1. The taxability of a person rests on resident status, source of income and the place of receipt of income. We have prepared this note for the purpose of determining the taxability of persons who are citizens of India but resident outside India or Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) Overseas Citizenship of India (OCI) or Foreign Citizens (FC).
A. DETERMINATION OF RESIDENTIAL STATUS OF AN INDIAN CITIZEN OR PERSON OF INDIAN ORIGIN
I. According to Section 6(1)(a) of the Income Tax Act, 1961 a person is said to be a resident of India if he is in India for a period of 182 days or more during the previous year; or
II. According to Section 6(1)(c) an Indian Citizen has been in the country for at least 365 days or more during the 4 years preceding the relevant previous year and for a period of 60 days or more during the relevant previous year, he would be regarded as a resident. In other words, from the above if any person stays for 364 days in the 4 preceding years other than the relevant previous year and 59 days in the relevant previous year that is 423 days in 5 preceding years including the relevant previous year then the individual would be considered as non-resident in India. According to Explanation (1) (a) of Section 6(1)(c) however, if a person who is an Indian citizen visits India, then he can stay in the country for 182 days without losing his non-resident status. However, if he stays in India between 120 days and 181 days and his Indian income exceeds 15 lac rupees then he would be an RNOR and his foreign income would be out of the tax net but his Indian income would be taxable.
III. For the purposes of Section 6(3)(i) a company is said to be resident in India in the previous year if it is an Indian company or as per Section 6(3)(ii) the place of its effective management is situated in India in the relevant previous year.
IV. The place of effective management is defined as the place where the key managerial and commercial decisions in the conduct of the decision is substantially made.
V. Also, in accordance with the provisions of Section 6(4) every company is said to be a resident in India in any and every case except where the management and control of the company is situated wholly outside India.
VI. Again, as per Section 6(5) if a person is resident in India for any source of income than he would be deemed to be resident in India for all sources of income in India.
VII. According to Section 6(1A), a person who is a citizen of India having income exceeding 15 lac rupees, other than income from foreign sources, would be deemed to be a resident of the country or in other words RNOR, if his income is not taxable in any other country or domicile. However, his income from foreign sources is not taxable.
VIII. Also, for the purpose of Section 6 of the Income Tax Act, 1961, the expression “income from foreign sources” means income which does not accrue or arise in India other than income arising from business set up in India.
IX. Now as per Section 6(6) a person would be deemed to be Resident but Not Ordinarily Resident (RNOR) in a previous year if
As per Section 6(6)(a) he is a non-resident in 9 out of 10 previous years or has been in India for less than 730 days in the preceding 7 years with respect to the relevant previous year respectively; or
As per Section 6(6)(c) a citizen of India, a person of Indian origin having Indian income more than 15 lac rupees stays in India for more than 120 days but less than 182 days; or
As per Section 6(6)(d) a person as defined in Section 6(1A) of the Income Tax Act, 1961.
X. Thus, from the above it is clear that as per Section 6(6)(d) read together with Section 6(6)(c) and with Section 6(1A), a citizen of India who is a stateless person (worldwide) or has no domicile, would be deemed resident of India and if his stay in the country is beyond 120 days but less than 182 days and their Indian income is more than 15 lac rupees then such a person would be regarded as RNOR and his Indian income would be taxable as they would be regarded as residents of India for the purpose of taxation. However, they would not be taxed on their foreign income. Again, in the same case if he stays for less than 120 days in India and his income is more than 15 lac rupees then he would be considered as per condition of Section 6(1)(c) as an NRI and not an RNOR.
XI. In other words, a citizen of India and person of Indian origin, who visits India if he has income less than 15 lac rupees, can stay for less than 120 days in the previous year with respect to Section 6(1)(c) without losing his non-resident status but his Indian income will be taxable.
