Determination of taxability of a Non-Resident Individual in India

“Explore the determination of taxability for Non-Resident Individuals (NRIs) in India. Understand the steps involving residential status identification, tax incidence, and the choice between existing and new tax regimes. Learn about TDS, tax liability calculation, and the impact of Double Taxation Avoidance Agreements (DTAA) on NRIs. Get insights into the technical aspects of income taxation for NRIs under the Income Tax Act 1961.”

An NRI is an Indian citizen who stays outside India for the purpose of carrying out employment or any business or vocation, under circumstances indicating an intention to stay outside India for an uncertain duration and any Indian citizen deputed outside India for a temporary period in connection with employment. An NRI is defined as a citizen of India or a Person of Indian origin (“PIO”) who is not a resident and a Person of Indian origin is a citizen of a foreign country (other than Bangladesh and Pakistan) if:

a) He/she at any time held an Indian Passport; or

b) He/she or either of his parents or any of his/her grandparents was a citizen of India; or

c) Spouse of an Indian Citizen (a) or (b) above.

Non-Resident Indians are people who hold an Indian citizenship legally, but do not live in India. Thus, we need to determine the tax liability of a Non-Resident individual (“NRI”) in India and for that a person needs to evaluate various aspects which are summarized as follows:

How to determine taxability of a Non-Resident Individual in India

Step I: Identification of Residential Status of Individual

In order to determine the taxability of an individual in India, one needs to check the residential status of person for the previous year for which taxability needs to be determined. In general terms, residential status and citizenship are used alternatively but in the sense of law, both the terms are distinct. A person may be a resident of one country and citizen of another at the same time and taxation of an individual in India is based on his residential status and not on his citizenship. Thus, understanding of residential status is important for the purpose of determination of taxation of an individual in India.

The Income Tax Act, 1961 (“the Act”) defines the term “residential status” of an individual for the taxation purposes in India. As per the Act, “non-resident” means a person who is not a “resident” in India. Let us now look at the meaning of the term ‘resident in India’ which is defined under section 6 of the Act which states that:

A person will be resident of India in any financial year if they satisfies the following conditions:

> If they stay in India for 182 days or more during the financial year, or

> If they stay in India for 60 days or more during the financial year, and 365 days or more during the immediately preceding four financial years.

An individual who does not satisfy both the conditions as mentioned above will be treated as Non-Resident in that previous year.

However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India. However, from the financial year 2020-21, the period is reduced to 120 days where the total income (excluding income from foreign sources) exceeds Rs 15 lakhs.

Also, as per section 6(1A) of the Act,

Irrespective of the conditions as stipulated above, an individual, being an Indian citizen, not being a resident as per section 6 of the Act as mentioned above, shall be deemed to be an Indian resident, if

i. total income (excluding income from foreign sources) exceeds Rs. 15 lakhs during the relevant year; and

ii. he is not liable to pay tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

Thus, an Indian citizen having total income (excluding income from foreign sources) exceeding Rs. 15 lakhs during the relevant tax year will be deemed to be a resident of India if he is not liable to tax in any other country by reason of domicile or residence or any other criteria of similar nature.

Conclusively, a person who does not fall under the definition of resident in India as mentioned above will be considered as a non-resident in India for the purpose of taxation under the Act.

Step II: Incidence of tax in case of a Non-resident in India

Once the residential status is determined, we should determine the scope of his income which is taxable in India under the Act. Scope of income is defined under the section 5(2) of the Act which states the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-

a) is received or is deemed to be received in India during the previous year by or on behalf of such person; or

b) accrues or arises or is deemed to accrue or arise to him in India during the previous year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

Also, the following incomes of NRIs are only taxable in India:

a) Income accrued in India;

b) Income received in India;

c) Income which has its source in India.

An income which is deemed to be received in India is defined under section 7 of the Act which is as follows:

7. The following incomes shall be deemed to be received in the previous year :—

(i) the annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule ;

(ii) the transferred balance in a recognised provident fund, to the extent provided in sub-rule (4) of rule 11 of Part A of the Fourth Schedule ;

(iii) the contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.

An income which is deemed to accrue or arise in India is defined under section 9 of the Act, for which you can refer the link attached:

https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx

Thus, any receipt fall incomes as defined under Section 9 of the Act will be considered as taxable income of non-resident individual in India and person responsible must be liable to pay tax on the same in India.

