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

The Incomes of an NRI Completely Exempt from Income Tax !

Interest On Non-Resident (External) Account Is Fully Exempt From Income Tax
Interest On NSCS Is Completely Exempt From Income Tax Under Section 10(4B)
Remuneration Of Non-Citizens Is Exempt From Income Tax
Income Of Certain Venture Capital Undertakings — Section 10 (23FB)
Other Exempted Incomes
Income in Special Economic Zones, 100% EOUs etc.

1. Interest On Non-Resident (External) Account Is Fully Exempt From Income Tax

Under the provisions of Section 10(4)(ii) of the Income Tax Act interest on money standing to credit of a person resident outside India or any person who has been permitted by the Reserve Bank of India to maintain the N.R. (External) A/C in a Non-resident (external) Account in any bank in India in accordance with the Foreign Exchange Regulation Act 1973 and now under the Foreign Exchange Management Act, 1999 (regarding FEMA), and any rules made there under is completely exempt from income tax. Hence, as the law stands today the entire income from NRE account and FCNR accounts earned by NRIs will be fully exempted from income-tax. For the purposes of this provision the expression “person resident outside India” is to be distinguished from a non-resident. The expression “person resident outside India” is defined in Section 2(w) of the Foreign Exchange Management Act 1999, as a person who is not resident in India.
Section 2(v) of the Foreign Exchange Management Act 1999, defines the term “person resident in India”. According to this definition a “person resident in India” means:

a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—

a person who has gone out of India or who stays outside India, in either case—
for or on taking up employment outside India, or
for carrying on outside India a business or vocation outside India, or
for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.
a person who has come to or stays in India, in either case, otherwise than—
for or on taking up employment in India, or
for carrying on India a business or vocation in India, or
for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.

any person or body corporate registered or incorporated in India.
an office, branch or agency in India owned or controlled by a person resident outside India.
an office, branch or agency outside India owned or controlled by a person resident in India.

Non-resident Indians

Non-resident Indians generally fall under the following broad categories:

Indian citizens who stay abroad for employment or for carrying on business or vocation or any other purpose in circumstances indicating an indefinite period of stay outside India.
Indian citizens working abroad on assignments with foreign governments/government agencies or international/regional agencies like the United Nations (including its affiliates), International Monetary Fund (IMF), World Bank (IBRD), etc.
Officials of the Central and State governments and public sector undertakings deputed abroad on temporary assignments or posted to their offices (including Indian Diplomatic Missions) abroad.

The non-resident Indian becomes resident of India only when he comes back to the country for employment or for carrying on in India any business or vocation or for any other purpose indicating an indefinite period of stay in India. He is not regarded as a person resident in India during his short visits to India, say, for holidays, business visits, etc. Indian citizens who take up jobs on completion of their higher studies abroad are regarded as non-residents only from the time they take up jobs abroad.

It should be noted carefully that this exemption is given not to a nonresident as understood under the Income Tax Act but to a person resident outside India. From a practical point of view and in most of the cases a person resident outside India under the fema and a non-resident person as per the Income Tax Act would be the same. However, in certain cases a person may be resident outside India as per fema but he may not be nonresident in India as per I.T. Act. Likewise, a person may be non-resident in India but he may not be a person resident outside India. This distinction should be carefully followed by a non-resident Indian. However, from practical point of view a non-resident Indian who is generally staying outside India, is regarded as a person resident outside India and is entitled to open a Nor-resident (External) Account Where such an account can be opened in the name of a non-resident Indian because he is regarded as a person resident outside India he would be entitled to this exemption in such a manner that the entire amount of interest on money standing to his Non-resident (External) Account would be completely exempt from income tax.

