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

Special Procedure of Assessment regarding Income of an NRI from Foreign Exchange Assets

Special Provision Of Computation Of The Total Income Of A Non-Resident Indian
Who Is A Non-Resident Indian For The Purposes Of These Special Provisions?
Specified Foreign Exchange Assets Income From Which Is Eligible For The Special Provisions Of Assessment
Income Tax On Investment Income And Long-Term Capital Gains Of An NRI
When Is No Income Tax Payable On The Long-Term Capital Gains Of Foreign Exchange Assets?
A Non-Resident Indian Need Not File Any Income Tax Return In Certain Cases
When Does The Special Procedure Continue To Apply To A Person Even After He Becomes A Resident In India?
NRIs Have The Option Not To Be Governed By The Special Provisions

1. Special Provision Of Computation Of The Total Income Of A Non-Resident Indian

It is provided in Section 115D that no deduction in respect of any expenditure or allowance shall be allowed under any provision of the Income Tax Act in computing the investment income of a non-resident Indian. It is further provided that in the case of a non-resident Indian, where his gross total income consists only of investment income or income by way of long-term capital gains or both, no deduction would be allowed under Chapter VI-A of the Income Tax Act. Further nothing contained in the second proviso to Section 48 would apply to capital gains of NRIs. It is also mentioned in the Income Tax Act that where the gross total income of a non-resident Indian includes any income of the type mentioned above, the total income shall be reduced by the amount of such income and if any deductions under Chapter VI-A of the Income Tax Act are to be allowed then they would be allowed as if the gross total income as so reduced were the gross total income of the assessee. Thus, this special provision is applicable where a non-resident Indian has certain investment income or has investment income as well as other income.

2. Who Is A Non-Resident Indian For The Purposes Of These Special Provisions?

The special provisions relating to certain incomes of non-resident Indians according to Chapter XII-A of the Income Tax Act are applicable only to non-resident Indians. These provisions are aimed to give special tax concessions on certain investments in respect of income tax which is levied at a special rate on the income of those investments of non-resident Indians. Hence, it is very important to know the manning of the expression “non-resident Indian”. According to Section 115C(e)a “non-resident Indian” means an individual, being a citizen of India, or a person of Indian origin who is not a resident. A person is deemed to be of Indian origin if he or either of his parents or any of his grand-parents were born in undivided India. Reference may be made to those paras for understanding the meaning of the expression “resident” and “non-resident”. It may also be mentioned here that Article 8 of the Constitution of India provides that any person who, or either whose parents, or any of whose grand-parents was born in India, who is ordinarily resident in any country outside India, would be deemed to be a citizen of India if he is registered by the diplomatic or consular representative of India in the country where he is for the time being resident. For this purpose an application has to made in the prescribed form and manner. Thus, generally speaking a non-resident Indian would mean a citizen of India who is not resident in India as well as persons who are of Indian origin, who are not resident in India. This expression is broadly understood by almost all the non-resident Indians clearly. It is such non-resident Indians who enjoy special tax concessions relating to the computation of income tax of certain investment incomes, etc.

3. Specified Foreign Exchange Assets Income From Which Is Eligible For The Special Provisions Of Assessment

It is not that every type of income of a non-resident Indian is entitled to the uniform rate of income tax of 20%. It is only certain selected assets, the income of which alone would be liable to the special provisions of assessment in the case of non-resident Indians. Such assets are known as “foreign exchange asset”. Under Section 115C(b) “foreign exchange assets” would mean any specified asset which the assessee has acquired or purchased or subscribed with or subscribed in a convertible foreign exchange. The expression “convertible foreign exchange”, according to Section 115C(a)means, foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of Foreign Exchange Regulation Act 1973, and any rules made under it. Investment income means any income which is derived from foreign exchange assets. Under Section 115C(f) “specified assets” means any of the following assets, namely,

Shares in an Indian company;
debentures issued by an Indian company, which is not a private company as defined in the Companies Act 1956;
deposits with an Indian company which is not a private company as defined in the Companies Act 1956;
any security of the Central Government as defined in Section 2(2) of the Public Debt Act 1944;
such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

Thus, only five types of assets acquired or purchased out of convertible foreign exchange can be termed as specified assets, more popularly known as “foreign exchange assets”. It is the investment income from such foreign exchange assets which alone is entitled to a special treatment under Chapter XII-A of the Income Tax Act .

4. Income Tax On Investment Income And Long-Term Capital Gains Of An NRI

Section 115E provides for the levy of income tax on the investment income and long-term capital gains of a non-resident Indian. It is provided that if the total income of a non-resident Indian consists only of investment income or income by way of long-term capital gains relating to long-term foreign exchange assets, then income tax would be payable on the long-term capital gains @ 10% and @ 20% on investment income.

Thus, as per Section 115E income tax 10% only would be charged in respect of long-term capital gains arising any of the assets mentioned in “specified assets”. However, the long- term capital gains on non-specified assets, like property, land, jewellery, etc. would be charged @ 20%.

I.T. on short-term capital gains on equities liable to S.T.T. would be 15% as per Section 115 AD.