Also, income of Non-Resident individual which are chargeable as per Double Taxation Avoidance Agreements (“DTAA”) are

a) Royalty or Fee for Technical Services

b) Business Income

c) Independent Personal Services

d) Dependent Personal Services

e) Other incomes as per DTAA

However, Taxability of any Non-Resident in India is governed by the provisions of Income Tax Act and provisions of DTAA, whichever is more beneficial.

Step III: Identification of Tax Liability of Non-Resident in India

For the purpose of computation and payment of tax liability in India, a Non-resident individual can opt for the existing tax regime or the new tax regime with lower rate of taxation (u/s 115BAC of the Income Tax Act).

The taxpayer opting for concessional rates in the new tax regime will not be allowed certain exemptions and deductions (like 80C, 80D, 80TTA, HRA) available in the existing tax regime.

Surcharge- Surcharge is an additional charge levied for persons earning income above the specified limits, it is charged on the amount of income tax calculated as per applicable rates

> 10% – Taxable income above Rs. 50 lakh- upto Rs. 1 crore

>  15% – Taxable income above Rs. 1 crore – upto Rs. 2 crore

>  25% – Taxable income above Rs. 2 crore – upto Rs. 5 crore

>  37% – Taxable income above Rs. 5 crore

>  Maximum surcharge on income by way of dividend or income under the provisions of 111A, 112A and 115AD is 15%.

Marginal Relief- Marginal relief is a relief from surcharge, provided in cases where the surcharge payable exceeds the additional income that makes the person liable for surcharge. The amount payable as surcharge shall not exceed the amount of income earned exceeding ₹ 50 lakh, 1 crore, 2 crore or 5 crore respectively.

Health and Education Cess- Health and Education Cess @ 4% shall also be paid on the amount of income tax plus surcharge (if any).

Apart from general tax provisions, TDS sections are also applicable on Non-Residents. As per section 195 of the Act, any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

TDS is deducted at either of the following rates, whichever is more beneficial to the payee:

> Rates as per the Finance Act of the given year

> Rates contained in the Double Taxation Avoidance Agreements (DTAA) between India and the country of residence of such Non-Resident.

 Note that rates prescribed under the Act has to be increased by surcharge and education cess at the prescribed rate. If the payment is being made as per DTAA rates, then there is no need to add surcharge and health and education cess. The section 195 TDS Rates are as follows:

However, if the payee fails to furnish a valid permanent account number (“PAN”) to the payer, the TDS shall be done at the higher of the following rates as per Section 206AA.

Step IV: Taxability under the Double Taxation Avoidance Agreements (DTAA)

Double taxation means taxing the same income twice in the hands of an assessee. This arises on account of income being taxed in the country of residence as well as in the country of source. When a person earns income or income arises to him from more than one country, then the foreign income is liable to income tax in both the countries i.e. where the person is resident and the country where the person has earned the income. DTAA is a mechanism which addresses rigors of double taxation.

India has entered into DTAAs with several countries. As per section 90(2), taxability for non-residents is determined as per the provisions of the Act or the applicable DTAA, whichever is more beneficial. However, capital gains under the DTAA are generally taxed in a different manner than other incomes.

The Income Tax Act provides relief from double taxation provided that if a person who is a resident in India in any previous year, in respect of his income, accrued or arose outside India had paid tax on such income in any country outside India, he shall be entitled deduction from the income tax payable by him of a sum calculated on such double taxed income. This relief from double taxation is provided under:

a) Section 90 of the act if the country in which tax is paid has entered DTAA with the Government of India provided the NRI to whom such DTAA applies, has to obtain a Tax Residency Certificate (“TRC”) from the Government of that country or specified territory and provide such other documents and information, as may be prescribed, for claiming treaty benefits; or

b) Section 91 of the act if the country in which tax is paid has not entered into any DTAA with the Government of India provided the relief is restricted to Indian rate of tax or the rate of tax of the said country, whichever is lower.

Also, if a non-resident assessee derives income from multiple sources in India, it is entitled to adopt the provisions of the act for one source and the DTAA for the other source, whichever is more beneficial to it, even though the payer is common for both sources.

Conclusion

There are various technical aspects which needs to be checked for determining the residential status and taxability of a person in India under the Income Tax Act 1961. This article provides information regarding various aspects and law related to the Non-resident individuals’ taxation in India. We have made our best efforts in analyzing the taxability of a Non-Resident individual in India. However, one would need to evaluate if there are any additional key matters that should be determined in different scenarios.