2. Interest On NSCS Is Completely Exempt From Income Tax Under Section 10(4B)

A citizen of India or a person of Indian origin who is a non-resident is not liable to any income tax in India on any income from interest on such savings certificates issued before the 1st. day of June, 2002 by the Central Government which may be specified by notification in the Official Gazette. Of course, it is necessary that the non-resident should have subscribed to such certificates in convertible foreign exchange remitted from a country outside India in accordance with the provisions of the Foreign Exchange Management Act 1999, and any rules made there under. For the purpose of this clause a person shall be deemed to be of Indian origin if he or either of his parents or any of his grand parents was born in India. Convertible foreign exchange for the purpose of this clause means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act 1999, and any rules made there under. National Savings Certificates (VI and VII Series) which enjoy a higher rate of interest for non-residents are such certificates which have been so notified under FERA. Hence, interest earned on 6 year National Savings Certificates (VI and VII Series) would be completely exempt from income tax in the case of non-resident Indians.

3. Remuneration Of Non-Citizens Is Exempt From Income Tax

There are certain exemptions which are available only to non-citizens of India. Thus, a non-resident who is not a citizen of India even though he may be of Indian origin would also be entitled to such exemptions as are given in Section 10(6) of the Income Tax Act. Some of the important exemptions are described below:

The remuneration received by an individual, who is not a citizen of India as an official of an embassy, etc. is free from income tax, provided that his country offers the exemptions to Indians similarly employed there. These exemptions ‘are under clause (ii) of Section 10(6).
The remuneration received by a non-citizen as an employee of a foreign enterprise for services rendered by him during his stay in India, provided the foreign enterprise is not engaged in any trade or business in India and his stay does not exceed 90 days in such previous year, is not chargeable under the Income Tax Act. Such remuneration is totally exempt under Section 1 0(6)(vi). Certain other types of remuneration are also exempt under Section 10(6).

4. Income Of Certain Venture Capital Undertakings — Section 10 (23FB)

The Finance Act, 2007 has, with effect from the A.Y. 2008-2009 provided a new definition of venture capital undertaking, where the investment of a Venture Capital Company or Venture Capital Fund would be exempt from tax. Thus, “venture capital undertaking” means such domestic company whose shares are not listed in a recognized stock exchange in India and which is engaged in the:

Business of:
1. Nanotechnology
2. Information technology relating to hardware and software development;
3. Seed research and development;
4. Bio-technology;
5. Research and development of new chemical entities in the pharmaceutical sector;
6. Production of bio-fuels; or
7. Building and operating composite hotel-cum-convention centre with seating capacity of more than three thousand; or
8. Developing or operating and maintaining or developing, operation and maintaining any infrastructure facility as defined in Section 80 IA(4).

2. Dairy or poultry industry.

5. Other Exempted Incomes

NRI Bonds (Second Series) had attractive tax exemptions

NRI Bonds (Second Series —7 years) could be gifted to any individual of Indian nationality or origin (resident or non-resident), or to a charitable trust recognised under the Income Tax Act.
India Development Bonds offered attractive tax exemptions

In Februaiy 1992 the SBI issued India Development Bonds. These enjoyed total exemption on the interest income and they could be gifted without any gift tax liability. Further, they enjoyed total freedom from enquiry as to the source of the money under all direct tax laws and FERA.
Exemption on interest in foreign currency deposits in Indian banks for non-residents and not ordinarily residents

With effect from assessment year 1993.94, interest on foreign currency deposits in banks in India, allowed now by the RBI, are fully exempt from income tax under Section 10(1 5)(iv)(fa) only in the case of non- residents and not-ordinarily resident individuals and Hindu Undivided Families. Thus, residents will not get this exemption.
Resurgent India Bonds (RIB)

The SBI offered Resurgent India Bonds to NRIs from August 5, 1998 upto August 24, 1998. These bonds were issued to individual NRIs, OCBs & banks on behalf of NRIs & OCBs. Their tenure was 5 years. The currencies were US Dollar, Pond Sterling & Deutsche Mark. Interest rate was 7.75% p.a. on USD, 8% p.a on GBP & 6.25% p.a. on DEM. Payment of interest is half yearly or cumulative. Principal and interest is fully repatriable to NRIs. Interest is exempt from I.T. & the Bonds are exempt from W.T. These benefits are also available to transferee and donee holders. These are transferable between NR1s/OCBs by endorsement and delivery. Premature encashment is permitted only in non-repatriable rupees without penalty. Loans in rupees to holders and third parties was available against collateral security of the Bonds. The collection was US $ 4.16 billions.
Insurance Policy — Maturity proceeds

