An Indian Citizen who stays abroad for employment/carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad is a non-resident. (Persons posted in U.N. Organisations and Officials deputed abroad by Central/State Governments and Public Sector undertakings on temporary assignments are also treated as non-residents). Non –Resident foreign citizens of Indian Origin are treated on par with non-resident Indian Citizens (NRIs) for the purpose of certain facilities.
Main categories of NRIs
The following are the main three categories of NRIs:-
(i) Indian citizens who stay abroad for employment or for carrying on a business or Vocation or any other purpose in circumstances indicating an indefinite period of stay abroad.
(ii) Indian citizens working abroad on assignment with foreign government agencies like United Nations Organisation (UNO), including its affiliates, International Monetary Fund (IMF), World Bank etc.
(iii) Officials of Central and State Government and Public Sector undertaking deputed abroad on temporary assignments or posted to their offices, including Indian diplomat missions, abroad.
Provisions regarding Resident and Non-Resident under Income Tax Act and Foreign Exchange Regulation Act
The residential status of a person is decided under two different Acts, one under Income Tax Act, 1961, ( I.T. Act) and another under Foreign Exchange Regulation Act, 1973 (FERA). The concept of Non-Resident under FERA is different as compared to that under Income Tax Act. Under Income Tax Act, the residential status of a person is determined on the basis of number of days he stays in India whereas under FERA, it is the intention of a person to be in India or outside India would be an important factor determining his residential status.
Provisions under the I.T. Act
The residential status for the Income Tax Act is determined in section 6 as under:
1. An individual will be treated as a resident in India in any previous year if he fulfills any of the following two conditions:
(a) he/she is in India in that year for period or periods amounting in all to 182 days or more, or
(b) Having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, and has been in India for 60 days or more in that year.
2. Under Explanation to section 6 (1) of the Income-tax Act, the residential status of an individual who is rendering service outside India and who visits India during leave or vacations in any previous year or an individual who is outside India and who comes on a visit to India in any previous year will be determined as under :
(a) An Indian citizen who leaves India in any previous year for the purpose of employment outside India or as a crew member of an Indian ship would be treated as a resident in India if he stays in India in that year for 182 days or more [instead of 60 days as stated in 1 (b) above ]. Conversely, if he stays in India for less than 182 days, he will be treated as non-resident for that year and his foreign income would not attract tax liability.
Further, w.e.f. 1st April, 1999, a crew member will be treated as non-resident in India if he is on board such ship outside the territorial water of India for 182 days or more during any year.
(b) An Indian citizen or a person of Indian origin who resides outside India and who comes on a visit to India in any previous year will be treated as resident in India if he stays in India in that year for 182 days or more [instead of 60 days as stated in 1 (b) above.]
Conversely, he will be treated as non-resident if he stays in India in that year for less than 182 days.
(3) An individual (whether Indian citizens or not) who is outside India and who comes on a visit to India in any previous year will be treated as “non-resident” in India if he stays in India in that previous year less than 182 days subject to the condition that during the preceding four previous years his stay in India does not amount to 365 days or more.
An Individual who fulfills any of the conditions mentioned in section 6(1) is treated as resident in India. But in order to become an “ordinarily resident”, he must satisfy the following two conditions as laid down under section 6(6) (a) of the Income-tax Act, 1961:
(i) He should have been resident in India in nine out of the ten previous years preceding the previous year in which he is resident within the meaning of section 6(1); and
(ii) He should have been in India for a period or periods amounting in all to 730 days or more during the seven years preceding that previous year.
If he does not fulfill any of the above conditions, he will be treated as “not ordinarily resident”.
(4) An individual who does not satisfy both the conditions as mentioned above as laid down in section 6 (1) will be treated as “non-resident” in that previous year.
(5) A Hindu undivided family, firm or other association of persons will be treated as “non –resident” in India in any previous year if the control and management of its affairs is situated wholly outside India during that year.
(6) A company will be treated as “non-resident” in India in any previous year if it is not an Indian company and also the control and management of its affairs is not situated wholly in India in that year.
The Provisions under Foreign Exchange Regulation Act (FERA) : A Non Resident Indian (NRI) as per India’s Foreign Exchange Management Act 1999 (FEMA), is an Indian citizen or Foreign National of Indian Origin resident outside India for purposes of employment, carrying on business or vocation in circumstances as would indicate an intention to stay outside India for an indefinite period.An individual will also be considered NRI if his stay in India is less than 182 days during the preceding financial year.
TDS will be deducted only on those incomes of Non Resident Indians (NRIs) which are liable to tax in India. If the income is tax free in India like long term capital gains from equity shares, there would be no TDS. Another important thing to remember is that you should be an NRI at the time of receiving the income. For instance, you may have purchased a long term debenture of a company while you were a resident Indian. But any interest that you receive during the period after becoming an NRI will be subject to TDS.
Interest on bank deposits
Interest earned on Non Resident External (NRE) accounts and Foreign Currency Non Resident (FCNR) accounts are tax free in India. Hence, there would be no TDS.
However, interest earned on the Non Resident Ordinary Account (NRO) is taxable and will be subject to a TDS of 30 per cent. There is no basic exemption limit. For example, interest earned by resident Indians from bank deposits is subject to TDS only over and above a limit of Rs 10000. No such limit applies for NRIs.
Interest on all other investments
Interest earned on all other investments like corporate deposits and bonds will be subject to TDS at 20 per cent. In all these cases, the company or party making the payment will deduct this tax.
Dividends from equity shares, equity mutual funds and debt mutual funds are exempt in the hands of the share or unit holder.
Capital gains on securities
– Equity shares and equity mutual funds (mutual funds with more than 50 per cent in equities)
Long term capital gains, that is profits made on sale after 1 year from date of purchase, on
equity shares and equity mutual funds are exempt from tax. There will be no TDS applicable.
Short term capital gains, that is, profits on sale within one year of date of purchase, will be
subject to a TDS of 15 per cent.
– Debt mutual funds, corporate debentures
Long term capital gains from debt mutual funds and corporate debentures (when sold in the secondary market) will be subject to TDS at 10 per cent.
Short term capital gains will be subject to a TDS of 30 per cent.
Capital gains on other assets like house property, gold
Long term capital gains will be subject to a TDS of 20 per cent.
Short term capital gains will be subject to a TDS of 30 per cent.
Now in case of sale of assets like gold and house property, the question arises as to who will deduct the tax at source. If the property is sold to an individual, does the individual need to deduct tax at source and deposit the same with the Government? Will the individual then issue a TDS certificate to the NRI?