Introduction to NRI Taxation

The income earned by any person in any country is subject to local tax laws of that sourced country.

Therefore, tax paid in foreign country is a cost to the depositor/investor and, hence, the tax environment, which includes tax laws and its administration, plays an important role in attracting foreign capital, both short-term as well as long-term.

Axis Bank provides advisory services in connection with Indian tax to minimize the tax liability of an NRI, who invests in India and earns income in India

India has a well-developed tax infrastructure. Rates of Income tax are moderate and the tax laws are moderate, which makes it an ideal investment and business destination. Certain special rate benefits are also given to NRI.

  Who is an NRI?

An NRI is a Non-Resident Indian. Non-Resident Indian means an individual, being a citizen of India or a person of Indian origin, who is not resident. NRI is taxed in India only on income accruing or arising in India, or deemed to accrue or arise in India, in the relevant financial year.

Basic Concepts 

Person: A person includes Individual, Hindu Undivided Family, Company, Firm, Association of Persons or Body of Individuals whether incorporated or not, local authority and every other artificial juridical person.

Assessment Year: Assessment Year means the period of twelve months commencing on the first day of April and ending on the last day of March every year. The tax is levied, in each assessment year, with respect to or on the total income earned by the assessee in the previous year.

Previous Year: Previous year means the financial year immediately preceding the assessment year.

Assessee: Assessee means a person by whom any tax or any other sum of money is payable under this Act.

Tax: Tax in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date.

Tax Credit Certificate: Tax credit certificate means a tax credit certificate granted to any person in accordance with the TDS provisions and any scheme made there under.

Residential Status 

The taxability of an individual in India depends upon his Residential Status under the Income-tax Act, 1961 (ITA). As per the ITA, whether an individual is a resident or not, depends upon his period of stay in India in the relevant financial year.

Different Residential Status under ITA:

Resident
- Ordinarily Resident
- Not Ordinarily Resident

Non-Resident
Scope of taxability of income
Resident

An individual, who complies with the residence test as below, is a Resident of India.

Residence Test - An individual who stays in India in a year ending on March 31 for at least 182 days in the relevant year becomes Resident for that year; OR
An individual, who stays in India in a year ending on March 31 for atleast 60 days in the relevant year, and for atleast 365 days during the four years immediately preceding the relevant year, becomes Resident for that year.

Relaxation in case of Indians - In the following cases, the period of 60 days is extended to 182 days: An Indian Citizen, who leaves India for employment outside India An Indian Citizen, who leaves India as a member of the crew of an Indian ship An Indian Citizen or a Person of an Indian Origin, who is abroad, and who is on a visit to India in any year.

Resident and Ordinarily Resident (ROR)

An individual satisfying either of the basic residence test and who is not an RNOR is an ordinarily resident. An individual, which is ROR, is taxed in India on the income received or deemed to be received in India or accrues or arises or is deemed to accrue or arise in India during such year or accrues or arise to him outside India in the relevant financial year.

Resident but Not Ordinarily Resident (RNOR)

A Resident individual satisfying any of the following condition is Resident but Not Ordinarily Resident - An individual who is a non-resident in India in 9 out of 10 years preceding the relevant previous year; OR An individual staying in India for 729 days or less during 7 previous years preceding the relevant previous year.

In other words, a person returning from overseas to settle down in India can be treated as "Resident But Not Ordinarily Resident" for a period of two years after he returns to India.

An individual, who is a RNOR, is taxed in India on the income, which accrues or arises in India. No tax liability accrues in respect of the income, which accrues or arises out of India.

Non-Resident

An individual, who does not satisfy any of the Residence Test, is a "Non-Resident". An individual, who is Non-Resident, is taxed in India on the income received or deemed to be received in India or accrues or arises or deemed to accrue or arise in India, in the relevant financial year.

Scope of Taxability of Income

Depending upon the residential status of an individual in India, the scope of taxable income will vary as shown in the table below:

Salary or pension earned in India is taxable though it may be paid in India or abroad. However, if the pension is received by or on behalf of the employee in a foreign country and later on remitted to India, it will be exempt from tax in India since it is not treated as income received in India.