Articles explain who is Non-Resident Individual, Partnership firm, Company for Income Tax Purpose, Taxable Income of Non Residents, Tax on Indirect transfer of a capital asset situated in India by Non-Residents, activities not to constitute business connection in India, Exemption from applicability of Section 206AA to non-residents, Relaxation to first time resident foreign companies, Tax incentive to unit located in international financial services center, Section Provisions for taxability of Non-residents with Limit of exemption or deduction or Computation of income, Chart of  Special Rates of Taxes for Non-Resident and Applicability of Minimum Alternative Tax (MAT) on foreign companies.

Benefits available to Non- Residents

1. Who is a Non-Resident

Section 2(30) defines non-resident as a person who is not a resident. Section 6 lays down the test of residency for different taxpayers as under:

A. Individual

An individual is said to be non-resident in India if he is not a resident in India. An individual shall be deemed to be resident in India if he satisfies any of the following conditions:

  1. If he is in India for a period of 182 days or more during the previous year; or
  2. If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

Condition no. 2 is not taken into consideration in cases given below:

a)  If an Indian citizen leaves India during the previous year for the purpose of employment outside India;

b)  If an Indian citizen leaves India during the previous year as a member of the crew of an Indian ship; or

c)  If an Indian citizen or a person of Indian origin comes on a visit to India during the previous year.

[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 undivided India]

Note:

With effect from Assessment Year 2015-16, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.

B. Partnership firm

A partnership firm is treated as non-resident in India if control and management of its affairs are situated wholly outside India.

C. Company

An Indian company is always resident in India. A foreign company is treated as resident if, during the previous year, control and management of its affairs is situated wholly in India. In other words, a foreign company is treated as non-resident if control and management of its affairs is situated wholly or partly outside India.

With effect from Assessment Year 2017-18, a company is said to be resident in India in any previous year, if:

(i) it is an Indian company; or

(ii) its place of effective management, in that year, is in India.

For this purpose, the “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.

2. Scope of Total Income

As per Section 5 of the Income-tax Act, 1961, unlike a resident person who is liable to pay tax on his global income, a non-resident shall be liable to tax in India in respect of following incomes only:

1)  Income received or is deemed to be received in India in such year; or

2)  Income accrues or arises or is deemed to accrue or arise to him in India during such year.

3. Indirect transfer of a capital asset situated in India

As per section 9(1)(i), any income accruing or arising, whether directly or indirectly, through transfer of a capital asset situated in India shall be deemed to accrue or arise in India.

The Finance Act, 2012 inserted Explanation 5 to section 9(1)(i) w.e.f. 01.04.1962 to clarify that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India, shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

A new Explanation 6 is inserted to section 9(1)(i) by the Finance Act, 2015 w.e.f 01.04.2016 to define the term “substantially”. It provides that share or interest in a company or entity registered or incorporated outside India shall be deemed to derive its value substantially from the assets located in India, if, on the specified date, the value of such assets:

(i) exceeds Rs. 10 Crore; and

(ii) represents at least 50% of the value of all the assets owned by the company or entity, as the case may be.

Further, a new Explanation 7 is inserted to provide that no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India, referred to in the Explanation 5:

(i)  if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of such company or entity; or

(ii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds any right in, or in relation to, such company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India, nor holds such percentage of voting power or share capital or interest in such company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India;

In a case where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity referred to in the Explanation 5, are not located in India, the income of the non-resident transferor, from transfer outside India of a share of, or interest in, such company or entity, deemed to accrue or arise in India under this clause, shall be only such part of the income as is reasonably attributable to assets located in India and determined in such manner as may be prescribed.

4. Certain activities not to constitute business connection in India

A new Section 9A is inserted by the Finance Act, 2015. It provides that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund (subject to certain conditions).

It further provides that an eligible investment fund shall not be said to be resident in India for the purpose of section 6 merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.

(Refer Section 9A for meaning of ‘Eligible Investment Fund’, ‘Eligible Fund Manager’ and other conditions).

5. Exemption from applicability of Section 206AA to non-residents

Section 206AA provides that where the taxpayer does not furnish its PAN to the personresponsible for withholding of tax, tax shall be deducted at source at higher of the following rates:

(a) rate specified in the relevant provision of this Act;

(b) rate or rates in force; or

(c) 20%.