5. When Is No Income Tax Payable On The Long-Term Capital Gains Of Foreign Exchange Assets?

Section 115F provides for complete exemption of long-term capital gains on the transfer of foreign exchange assets in certain cases. Thus, it is provided that where, in the case of a non-resident Indian, any long- term capital gains arise from the transfer of a foreign exchange asset and the non-resident Indian has within a period of six months from the date of such transfer invested or deposited the whole or any part of the net consideration in any specified asset or in account referred to in Section 10(4) or in Savings Certificates as per Section l0(4B), then no tax is payable. Thus, if the amount of the net consideration is invested in the purchase of a new asset as specified earlier, then no income tax is leviable on such long-term capital gains. Where, however, the cost of the new asset is less than the net consideration in respect of the original asset, then income tax is to be levied on the proportionate capital gain.

The expression “net consideration” in relation to the transfer of the original asset means the full value of the consideration received or accruing as a result of the transfer of such assets as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. It is also provided in sub-Section (2) of Section 115F where the net asset is transferred or converted into money within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original assets not so charged under Section 45 on the basis of the cost of such new asset as provided in this Section, it would be deemed to be income chargeable under the head “capital gains” relating to the long-term capital asset of the previous year in which the new asset is transferred or converted into money. Thus, long-term capital gains can be completely income tax free if they are invested in specified assets or other assets as mentioned above. A non-resident Indian should take full advantage of this provision by adopting proper tax planning.

6. A Non-Resident Indian Need Not File Any Income Tax Return In Certain Cases

A very important privilege is granted to a non-resident Indian who has income from foreign exchange assets only. Thus, it is provided in Section -115G that a non-resident Indian is not required by Section 139(1) to file an income tax return, if both the conditions as given below are fulfilled, namely:

his total income in respect of which he is assessable under the Income Tax Act during the previous year consisted only of investment income or income by way of long-term capital gains or both; and
the tax deductible at source under the provisions of Chapter XVII has been deducted from such income.

Thus, it is clear that where the requisite income tax is deducted at source from the income of a non-resident Indian and he has only investment income or long-term capital gains relating to foreign exchange assets, he is not required to furnish any income tax return.

7. When Does The Special Procedure Continue To Apply To A Person Even After He Becomes A Resident In India?

Sometimes a non-resident Indian may become resident in India in any subsequent year. Normally a resident is not entitled to the special tax concession under Chapter XII-A of the Income Tax Act relating to the assessment of the total income being investment income of foreign exchange assets at the 20% rate of income tax. But under the provisions of Section 115H, such a non-resident Indian who becomes a resident in respect of the total income of any subsequent year can also continue to be assessable to income tax at the special rate of 20% income tax on the investment income in future years as well. For this purpose he has to exercise his option. Where such a non-resident Indian becomes a resident in India in a subsequent year and wishes to avail himself of the special provisions of Chapter XII-A, he should furnish to the Assessing Officer a declaration in writing along with his return of income under Section 139 for the assessment year for which he is assessable to the effect that the provisions of Chapter XII-A would continue to apply to him in respect of the investment income from any foreign exchange asset. However, only the last four items of the specified assets, would enjoy this special concession. Thus, in respect of the income from investment in shares of a limited company a non-resident Indian will not get the privilege of this tax concession under Chapter XII-A when he becomes a resident. He would, however, be eligible to the tax concession in respect of the income from the investments from the assets of the four types mentioned in Section 115C(f)(ii)or (iii) or (iv) or (v).

8. NRIs Have The Option Not To Be Governed By The Special Provisions

The provisions of Chapter XII-A, namely, levy of a uniform rate of income tax of 20% on the investment income of a non-resident Indian, etc. are not compulsory in the case of every non-resident Indian. Rather, Section 115-I provides that a non-resident Indian may elect not to be governed by the provisions in this chapter in any financial year. He may do so when he finds that the normal rates of income tax would mean a lower income tax liability than the uniform rate of 20%. Such a case would exist there when the total income for A.Y. 2010-2011 is upto Rs. 9,60,000. The average rate of income tax on such an income would be about 20%. Hence a non-resident Indian with an income of less than Rs. 9,60,000 would certainly like to be assessed by the normal procedure and according to the normal rates of income tax. In such a case he has to furnish to the Assessing Officer a return of income for the relevant year declaring that the provisions of Chapter XII-A would not be applicable to him for that assessment year. When the nonresident does such a thing for any assessment year the provisions of Chapter X11-A would not apply to him for that assessment year and his total income for that assessment year would be computed and tax on such total income would be charged in accordance with the other provisions of the Income Tax Act.

9. Tax Planning Guidelines For An NRI Having Income From Foreign Exchange Assets As Well As Other Income

When a non-resident Indian has income from foreign exchange assets as well as other income, tax planning assumes special significance. A calculation has to be made by the non-resident of the income tax payable on the investment income out of such foreign exchange assets. In the case of a large investment it would generally be prudent for him to be liable to income tax according to the special provisions of Chapter XII-A @ 20% income tax only. As regards his other income, he would be liable to income tax on the usual slab rates of tax. Where, however, the non-resident finds that the investment income is below Rs. 9,60,000 it would be better for him to be taxed like a normal resident individual. If this tax planning is adopted by him he would pay less tax.