Income earned by Non-residents become taxable in India if such income is earned or accrued in India. This requires certain non-residents to comply with the tax laws of India by paying appropriate amount of tax and filing their return. Whether a person is a non-resident can be determined by the provisions to calculate their residential status.
Residential Status of an Individual
For an individual, the residential status can be either of the following:
- Resident and Ordinary Resident
- Resident but not Ordinarily Resident
The Income Tax Act considers an individual as resident in India if any one of the following conditions is satisfied:
- The individual has been in India during the previous year for a total period of 182 days or more, or
- The individual has been in India during the 4 years immediately preceding the previous year for a period of 365 days or more and has been in India for at least 60 days in the previous year.
However, an Indian citizen who leaves India in any previous year as a member of the crew of an Indian ship or for purposes of employment outside India, or an Indian citizen or person of Indian origin (PIO) who being outside India comes on a visit to India in the previous year. (position up to Assessment Year 2020-21 i.e. Financial Year 2019-20) shall not be considered for the 2nd condition given in the above definition.
A Person of Indian Origin (PIO) is a person whose either of parents or grand-parents were born in undivided India.
The Finance Act, 2020 has brought in significant changes as to how Income tax considers non-residents. An individual being a citizen of India whose income other than income from foreign sources exceeds Rs. 15 lakhs shall be deemed to be a Resident (but not Ordinary Resident) in India in that previous year if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
Further, a person who is a citizen of India or a person of Indian origin having total income other than income from foreign sources exceeding Rs. 15 lakhs during the previous year shall be deemed as resident in India if he has been in India for 120 days or more during the previous year.
Now, if an Indian citizen or a person of Indian origin, whose total income, other than income from foreign sources exceed Rs. 15 lakhs, is staying in India for 120 days or more but less than 182 days shall be treated as Resident but not Ordinary Resident and taxed accordingly.
Meaning of total income other than from foreign sources
Total income refers to taxable income earned by the individual in India, or income accrued in India. Exempted income shall not be included. All income arising or accruing outside India should be excluded. Income from a business located outside India, but controlled from India and income from a profession set up in India, but received outside India are included in this calculation.
Taxation of various incomes
|Details of Income||Ordinary Resident||Not Ordinary Resident||Non-Resident|
|Income received or deemed to be received in India||Taxable||Taxable||Not taxable|
|Income accrued in India or deemed to accrue or arise in India||Taxable||Taxable||Not taxable|
|Income accrued outside India and received outside India from a business controlled from India||Taxable||Taxable||Not taxable|
|Income accrued outside India and received outside India other than business controlled from India||Taxable||Not taxable||Not taxable|
Requirement of PAN
Every non-resident is not mandatorily required to possess a Permanent Account Number. Only the non-residents who are earning taxable income in India and are required to obtain PAN in order to file return of Income.
Income from Salary and House Property
A non-resident or a person of Indian Origin may receive salary for their services rendered in India, such salary shall be taxable in India under the head “Salary”. Similarly, a person may receive rent in India from a property located in India, the same shall be taxable in India under the head “Income from house property”.
Income from Business or Profession
Income earned by a non-resident from business activity in India shall be taxable in India if it accrues or arises, directly or indirectly through a business connection in India. This is subject to the provisions of DTAA discussed later.
Significant Economic Presence
Finance Act 2020 has provided that significant economic presence shall constitute business connection in India. It means transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India if the aggregate of payments arising from such transactions during the year exceed an amount notified by the government.
Economic Presence also includes systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India as may be notified.
Income from Profession
Income earned by a non-resident from profession carried on in India shall be taxable in India. This is subject to the provisions of DTAA.
Royalty/ Fees for Technical Services
A non-resident or a foreign company, with a permanent establishment in India, provides professional services through a fixed place of profession situated in India whose right, property or information is effectively connected with profession. The income earned shall be by way of royalty/ fees for technical services and shall be taxable under the head Profits and Gains of business or profession. Normal tax rate shall apply on the non-resident.
Income from Capital Gains
Income arising from transfer of a capital asset situated in India shall give rise to capital gains. Capital asset may be land, building, jewellery or even shares of a company, etc. It should be noted that shares of a company incorporated outside India may still be a capital asset in India if the shares derive their value substantially from asset in India.
The nature of capital gains – long term or short term, depends on the period of holding of the asset. Short term capital gains are to be taxed under the normal provisions of the Act. In case of long-term capital gains, the non-resident assessee may choose between the normal provisions in section 112 and 112A of the Income Tax Act and the special provisions in Chapter XII-A of the Act.