However, the provisions of section 206AA shall not apply to a non-resident, not being a company, or to a foreign company, in respect of—

(i) payment of interest on long-term bonds as referred to in section 194LC; and

(ii) any other payment subject to such conditions as may be prescribed.

6. Relaxation to first time resident foreign companies

Section 115JH is inserted to provide relaxation to foreign companies from certain compliances if such company is held to be resident in India for the first time. It is provided that provisions relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, advance tax, TDS or transfer pricing shall apply to said company subject to such modifications or exceptions, as may be prescribed by the Government.

7. Tax incentive to unit located in international financial services center

Rate of MAT shall be 9% in case of unit located in International Financial Services Center (‘IFSC’), provided such unit derives its income solely in convertible foreign exchange. A unit located in IFSC, deriving income solely in convertible foreign exchange, shall not be subject to dividend distribution tax on declaration of dividend out of its current income.

No Securities Transaction Tax (STT) and Commodities transaction tax would be levied on transactions undertaken on a recognised stock exchange located in IFSC if consideration is paid or payable in foreign currency.

Long-term capital gain arising from transaction in foreign currency on recognized stock exchange located in IFSC would be exempt even if STT is not paid.

8. Provisions for taxability of Non-residents

S.N.SectionParticularsLimit of exemption or deduction or Computation of incomeAvailable to
A. Income not chargeable to tax
1.10(4)(i)Interest on bonds or securities notified before 01-06-2002 by the Central Government including premium on redemption of such bonds.Interest amountNon resident
2.10(4)(ii)Interest on money standing to the credit in a Non-resident (External) account in India.Interest amountPerson resident outside India (under FEMA Act) and person who has been permitted to maintain said account by RBI
3.10(4B)Interest on notified savings certificates issued before 01-06-2002 by the Central Government and subscribed to in convertible foreign exchange.Interest amountIndividual, being a citizen of India or a person of Indian Origin, who is a non resident.
4.10(6)(ii)Remuneration received by Foreign Diplomats/Consulate and their staff (Subject to conditions)RemunerationIndividual (not being a citizen of India)
5.10(6)(vi)Remuneration received by non-Indian citizen as employee of a foreign enterprise for services rendered by him during his stay in India, if:

a)  Foreign enterprise is not engaged in any trade or business in India

b)  His stay in India does not exceed in aggregate a period of 90 days in such previous year

c)  Such remuneration is not liable to be deducted from the income of employer chargeable under this Act

RemunerationIndividual – Salaried Employee (not being a citizen of India)
6.10(6)(viii)Salary received by a non-resident, for services rendered in connection with his employment on a foreign ship if his total stay in India does not exceed 90 days in the previous year.SalaryNon-resident Individual – Salaried Employee (not being a citizen of India)
7.10(6)(xi)Remuneration received by an Individual, who is not a citizen of India, as an employee of the Government of a foreign state during his stay in India in connection with his training in any Government Office/Statutory Undertaking, etc.RemunerationIndividual-Salaried Employee (not being a citizen of India)
8.10(6A)Tax paid by Government or Indian concern on royalty or FTS from Government or Indian concern under agreement made before 1-6-2002 which either relates to a matter included in the industrial policy of the Government and is in accordance with that policy or is approved by Central GovernmentTax liability of foreign company borne by taxpayerForeign Company
9.10(6B)Tax paid by Government or Indian concern under terms of agreement entered into before 1-6-2002 by Central Government with Government of foreign State or international organization on income derived from Government or Indian concern, other than income by way of salary, royalty or fees for technical servicesTax liability of non-resident borne by taxpayerNon-resident
10.10(6BB)Tax paid by Indian company, engaged in the business of operation of aircraft, who has acquired an aircraft or its engine on lease, under an approved (by Central Government) agreement entered into between 31-3-1997 and 1-4-1999, or after 31-3-2007, on lease rental/incomeTax liability so borne by Indian CompanyGovernment of foreign State or foreign enterprise
11.10(6C)Income by way of royalty or fees for technical services rendered in India or abroad in projects connected with security of India pursuant to agreement with Central GovernmentRoyalty and fee for technical servicesNotified foreign company
12.10(8A)Foreign income and remuneration received by consultant (agreement relating to his engagement must be approved) out of funds made available to an international organization (agency) under a technical assistance grant agreement between that agency and the Government of a foreign State (Subject to certain conditions).Entire AmountIndividual, being a:

a) A non-resident engaged by the agency for rendering technical services in India;

b) Non-Indian citizen; or

c) Indian citizen who is not ordinarily resident in India

13.10(8B)Foreign income and remuneration received by an employee of the consultant as referred to in Section 10(8A) (contract of service must be approved by the prescribed authority before commencement of service).Entire AmountIndividual, being a:

a) Non-Indian citizen; or

b) Indian citizen who is not ordinarily resident in India

14.10(15)(iid)Interest on notified bonds (notified prior to 01-06-2002) purchased in foreign exchange (subject to certain conditions)Interest AmountIndividual, being a:

a) NRI or nominee or survivor of NRI;

b) Individual to whom bonds have been gifted by NRI.

