We all know that taxation of a Non-resident in India is discussed more than often. There is one of the major amendment in section 6 of the Income-tax Act dealing with the residential status in India. An insertion of clause 1(A) and amendments to the existing sub-clause (c) by the Finance Act 2020, has bought the entire discussion back again. Many of you all might be finding it very difficult to understand the complexities involved therein. Now these amendments shall be applicable for the AY 2021-22 i.e for Financial Year 2020-21 and i will take up this in a separate article.

My this article is focused on determining the taxable income for a Non-resident for the AY 2020-21. This shall cover following:

1. Determining the residential status;

2. What will be the taxable Income of Non-residents;

3. Which income-tax deductions and tax benefits are allowed to a Non-resident;

4. Special Provisions for Non-residents.

1. How to determine the residential status?

Detailed provisions are covered under section 6 of the Income-tax Act. You are considered an Indian resident for a financial year, if :

i. You were in India for at least 182 days or more OR

ii. You were in India for 60 days or more and were in India for 365 days or more (consider in aggregate) in the last four years preceding the financial year.

If you are a citizen of India and you leave India as a member of a crew on an Indian ship or for the purpose of employment outside India, then for you ’60 days’ as mentioned in point ii will be replaced by 182 days­­ – Which means you are a resident when you spend at least 182 days in India. You are an NRI if you do not meet any of the above conditions.

2. In case you are a NRI, then which income will be taxable in India?

Your income which is earned or accrued in India is taxable in India.

– Salary received in India or salary for service provided/rendered in India;

– Income from a house property situated in India;

– Any income earned from a business controlled or set up in India is taxable to the NRI;

– Capital gains on transfer of asset situated in India;

– Income from fixed deposits or interest on savings bank account.

These are all examples of income earned or accrued in India. These incomes are taxable for an NRI. Income which is earned outside India is not taxable in India. Interest earned on an NRE account and FCNR account is tax-free. Interest on NRO account is taxable for an NRI.

What is NRE and NRO account?

An NRE account is a bank account opened in India in the name of an NRI, to park his foreign earnings; whereas, an NRO account is a bank account opened in India in the name of an NRI, to manage the income earned by him in India. An NRI can open a joint NRO account with one or more NRIs or Indian citizens.

3. Which income-tax deductions and tax benefits are allowed to a Non-resident?

Provisions relating to these are covered under Chapter VI A of the Income-tax Act.

Under section 80C

i. Life insurance premium payment: The policy must be in the NRI’s name or in the name of their spouse or any child’s name.

ii. Children’s tuition fee payment: Tuition fees paid to any school, college, university or other educational institution situated within India for the purpose of full-time education of any two children (including payments for play school, pre-nursery and nursery).

iii. Principal repayments on loan for the purchase of a house property: Deduction is allowed for repayment of loan taken for buying or constructing residential house property. Also allowed for stamp duty, registration fees and other expenses for purpose of transfer of such property to the NRI. Also, Deduction towards property tax paid and interest on home loan deduction is also allowed

iv. Unit-linked insurance plan (ULIPS): ULIPS is sold with life insurance cover for deduction under Section 80C.

v. Investments in ELSS: ELSS has been the most preferred option in recent years as it allows you to claim a deduction under Section 80C upto Rs 1.5 lakhs, it offers the EEE (Exempt-Exempt-Exempt) benefit to taxpayers and simultaneously offers an excellent opportunity to earn as these funds invest primarily in the equity market in a diversified manner.

Deductions not allowed under section 80C

i. Investment in PPF is not allowed (NRIs are not allowed to open new PPF accounts, however, PPF accounts which are opened while they are a resident are allowed to be maintained)

ii. Investments in NSCs

iii. Post office 5-year deposit scheme

iv. Senior citizen savings scheme

Under section 80D

NRIs are allowed to claim a deduction for premium paid for health insurance.

Particulars Self, family, children Parents Deduction under 80D (Rs)
Individual and parents below 60 years 25,000 25,000 50,000
Individual and family below 60 years but parents above 60 years 25,000 50,000 75,000
Both individual, family and parents above 60 years 50,000 50,000 1,00,000

Points to be taken care for this:

1. For the members of HUF Rs.25,000 for health insurance and Rs. 50,000 for Medical expenditure However, the aggregate cannot exceed Rs.50,000.

2. Contribution towards health insurance plan has to made to a scheme as specified by the Central Government approved by IRDA.

3. Payment should be made by any mode other than cash.

4. Senior citizen: Senior citizen means an individual resident in India who is of the age of 60 yrs or more during the relevant financial year

5. Premium paid towards a brother, sister, grandparents, aunts, uncles or any other relative cannot be claimed as a deduction for taking tax benefit.

6. Premium paid on behalf of working children cannot be taken for tax benefit.

7. In the case of part payment by you and a parent, both of you can claim a deduction to the extent paid by each.

8. Group Health Insurance premium provided by the company is not eligible for deduction.

Under section 80E: Deduction is available to NRI in respect of interest on loan taken for higher education paid for self, spouse, children or student for whom NRI is a legal guardian.

Under section 80G: Deduction is available to NRI for eligible donations.

Under section 80TTA: Deduction is available to NRI by way of interest on deposits (not being time deposits) in a savings account with a banking company, co-operative society or post office upto Rs.10,000.

4. Special provisions for NRI:

Special provisions relating to certain incomes of NRI are covered from section 115C to 115-I of the Income-tax Act. If your only income is ‘Investment Income’ and/or long term capital gains then you will not get the Income-tax deductions (LIC, mediclaims etc).

This means, if your total income comprises capital gains/investment income and Income other than capital gains/investment income; tax deduction will be available for such other income and not capital gains/investment.

To understand this, you need to know what amounts to Investment Income?

“Investment income” means any income derived from a foreign exchange asset. Foreign exchange asset means any specified asset (i.e Shares, Debentures, Deposits with an Indian company, any security of the Central Government, such other assets as the Central Government may specify) which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange.”

Please note: Taxation of a capital gains is in a whole a wide topic which needs discussion separately.

It is not compulsory for a NRI to file a return in India if:

– Total income consist only of capital gains/investment income and tax has been deducted on it;

– If your total income does not exceed Rs.2,50,000 which is the current slab in India.

Please note:

– There are wide range of amendments for the Non-residents which are applicable from FY 2020-21;

– Above article be considered as informative. Each Assessee has a separate case and one advisory cannot fit for all. It is advisable to go for a professional consultant before finalising your return.

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Qualification: CA in Practice
Company: Shivangi R and Associates
Location: Mumbai, Maharashtra, IN
Member Since: 07 Jul 2017 | Total Posts: 9
I am a member of the Institute of Chartered Accountants of India (ICAI), with professional experience of more than 6 years in assisting array of clients based in Solapur, Mumbai and outside India in areas of Domestic and International taxation, advisory and litigation support, Audit and certificati View Full Profile

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2 Comments

  1. mehul vasoya says:

    Hi,

    If canada based client is taking Life Insurance Policy in India than at the time of death claim, what is tax liability to pay by his nominee in India and/or Canada.

    Please Assist.

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