XII. Most Important Point
Therefore, as per Section 6(1)(c) and clause(b) of Explanation 1 of Section 6(1) of the Income Tax Act 1961, a person of Indian origin or an Indian citizen on a visit to the country would be regarded as a non-resident if he stays in India for less than 120 days in the previous financial year and does not stay for more than 365 days in the 4 preceding financial years. Thus, a person can stay in India in India for a maximum of 483 days in 5 years including the current financial year including the current date and if his income is less than 15 lac rupees then he would not lose his non-resident status (NRI). In case such a person who has not surrendered his Indian citizenship or holds an Indian passport or is a Person of Indian Origin and has income exceeding 15 lac rupees during the financial year then such a person would be considered as an RNOR according to the provisions of Section 6(6)(c) read with Explanation 1 to Section 6(1) and accordingly his Indian income would be subject to taxation in India but his foreign income (income from foreign sources) would be exempt from tax. This in short covers up everything on non-resident status for short span of time preceding 5 years. Other clauses are there for larger spans of time under Section 6(6)(a) and Section 6(6)(b) (and also for HUF and AOP).
B. DEFINITION – PERSONS OF INDIAN ORIGIN
The PIOs may be deemed to be as any person who held an Indian passport at some point and if he or either of his parents, or any of his grandparents were born in undivided India.
C. DEFINITION – OVERSEAS CITIZENS OF INDIA (OCI)
OCI is a form of permanent residency available to people of Indian origin and their spouses which allows them to live and work in India indefinitely. Despite the name, OCI status is not citizenship and does not grant the right to vote in Indian elections or hold public office. They are given a lifelong multiple entry visa into the country for any purpose and they would be treated at par with the NRIs in all fields. (Indian Citizenship Act, 1955 – discussed elsewhere in this article).
2. One important aspect of Residence in India is that India does not allow dual citizenship. An Indian person who wants to settle abroad permanently would have to surrender his Indian passport and would not remain an Indian citizen. However, OCIs are allowed to retain their foreign passports or rather such persons hold dual citizenship.
3. NRIs, PIOs, OCIs and FCs who are residents of India for 182 days or more during the previous year or stay for 60 days or more during that previous year and for more than 364 days during the 4 years immediately preceding the relevant previous year are taxable in India. Such persons would have to file their Income Tax Return in India. The income tax filing is usually based on his / her global income and is subject to the conditions of Double Taxation Avoidance Agreements (DTAA) [discussed elsewhere in this document].
4. An Indian who is employed outside India and stays in another country for the purpose of employment for more than 182 days during the previous year or for a period of less than 60 days during the previous year and for less than 365 days during the 4 years immediately preceding that relevant previous year but has income in India not exceeding 15 lac rupees such persons would be not be taxed on their foreign salary income and would be regarded as non-residents.
5. However, NRIs and PIOs on a visit to India would be treated as Resident but not Ordinarily Residents (RNOR) in India if they stay in India for a period of 120 days or more but less than 182 days and their income from Indian sources exceeds 15 lac rupees during the previous year. Such persons would also not be taxed on their income from foreign sources but their position has been compromised to RNORs. Also they would have to check that they have not stayed for a period of 365 days in 4 preceding years, immediately preceding the relevant previous year.
6. Thus, DTAA generally applies to NRIs and PIOs who are regarded as non-residents according to Section 115C of the Income Tax Act, 1961. NRIs hold Indian passport but PIOs hold foreign passports
7. Section 90 of the Income Tax Act, 1961
According to Section 90(1)(a) of the Income Tax Act, 1961 the Central Government may enter into an agreement with the Government of another country outside India for granting relief in respect of the income tax paid in both the countries according to Section 90(1)(a)(i) or according to Section 90(1)(a)(ii) for promoting mutual economic relations or trade and investment; or
according to Section 90(1)(b) for avoidance of double taxation of income under this act or any other corresponding law in force in the other country without creating opportunities for exemption or reduced taxation through tax evasion or avoidance including treaty shopping arrangements aimed at providing relief or direct or indirect benefits to the residents of any other country; or
according to Section 90(1)(c) – for exchange of information for the prevention of tax evasion etc.; or
According to Section 90(2) where the Central Government has entered into an agreement with another country for granting of tax relief or avoidance of double taxation on the income of the assessee then the provisions of the Income Tax Act, 1961 would apply to the extent this agreement is more beneficial to that assessee.