10(15)(iii)Interest on securitiesInterest amountIssue Department of Central Bank of Ceylon
10(15)(iiia)Interest on deposits made with scheduled bank with approval of RBIInterest amountBank incorporate abroad
10(15)(iiib)Interest payable to Nordic Investment BankInterest amountNordic Investment Bank
10(15)(iiic)Interest payable to the European Investment Bank on loan granted by it in pursuance of framework agreement dated 25-11-1993 for financial corporation between Central Government and that BankInterest amountEuropean Investment Bank
10(15)(iv)(b)Interest received from industrial undertaking in Indian on money lent to it under a loan agreement entered into before 01-06-2001Interest amountApproved foreign financial institution
10(15)(iv)(fa)Interest payable by scheduled bank on deposits in foreign currency where acceptance of such deposit by the bank is duly approved by RBI.Interest amounta) Non-resident

b) Individual or HUF being a resident but not ordinary resident

10(15)(viii)Interest on deposit made on or after 01.04.2005 in an offshore Banking Unit referred to in Section 2(u) of the Special Economic Zones Act, 2005.Interest amountPerson who is a non-resident or not ordinarily resident.
15.10(23BBB)Income of European Economic Community from interest, dividends or capital gains from investment of funds under specified schemeSpecified interest, dividends or capital gainsEuropean Economic Community
16.10(23BBC)Income of SAARC Fund for Regional Projects set up by Colombo Declaration issued on 21-12-1991Entire incomeSAARC Fund for Regional Projects
17.10(48)Any income received in India in Indian currency by a foreign company on account of sale of crude oil or any other goods or rendering of services as may be notified by the Central Government, to any person in India under an

approved and notified agreement or arrangement (Subject to certain conditions)

Specified IncomeForeign Company
18.10(48A)Any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India (subject to certain conditions)Entire incomeForeign company
19.10(50)Any income which is chargeable to equalization levy under Chapter VIII of the Finance Act, 2016.Entire incomeNon-resident
B. Income under the head Profit and gains from business or profession
1.44B read with 172Income from shipping business shall be computed on presumptive basis (Subject to certain conditions).7.5% of specified sum shall be deemed to be the presumptive incomeNon-resident engaged in shipping business
2.44BBIncome of a non-resident engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils shall be computed on presumptive basis (Subject to certain conditions).10% of specified sum shall be deemed to be the presumptive incomeNon-resident engaged in activities connected with exploration of mineral oils
3.44BBAIncome of a non-resident engaged in the business of operation of aircraft shall be computed on presumptive basis (Subject to certain conditions).5% of specified sum shall be deemed to be the presumptive incomeNon-resident engaged in the business of operating of aircraft
4.44BBBIncome of a foreign company engaged in the business of civil construction power turnkey or the business of erection of plant or Machinery or testing or commissioning there of, in connection with projects shall be computed on presumptive basis (Subject to certain conditions).10% of specified sum shall be deemed to be the presumptive incomeForeign Company
5.44CDeduction for Head office Expenditure (Subject to certain conditions and limits)Deduction for head-office expenditure shall be limited to lower of following:

a) 5% of adjusted total income* ; or

b) Head office exp. as attributable to business or profession of taxpayer in India

* In case where adjusted total income of assessee is a loss, adjusted total income shall be substituted by average adjusted total income

** Adjusted total income or average adjusted total income shall be computed after prescribed adjustments i.e. unabsorbed depreciations, carry forward losses, etc.