Interest/ Royalty/ Fees for technical services
Interest, royalty, fees for technical services shall be deemed to accrue or arise in India, if the amount is payable by:
- The government
- A resident in India where the amount is in respect of any debt, asset or service utilized for the purpose of business or profession conducted in India or for earning any income from any source in India
- A non-resident where the amount is in respect of any debt used for the purpose of business, any right or property utilized for the purpose of his business or any other income, any service utilized for the purpose of his business or any other income.
Taxation of Interest
|Interest||Rate of Tax|
|Interest received from government or Indian concern on money borrowed||20% of interest|
|Interest received under section 194LB from an Infrastructure Debt Fund in foreign currency||5% of interest|
|Interest received under section 194LC from Indian company or business trust within a specified period||5% of interest (for AY 2020-21), 4% from AY 2021-22 onwards.|
|Interest received under section 194LD by foreign institutional investor or qualified foreign investor from an Indian company or Indian government where such interest in payable within a specified period||5% of interest|
|Interest received on Rupee Denominated Bonds issued outside India and purchased in foreign currency||5% of interest (Interest on Rupee denominated bonds issued by an Indian company or business trust between 17.09.2018 and 31.03.2019 is exempt from tax.)|
Taxation of Royalty/ Fees for Technical Services
Royalty and fees for technical services received from the Government or an Indian Company, other than those covered under section 44DA shall be taxable at the rate of 10% or DTAA, whichever is lower. Section 44DA shall apply where the non-resident or the foreign company has a permanent establishment in India or provides services through a fixed place of profession situated in India. Under this section, the royalty or fees for technical services shall be treated as business income as discussed above.
Special Provisions of taxation of Non-Residents
Chapter XII-A of the Income Tax Act provides the special provisions of taxation in the hands of non-residents. Section 115I provides that a non-resident may elect not to be governed by the provisions of this chapter for any assessment year by furnishing his return of income for that Assessment Year under section 139 and declaring therein that the provisions of this chapter shall not apply to him for that Assessment Year. If he does so, then his income shall be computed under the normal provisions of the Act.
Thus, the non-resident assessee has the option to choose whether to be taxed under the normal provisions of the Act or under the special provisions under this Chapter. This chapter consists of section 115C to 115I of the Income Tax Act.
Special Computation of Income
Section 115D provides the special provisions for computation of total income by NRIs. As per this section, computation shall be done as follows: –
- While computing investment income, no deduction / expenditure shall be allowed.
- Indexation benefit shall not be applicable against the long-term capital gains.
- Deductions under Chapter VI-A shall also not apply against investment income and LTCG
Special Rate of Tax
Section 115E provides that, where the total income of the non-resident includes investment income or LTCG, tax payable by him shall be aggregate of –
- 20% of investment income
- 10% of LTCG
- Normal tax on balance income (ignoring the investment income and LTCG for slab rates)
Transfer of Foreign Exchange Asset
Where the NRI has transferred a Long-Term foreign exchange asset and within a period of 6 months, after the date of such transfer invested the net consideration in any specified asset, then –
- If the cost of the new asset is greater than or equal to the net consideration, the entire capital gain shall be exempted
- If the cost of the new asset is less than the net consideration, exemption shall be available proportionately.
Double Taxation Avoidance Agreement (DTAA)
Section 90 of the Income Tax Act provides that the Central Government may enter into an agreement with the Government of any other country outside India or specified territory outside India –
- For the granting of relief in respect of income on which income tax has been paid in both the countries/ territories; or
- For the avoidance of double taxation of income under the Income Tax Act and under the corresponding law in the other country/ territory; or
- For exchange of information for the prevention of evasion or avoidance of income tax chargeable under this Act or under the corresponding law in force in that country or specified country or specified territory; or
- For recovery of income tax under the Income Tax Act and corresponding law in force in the other country/ territory.
Under the DTAA, income is taxed only in one country. Where income is taxed in both countries, then tax paid in one country shall be allowed as deduction from the tax payable in the other country / territory.
The DTAA or the normal provisions of the Income Tax Act, whichever is more beneficial to the assessee shall be applicable.
As per DTAA, the income of a non-resident or a foreign company received from India shall be taxable in India, only if, the non-resident or foreign company has a permanent establishment in India. The profit attributable to such permanent establishment shall be taxable in India. Where the non-resident or foreign company does not have a permanent establishment in India, the income earned in India is not taxable in India.
Filing of Returns
Every person other than a company or a firm shall file his return if total income exceeds the maximum amount not chargeable to tax. For a non-resident, the maximum amount not chargeable to tax is Rs. 2,50,000. The benefit of senior citizen in not available to a non-resident.
Non-resident is not required to furnish the return of income if:
- Total Income consists of only Investment Income and/ or LTCG
- TDS has been duly deducted at source from such income.