Amount received on maturity of insurance policy is exempt. The Finance Act, 2003 w.e.f. the A.Y. 2004-2005 provides that exemption under Section 10(10D) shall not be allowed on any sum received under n insurance policy issued on or after 1-4-2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the actual capital sum assured. However, on death before maturity of the policy these provisions will not apply.
Exemption of wood handicraft export profits — Section 10BA

On and from the financial year 2003-04 (i.e., A.Y. 2004-2005) a special exemption under Section 1 OBA is available to all those exporters who are located in free trade zone or who are working in an undertaking established as a 100% export-oriented undertaking in respect of hand made articles or things of artistic value which requires the use of wood as the main raw material. Such undertakings should employ 20 or more workers. The deduction would not be allowed from the assessment year beginning on the first day of April, 2010.

6. Income in Special Economic Zones, 100% EOUs etc.

From a practical point of view, over 90% of the non-resident Indians will be able to compute their total income as well as their income tax liability in India by having a knowledge of the different provisions of the Income Tax Act, 1961. The NRIs should, therefore, remember these provisions well. They should further remember that they can now enjoy a ten-year tax holiday upto the A.Y. 2011-12 in respect of the profits of new industrial undertakings set up in a Free Trade Zone, etc. under Section 10A of the Income Tax Act. Likewise, they can enjoy a 10-year tax holiday upto the A.Y. 2009-10 in respect of the profits of 100% Export Oriented Units under Section 10B of the Income Tax Act. New industrial undertakings set up in Special Economic Zones on or after 1.4.2002 will be eligible to 100% deduction for five years. For the next two assessment years, however, exemption would be only to the extent of 50% of their profits. A change in the ownership of the industrial undertaking would debar it from getting the exemption. However, when the change is from a proprietary or partnership firm to a company on succession, then the restriction will not apply if not less than 51% voting power is kept with the earlier partners or proprietor. The latter exemption is different from the previous one inasmuch as “manufacturing” by a 100% Export Oriented Undertaking would include any process or assembly or recording of programmes on any disc, tape, perforated media or other information storage device. Likewise, “produce” in relation to any article or thing would include production of computer programmes and export of software for the purposes of exemption under Section 10B, which is not covered under Section 10A.

The Finance Act, 2003 has, w.e.f. the AX. 2004-2005, amended Section 10A and Section 10B to provide that where an undertaking of an Indian company is transferred to another company under a scheme of amalgamation or demerger, the deduction would be allowed in the hands of the amalgamated or the resultant company.

The benefit of deduction under Section IOA and lOB has been extended to the business of cutting and polishing of precious and semiprecious stones from the A.Y. 2004-2005.

As per the Finance Act, 2005 a sun set clause has been inserted to provide that no deduction to an undertaking set up in a Special Economic Zone which begins to manufacture or produce articles or things or computer software after 31.3.2009 in a Special Economic Zone would be allowed as a tax holiday. It is also provided that such undertakings should file income tax return in time to avail of the benefit.

The Taxation Laws (Amendment) Act, 2005 provides that if deduction was not granted u/s 10A, 10B or 10C due to non receipt of convertible foreign exchange which is received later on, then the deduction under the above sections can be granted within four years from the end of the previous year in which the amount is brought in India.

From the A.Y. 2006-07, under Section IOAA newly established units in Special Economic Zones would get a 100% tax holiday for five consecutive assessment years and a 50% tax holiday for the next further five assessment years in respect of export profits with a further tax benefit of 50% tax holiday for the’ next 5 years on the fulfilment of some conditions.

The tax exemption for 100% EOUs u/s 10B and the Software Technology Park of India (STPI) under the fourth proviso to Section 10A(1) has been extended by the Finance (No. 2) Act,, 2009 by one year, i.e. for the AY 2011-2012 also. Thus, the sunset clause will now be applicable from the AY 20 12-2013.

Under the provisions of Section 801B (9) as amended by the Finance Act, 2008, income of a refinery for mineral oil starting operations by 31.3.2012 will also get the 7-year tax holiday.