CIT (1998) 230, ITR 206 has held that where the amounts are paid for preparatory study in a foreign country to a non-resident for services which are to be utilised in India, such amounts would be deemed to accrue or arise in India. In this case, it was also held that there is no difference between fees for Engineering Services and amounts paid as living allowances and travel allowances.
Thus, only Indian income is liable to income tax in India in the case of a non-resident person. This means that a non-resident person is not liable to pay any income tax in India on his foreign income. Though an income may not actually accrue or arise in India, yet it may be deemed to accrue or arise in India. Thus, under Section 9 (reproduced below) the following are the important types of income which are deemed to accrue or arise in India:

Income through any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situated in India.

Salary income for service rendered in India; and
Salary for the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment from the A.Y. 2000-2001.

Salary payable by the government to a citizen of India for service outside India.
A dividend paid by an Indian company outside India.
Interest by the government, etc.
Royalty payable by the government or others in some cases.
Fees for technical services payable by the government or others ii some cases.

In Asian Development Service v. CIT [1999) 239 ITR 713, it was held where in respect of placement of an amount to a non-resident, tax liability was to be borne by the resident, the tax liability of non-resident was to be determined with reference to the gross figure.

3. How to Compute the Taxable Income of a Non-Resident Indian (NRI)

Here, we shall specifically deal with the steps which are necessary for the computation of the total income or taxable income of a non-resident Indian in relation to a particular assessment year. The first step in computation of the total income is under each head of income separately after making the specified deductions and taking into account allowances allowed in computing income under such head of income. The total of the income under different heads of income is known as the gross total income. Any income which is completely exempt from tax is not to form part of the gross total income. Certain deductions in the matter of investment in Bank deposits, etc., are allowed from the gross total income. The balance is the taxable income of the non-resident Indian and is technically known as the “total income” of the non-resident Indian for a previous year in relation to a particular assessment year. A deduction of income tax is allowed on the investment in the form of NSCs (VIII Issue), P.P.F., special units, bonds, etc., under Section 80C of the income Tax Act. This is explained by means of an example given below.
The following are some of the most important points which should be remembered by an NRI in computing the (taxable) total income:

If there is loss from one source of income, it can be set off against income from another source under the same head of income as per Section 70 of the I.T. At. If there is a short-term capital loss, it can be set off against short-term capital gain or long-term capital gain regarding any capital asset in the same assessment year. But the long-term capital loss can be set off only against taxable long-term capital gain and not against short-term capital gain.
Normally, the loss under one head of income can be set off against income under another head of income except (i) business loss which cannot be set off against income under the head “Salaries”, and (ii) loss under the head “Capital gains”, as per Section 71 of the I.T. Act, 1961.
Loss under the head “Income from house property” which can not be set off as described in (b) above shall be allowed to be carried forward for the next 8 assessment years for set off against income from house property as per Section 71B of the 1.T. Act, 1961.
Unabsorbed business loss can be carried forward for set off against income under the head “Profits and gains of business or profession” for the next 8 assessment years as per Section 72 of the I.T. Act. However, speculation losses can be set off or carried forward and set off for the next 8 years only against speculation profits, as per Section 73 of the LT. Act.
The unabsorbed short-term capital loss can be carried forward for set off against any capital gain — both long-term and short-term for the next 8 assessment years. However, long—term capital loss can be carried forward and set off for the next 8 assessment years only against long-term capital gain, as per Section 74 of the I.T. Act.
The above rules are relevant for the computation of Indian taxable income and are not to be affected by the gain or loss made by the NRI in the foreign country.

4. Income Tax Planning by an NRI Returning to India permanently

One important aspect that should be taken care of by a returning NRI is that there should be sufficient investment in the names of the spouse and major children. Besides, a new file in the name of Hindu undivided family can also be started by the returning NRI. The investment should be made in each of the files in such a manner that the amount of taxable income is kept below exemption limit, which is Rs. 5,00,000 for an individual male and female for the Assessment Year 2019-2020. Every returning NRI must adopt tax planning carefully so as to avoid clubbing of the income of his spouse or daughter-in-law or minor children with his income. Likewise, an NRI can make investments through the help of well- known brokers in shares of reputed companies so that there is security along with liquidity of investment and the dividend income is eligible to exemption under Section 10(34) . The investment may also be made in mutual funds as the income from mutual funds is exempt from tax.

If there is any taxable income, say on account of rental income or investment in non-banking deposits, etc., then the tax incidence can be reduced through investments in PPF, NSCs, Life Insurance premium, specified and notified infrastructure bonds, units, etc. under Section 80C where deduction from income is allowed upto maximum investment of Rs. 1,50,000 per tax-payer
Where an NRI is interested in having a house, he can invest his funds in the purchase or construction of a self-occupied residential house, the income of which will be nil for income tax purposes.

Further, he can even borrow moneys from his relative and get a deduction on interest upto Rs. 1,50,000 every year from any other taxable income. The above account of tax planning to be adopted by an NRI gives the most important aspects of tax planning to achieve a zero income tax level.

5. Wealth Tax Liability of an NRI ?

Wealth tax is payable in India under the Wealth Tax Act 1957 on net wealth as on a particular date, which is known as the valuation date. Generally speaking, valuation date is the last day of the previous year i.e., 31 March. Wealth tax is payable by individuals and Hindu undivided families and certain companies. A non-resident individual in India, like any other resident individual is liable to wealth tax only when the net wealth on taxable “assets” on a valuation date exceeds Rs. 30 lakh. The amount of Rs. 30 lakh excludes certain exemptions from wealth tax. Deduction is allowed in respect of debts and Liabilities. The items of wealth which are either totally exempt from wealth tax and or which are so exempt from wealth tax up to a particular limit are deducted from the gross wealth to arrive at the taxable wealth on the valuation date. Generally speaking, the value of assets on the valuation date as per III Schedule to the Wealth Tax Act is taken for the purpose of computation of wealth tax payable by a non-resident individual. Hence, a non-resident should so plan his investments in India that he secures the maximum deductions and exemptions in a manner that he is liable to least possible wealth tax. The rate of wealth tax is 1% of the taxable net wealth that exceeds Rs. 30 lakh on the valuation date.

A Non-Resident Indian is liable to Wealth Tax in India on his Indian Wealth and not on his Foreign Wealth.