In such cases to obtain relief the Tax Residency Certificate and other information in Form 10F, 10FA and 10FB need to be provided to the Income Tax authorities.
8. Section 91 of the Income Tax Act, 1961
This Section deals with the countries with which no Agreement exists. “If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under Section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.”
9. Section 93 of the Income Tax Act, 1961
This Section deals with transfer of assets to non-residents and the treatment of consequent income therefrom.
10. Section 115A of the Income Tax Act, 1961
“According to Section 115A(1) where the total income of a non-resident individual or a foreign company includes any income by way of dividends other than dividends under section 115O of the Income Tax Act, 1961 or interest income received from a debt incurred by an Indian concern in foreign currency the dividends and interest income would be chargeable to tax at the rate of 20%.”
“In accordance to Section 115A(5)(a) where the total income of non-resident individual or a foreign company referred to in Section 115A(1) consists only of income by way of dividends or income by way of interest and tax has been deducted at source from such income under Section 115A(5)(b) under the provisions of Part B of Chapter XVII at the rate specified i.e. 20% then such a non-resident or foreign company need not file a return of income under section 139(1) of the Income Tax Act, 1961.”
11. Section 115AB of the Income Tax Act, 1961
This section deals with tax on income from units purchased in foreign currency and capital gains arising therefrom to Offshore Funds. Not required for our purpose.
12. Section 115AC of the Income Tax Act, 1961
This section deals with “income to non-residents by way of interest on bonds purchased in foreign currency, dividends from GDRs or long-term capital gains from transfer of GDRs. In short, such income would be chargeable to tax at the rate of 10% and if the total income of the assessee consists only of such income, then it would not be necessary for him to furnish his return of income under section 139(1) of the Income Tax Act provided tax on aggregate of such income has been deducted at source under Part B of Chapter XVII of the said act.”
13. Section 115ACA of the Income Tax Act, 1961
“Any income to resident individual employees of Indian company by way of dividends from GDRs and long-term capital gains from GDRs purchased in foreign currency as a part of Employees Stock Options would be chargeable to tax at the rate of 10%.”
14. Section 115D of the Income Tax Act, 1961
“No deduction in respect of any expenditure or allowance would be allowed under any provision of the Act in computing the investment income earned by a non-resident. According to the provisions of second proviso to section 48 no deduction on account of indexed cost of acquisition and indexed cost of improvement would be allowed to the non-resident where his gross total income consists only of income by way of investments or long-term capital gains. However, deductions under Chapter VIA would be allowed from gross total income.”
15. Section 115F of the Income Tax Act, 1961
“Any long term capital gains that arises on transfer of foreign exchange assets to an NRI, (the asset so transferred being hereafter in this section referred to as the original asset), and the NRI within a period of six months after the date of such transfer, invests the whole or any part of the net consideration in any specified asset, or in any savings certificates referred to in clause (4B) of section 10 as specified assets or such savings certificates being hereafter in this section referred to as the new asset),
then the long -term capital gains, shall not be charged to tax where the amount invested exceeds the net consideration; or
otherwise, where the amount so invested is less than net consideration the long-term capital gains be reduced by the amount proportionate to the amount as the new asset bears to the amount of net consideration.
Where the new asset is transferred or converted into money within a period of 3 years from the date of its acquisition the amount of long-term capital gain not charged to tax under Section 45 shall be charged to tax as capital gains in the year the asset is so converted or transferred.”
Explanation — For the purposes of this sub-section, —
(i) “cost”, in relation to any new asset, being a deposit referred to in sub-clause (iii), or specified under sub-clause (v), of clause (f) of section 115C, means the amount of such deposit;
(ii) “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 asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
16. Section 115H of the Income Tax Act, 1961
“Where a person, who is a non-resident Indian in any previous year, becomes assessable as resident in India in respect of the total income of any subsequent year, he may furnish to the [Assessing] Officer a declaration in writing along with his return of income under section 139 or the assessment year for which he is so assessable, to the effect that the provisions of this Chapter shall continue to apply to him in relation to the investment income derived from any foreign exchange asset and if he does so, the provisions of this Chapter shall continue to apply to him in relation to such income for that assessment year and for every subsequent assessment year until the transfer or conversion into money of such assets.”