Non-resident
6.44DADeduction of expenditure from royalty and FTS received under an agreement made after 31-03-2003 which is effectively connected to the PE of non-resident in India (Subject to certain conditions)Expenditure incurred wholly and exclusively for the business of PE or fixed place of profession in India shall be allowed as deduction.Non-resident
C. Income under the head Capital Gains
1.47(via)Transfer of a capital asset being shares in an Indian company by the amalgamating foreign company to the amalgamated foreign company (in scheme of amalgamation) shall not be treated as ‘transfer’ (Subject to certain conditions).No capital gains shall arise in the hands of foreign amalgamating company due to transfer of capital assets.Foreign amalgamating company
2.47(viab)Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a foreign company to another foreign company under a scheme of amalgamation shall not be regarded as transfer (Subject to certain conditions)No capital gains shall arise in the hands of foreign amalgamating companyForeign amalgamating company
3.47(vic)Transfer of a capital asset being shares in an Indian company by the demerged foreign company to the resulting foreign company (in scheme of demerger) shall not be treated as ‘transfer’ (Subject to certain conditions).No capital gains shall arise in the hands of foreign demerged company due to transfer of capital assets.Foreign demerged company
4.47(vicc)Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a demerged foreign company to resulting foreign company pursuant to demerger shall not be regarded as transfer (Subject to certain conditions)No capital gains shall arise in the hands of foreign demerged companyForeign demerged company
5.47(viia)Transfer of capital asset being bonds or GDR [referred to in section 115AC(1)] outside India by one non-resident to another non-resident shall not be treated as ‘transfer’.No capital gains shall arise in the hands of non-resident transferorNon-resident
6.47(viib)Transfer of a capital asset, being a Government security carrying a periodic payment of interest, made outside Indian (through an intermediary dealing in settlement of securities) by a non-resident to another non-resident shall not be treated as ‘transfer’ (Subject to certain conditions). (Inserted by the Finance (No. 2) Act, 2014.No capital gains shall arise in the hands of non-resident transferorNon-resident
7.First Proviso to 48Computation of capital gains when shares or debentures in an Indian Company are transferred which were acquired in foreign currency (Subject to certain conditions)Capital gain shall be computed in same foreign currency (utilized for acquiring shares or debentures) which shall be reconverted into Indian currency (without providing benefit of indexation)Non-resident
8.115FLong-term capital gain arising from transfer of specified foreign exchange assets shall be exempt from tax if net consideration is invested within six months after date of transfer in any specified asset or deposited in notified saving certificates (Subject to certain conditions).Amount of exemption shall be computed in following manner:

Amount invested in new asset X Capital gains / Net Sales consideration

Non-resident Indian
D. Other Provisions
1.90A non-resident can apply either provisions of the Act or the relevant DTAA (India has entered into with counterpart foreign country), whichever is more beneficial.Beneficial provisions of DTAA or the Income-tax ActNon-resident
1A.95Implementation of GAAR has been deferred by 2 years. Provisions of GAAR shall be applicable in respect of any assessment year beginning on or after April 1, 2018.
2.192If net taxable income (being income from employment) is less than maximum amount which is not chargeable to tax (Rs. 2,50,000) no tax shall be deducted at source.No deduction of tax at source from salariesNon-resident – Individual
3.245N, 245QA non-resident applicant can apply before Authority for determination of tax liability that may arise out of a business carried out in India (Subject to certain conditions)Non-resident can file application for Advance RulingNon-resident
4.115GA non-resident Indian shall not be required to file his return of income if his total income consists only following incomes and tax has been deducted therefrom:

a) Income from investment in foreign exchange assets

b) Long-term capital gains arising from transfer of foreign exchange assets.

Exemption from filing of return of incomeNon-resident Indian

* For detailed conditions refer Income Tax Act, 1961

Notes:

a) “Foreign Exchange Asset” means any “specified asset” which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange [Section 115C(c)].

b) In view of Section 115(f), “Specified asset” means any of the following assets, namely:

(i) Shares in an Indian company;

(ii) Debentures issued by an Indian company which is not a private company;

(iii) Deposits with an Indian company which is not a private company;

(iv) Any security of the Central Government;

(v) Other notified assets

c) ‘Non-resident Indian’ means an individual, being citizen of India or a person of Indian origin who is not a “resident” [Section 115(e)].

9. Special Rates of Taxes for Non-Resident

S.N.SectionParticularsRates
1.112(1)(c)Long Term Capital Gains20%
2.112(1)(c)Long term capital gains arising from transfer of a capital asset, being unlisted securities or shares of a company not being a company in which public are substantially interested.10%
3.112(1)(c)Concessional rate of tax if long term capital gains arising from transfer of listed securities or units or zero coupon bonds is calculated without taking into consideration the benefit of indexation.