17. Section 115 – I of the Income Tax Act, 1961
“A non-resident Indian 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 declaring therein, that the provisions of this Chapter shall not apply to him for that assessment year and if he does so, the provisions of this Chapter shall not apply to him for that assessment year and his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act.”
18. Section 174 of the Income Tax Act, 1961
This Section deals with assessment of individuals leaving India. “According to Section 174(1) – Notwithstanding anything contained in section 4, when it appears to the Assessing Officer that any individual may leave India during the current assessment year or shortly after its expiry and that he has no present intention of returning to India, the total income of such individual for the period from the expiry of the previous year for that assessment year up to the probable date of his departure from India shall be chargeable to tax in that assessment year.
19. Section 194LC of the Income Tax Act, 1961
Where any income by way of interest is payable to a non-resident individual or a foreign company in respect of monies borrowed from it in foreign currency by a specified company then the specified company referred to in this section would deduct tax at source at the rate of 5% of the amount of interest at the time of payment of such interest by whatever mode cheque, bank draft etc. or credit whichever is earlier.
20. TAXATION OF TOTAL INCOME OR GLOBAL INCOME
As discussed earlier according to Section 90, the Central Government may enter into an agreement with the Government of any country outside India for the granting of relief in respect of taxes paid in that country and vice versa. Tax credit or Tax relief available under section 90 or 91 is generally lower of the following amounts:
1) Tax paid on doubly taxed income outside India.
2) Tax payable on doubly taxed income under Income Tax Act. Therefore, tax relief on doubly taxed income will be equal to taxes paid outside India if the taxes due on such income is more under the Indian Income Tax Act’1961 and if tax payable in India on such doubly taxed income is less than taxes paid outside then tax relief will be equal to the taxes calculated under the Income Tax Act’1961.
Thus, tax computation of both the residents earning income from foreign sources and non-resident Indians in respect of income earned or arising in India would be subject matter of DTAAs.
GENERALLY THE PRINCIPLES UNDER THESE HEADS ARE FOLLOWED FOR THE DETERMINATION OF INCOME FROM FOREIGN COUNTRIES
1. ARTICLE 1 – SALARY
“Salary, wages or other similar remuneration to a resident would be taxed in the Contracting State where the employment is exercised. If the employment is so exercised then the income so derived may be taxed in the other state.”
Also notwithstanding anything contained above “the remuneration derived by a resident of a Contracting State (say India) in respect of employment exercised in the other Contracting State (say Singapore) shall be taxable only in the first-mentioned State (in India) if the recipient is present in the other State (say Singapore) for a period not exceeding 183 days (i.e., 183 days) and the income is paid by or on behalf of an employer who is not a resident of the other State (say Singapore) i.e., paid by or on behalf of an employer of India and the income is not borne by the PE or a fixed base (of an employer in India) which the employer has in the other State.” Therefore, an NRI is not taxable for salary, wages or other similar remuneration in India if he is not present in India for 182 days or more and the income is not paid by an employer or on behalf of an employer who is a resident of India or by the PE or fixed base of an employer in India.
2. ARTICLE 2 – CAPITAL GAINS
Thus, Capital Gains arising to a Non-Resident Indian from shares of a company resident in India, acquired before April 1, 2017, would be taxed only in the state in which the alienator is resident, in this case Singapore. Also, capital gains arising to resident of India from shares of a Singapore company, acquired before April 1. 2017, would be taxable only in the state in which the alienator is resident i.e., India.”
“Thus, it is important to understand, that at present capital gains arising to a non-resident Indian, residing in Singapore would be taxed at the rate of tax on capital gains applicable to such persons in India and no incentives are allowed on such investments based on the DTAA.”
“Gains arising from alienation of any other property other than immovable property and shares would be taxed in the Contracting State in which the alienator is a resident.”
3. ARTICLE 3 – INTEREST
“Interest arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.” For example, Interest arising in Singapore to an Indian resident may also be taxed in India.