If transfer takes place after July 10, 2014, the above concessional rate of tax will not be available in case of long-term capital gain arising from transfer of units (As amended by the Finance (No. 2) Act, 2014).

10%
4.10(38)Long-term capital gains arising from transfer of equity shares or units of equity oriented fund or a unit of business trust is exempt from tax if such transaction is chargeable to securities transaction tax.

With effect from assessment year 2016-17, the exemption shall also be available for an income arising from transfer of any units of a business trust which were acquired in consideration of a transfer referred to in Section 47(xvii) and in respect of which security transaction tax has been paid.

Nil
5.111AConcessional rate of tax if short term capital gains arising from transfer of equity shares or units of an equity oriented fund, or a unit of business trust is chargeable to securities transaction tax.

With effect from assessment year 2016-17 the concessional tax rate shall also apply to any income arising from transfer of any units of a business trust which were acquired in consideration of a transfer referred to in section 47(xvii) and in respect of which security transaction tax has been paid.

15%
6.115A(1)(a)(i)Dividends other than as referred to in Section 115-O20%
7.115A(1)(a)(ii)Interest received from Government or an Indian concern on monies borrowed or debt incurred in foreign currency20%
8.115A(1)(a)(iia)Interest from notified Infrastructure Debt Fund as referred to in section 10(47)5%
9.115A(1)(a)(iiaa)Interest received from Indian Company on monies borrowed by it in foreign currency from a source outside India under a loan agreement or through issue of any long-term bond as referred to in Section 194LC (Subject to certain conditions).5%
10.115A(1)(a)(iiab)Interest on Rupee Denominated Bonds of an Indian Company or Government Securities received during 01.06.2013 and 30.06.2017 by FIIs / QFIs as referred to in Section 194LD (Subject to certain conditions).5%
11.115A(1)(a)(iiac)Interest received from business trusts, being of the nature referred to Section 10(23FC), by its unit holders as referred to in Section 194LBA (Subject to certain conditions).5%
12.1115A(1)(a)(iii)Income in respect of units purchased of a Mutual Funds in foreign currency [specified under section 10(23D) or of UTI]20%
13.115A(1)(b)Income by way of Royalty or FTS (other than income referred to in Section 44DA) received in pursuance of an agreement made at any time after 31-03-1976.10%
14.115ABIncome of an overseas financial organization on transfer of units purchased in foreign currency being long-term capital gains10%
15.115ACIncome from bonds or GDRs of a public sector company sold by the Government and purchased in foreign currency or long-term capital gains arising from their transfer [other than dividends as referred to in section 115-O]10%
16.115AD(b)Short term capital gains earned by FIIs as referred to in Section 111A15%
17.115AD(b)Any other short term capital gain earned by FIIs (other than as referred to in Section 111A)30%
18.115AD(b)Long term capital gains earned by FIIs10%
19.115AD(a)Interest referred to in section 194LD earned by FIIs5%
20.115AD(a)Other income earned by FIIs [other than dividends as referred to in Section 115-O]20%
21.115BBA(1)(a)/(b)Income of a non-resident foreign citizen sportsman for participation in any game in India or received by way of advertisement or for contribution of articles relating to any game or sport in India or income of a non-resident sport association by way of guarantee money20%
22.115BBA(1)(c)Income of non-resident foreign citizen (being an entertainer) for performance in India20%
23.115EIncome from foreign exchange asset of non-resident Indian [not applicable in the case of dividends referred to in section 115-O]20%
24.115ELong-term capital gain from transfer of foreign exchange asset by non-resident Indian10%

7. Applicability of Minimum Alternative Tax (MAT) on foreign companies

With effect from assessment year 2016-17, in respect of a foreign company, capital gains arising from transfer of securities, interest, royalty and fees for technical services accruing or arising to such foreign company shall be excluded from book profit for the purpose of charging MAT. Further, expenditure, if any, debited to the profit loss account, in respect of such income shall also be added back to the book profit for the purpose of computation of MAT.

However, provisions of section 115JB shall not be applicable with effect from April 1, 2001 to a foreign company, if—

(i)  the assessee is a resident of a country or a specified territory with which India has an Double Taxation Avoidance Agreement(‘DTAA) or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India; or

(ii)  the assessee is a resident of a country with which India does not have an DTAA and the assessee is not required to seek registration under any law for the time being in force relating to companies.

(Republished with Amendments)

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