“Such interest arising in the Contracting State may also be taxed there, according to the laws of that State but if the beneficial owner of interest is a resident of the other Contracting State, then the interest arising to a company resident in the other Contracting State would be taxed at a rate not exceeding 15%. of the gross amount of interest.”
“Therefore, interest arising in India and paid to a resident of Singapore may be taxed in Singapore. Such interest arising in India may also be taxed in India but if the beneficial owner of the interest is a resident of Singapore, then the interest would not be taxed at a rate exceeding 15% of the gross amount of interest.”
4. ARTICLE 4 – IMMOVABLE PROPERTY
Income derived by the resident of a Contracting State from an immovable property situated in that other Contracting State would be taxed in that other state. The term immovable property would have the meaning as construed in the Contracting State in which the property is situated. This would apply to the income by way of direct use or letting or any other use of the Immovable property including lease, rent etc.
5. ARTICLE 5 – DIVIDENDS
Dividends paid by the company of one Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. However, the dividend so paid may also be taxed according to the laws of the state in which the company is resident. Dividends paid by an Indian company to a non-resident Indian resident in Singapore may be taxed in Singapore. “However, there are no tax on dividends in Singapore so dividend received is non-taxable in the hands of an NRI or a Singapore resident.”
“However, dividends paid by a company which is a resident of a Contracting State (say India) to a resident of the other Contracting State (say Singapore) may also be taxed in Contracting State (India) of which the company paying the dividends is a resident but if the beneficial owner is the recipient the tax would not exceed 15%.”
“Thus, for our purpose dividends are taxable in the hands of residents of Singapore or NRIs on dividends arising from Indian companies at the rate of 15%.”
Dividends would be deemed to arise in India if they are paid by a company which is a resident of India and dividends would be deemed to arise in Singapore if it is paid by a company which is resident in Singapore.
6. RULE 128 – FOREIGN TAX CREDIT
“An assessee being a resident would be allowed a credit in respect of foreign tax paid by him in a country with which India has a DTAA under Section 90 and under Section 91 with which India has no DTAA. The credit would be available in respect of payment of tax, surcharge and cess but not in respect of interest, fee and penalty. The credit shall be lower of the amounts payable under the act and the foreign tax paid on such income. The credit for the tax paid by way of deduction or otherwise would be available in the year in which such income corresponding to such tax has been offered to tax or assessed to tax in India. If the income on which foreign tax has been paid or deducted has been offered to tax across more than 1 year then the tax credit would be allowed in proportion to the assessment of income to tax in those years.”
7. Form 67 is a simple form for claiming “foreign tax credit” which asks for all the basic information mentioned below like:
a) Source and amount of income earned abroad in INR
b) Taxes paid outside India in INR
c) Country in which taxes are paid
d) Exchange rate for computation of tax credit
e) Tax payable on such income in India under normal provisions also under section 115JB/115JC where applicable.
f) Article of DTAA where tax credit is claimed as per the Double taxation avoidance agreement.
g) Rate of tax as per DTAA.
h) Whether credit for any foreign tax has been claimed which is under dispute
Whether any refund of foreign tax has been claimed in any prior accounting year as a result of carry backward of losses.
RULE – 21AB
8. “In order to claim relief under Section 90 and Section 90A for foreign tax credit the assessee has to submit a certificate and complete the documentation like the Tax Residency Certificate, Tax Identification Number or other unique identification number, address of the assesse in the country of residence etc. in the Form 10F. The resident assessee for the purpose of obtaining the certificate of residence would have to make an application in Form 10FA to the Assessing Officer who would then grant the certificate of residence in form 10FB.”
9. Rule 37BC
“In case of non-resident individual or a foreign company, referred to as the deductee, not having a permanent account number, the provisions of Section 206AA would not apply in respect of payments in the nature of dividends, interest, royalties, fees for technical services or payments on transfer of any capital asset, if the non-resident individual furnishes details like name, email address, contact number, address, Tax Residency Certificate of the country in which he is resident, Tax Identification Number or any other unique number by which the deductee would be identified by the country of his residence. Also, the provisions of Section 206AA shall not apply to such a non-resident individual or a foreign company if the provisions of Section 139A do not apply to such individual on account of Rule 114AAB.”
10. Rule 37BB
Applicable – Any person making payment to a non-resident other than company or a foreign company has to submit Form 15CA to the assessing officer where the payment does not exceed 5 lac rupees in a year. Please refer Form 15CA, 15CB and 15CC. Form 15CB to be furnished by a CA.
11. Also Refer Rule 114 – I
Refer Form 27Q (in respect of payments other than salary made to non-residents)
D. Definition of Indian Citizen in accordance with of the Indian Citizenship Act, 1955
The definition of the word “citizen” would be as per the Indian Citizenship Act,1955
We are including that portion of the definition of the word citizen as is relevant for the limited purpose of the scope of this note which is determination of taxability of individuals who are earning an income abroad whether as salary or from any other source. However, the term citizen has been defined under various heads which is discussed under the following heads:
- Citizen by birth
- Citizen by descent
- Citizen by registration
- Citizen by naturalization
- Citizen by incorporation of territory
- Overseas Citizen of India
a) Citizen by Birth
As per Section 3(1)(a) every person would be a citizen by birth if he is born in India on or after January 26, 1950 but before July 1, 1987; or
As per Section 3(1)(b) if he is born after July 1,1987 but before the Citizen Amendment Act, 2003 and either of his parents are citizens of India at the time of his birth
b) Citizen by Descent
As per Section 4 (1)(a) a person would be considered as a citizen of India if he is born on or after January 26, 1950 but before December 10, 1992 if his father is a citizen of India at his birth; or
As per Section 4(1)(b) if a person is born on or after December 10, 1992 and either of his parents are citizens of India at the time of his birth;
It should be noted that if he is born before December 10, 1992 and his father has been a citizen of India also by virtue of descent then he would not be considered as a citizen unless his birth has been registered with the Indian Consul within 1 year of such birth. But if he is born after December 10, 1992 then his birth should be registered with the Consul within expiry of 1 year or the commencement of the Act, whichever is later;
As per Section 4(1A) of the act if a minor becomes a citizen by virtue of this Section and is also a citizen of another country then he would cease to be the citizen of India unless he renounces the nationality of that other country within 6 months of attaining majority, that is, 18 years of age.
c) Citizen by Registration
A person would be deemed to be a citizen under Section 5 of this act under conditions imposed by the Central Government if he submits an application for registration in this behalf, is not an illegal immigrant into the country and belongs to any one of the following categories;
As per Section 5(1)(a) he is a person of Indian origin and ordinarily resident in India for 7 years preceding the year of application for registration. In accordance with Explanation 1 a person is regarded as ordinarily resident in the country if he is a resident in the country throughout the period of 12 months immediately preceding the date of application and a resident in the country for 8 years immediately preceding the 12 months for a period not less than 6 years. Also, for the purposes of this section a person would be deemed to be of Indian origin if he or either of his parents is born in undivided India; or
He is a person of Indian origin and ordinarily resident in any country outside undivided India;
A person who is married to a citizen of India and has been ordinarily resident in India for 7 years before making the application;
Minor children of persons who are citizens of India;
He is a person of full age and capacity who or either of his parents were citizens of independent India and has residing in India for a period of 1 year before making an application for registration;
He is registered as an OCI for 5 years and has been residing in the country for 1 year immediately before making the application for registration.
d) Overseas Citizens of India (OCI)
According to Section 7A(1)(a)(i) the Government of India can, on an application made to it, register any person who is of full age and capacity as an OCI, who is a citizen of another country but was a resident of India at the time of commencement or any time after the commencement of Constitution of India.
According to Section 7A(1)(a)(ii) a person who is a citizen of another country but was eligible to become the citizen of the country at the time of commencement of the Constitution; or
According to Section 7A(1)(a)(iii) a person who is a child or a grandchild of such a citizen.
According to Section 7A(1)(b) a person who is a minor child of such a citizen mentioned in clause (a).
Special Rights given to OCIs
They are given a lifelong multiple entry visa into the country for any purpose and they are to be treated at parity with the NRIs in all fields including economical financial and educational fields.
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