NRI Income tax policy in India

Persons liable to tax

Section 4 of the I.T. Act is a charging section. Under this section the Income Tax is charged for any assessment year at the rates prescribed for that year in accordance with the provisions of the I.T. Act in respect of total income of the previous year of any person.

The previous year for the purpose of Income Tax Act would mean a financial year which ends on 31^st March of every year immediately preceding the assessment year.

The person has been defined to include:

i) an individual

ii) a Hindu Undivided Family (HUF)

iii) a company

iv) an association of persons or a body of individuals, whether incorporated or not,

v) a local authority, and every artificial juridical person, not falling within any of the preceding sub-clauses.

Income liable to tax For resident

The resident is charged to tax on all the incomes :-

(i) which is received or is deemed to be received in India

(ii) which accrues or arises or is deemed to accrue or arise in India, and

(iii) which accrues and arises outside India which means the world income is taxable in case of a resident

For resident but not ordinarily resident

Person who is resident but not ordinarily resident is liable to tax the same way as that of resident except that the income which accrues or arises outside India is not taxable in India unless it is derived from a business controlled in or a profession setup in India.

For non residents

In case of a non-resident the income received or deemed to be received in India or income accrues or arises or is deemed to accrue or arise in India only is taxable in India. Thus, the income accruing or arising outside India is not taxable in India.

The following income which might have been payable outside India are deemed to arise in India.

i) dividend paid by an Indian company to a non-resident.

Interest paid on moneys borrowed and brought into India, and

iii) royalty and technical services fees where the royalty is payable in respect of any right or fees are payable in respect of technical services used for business or profession in India which is exempt, if it is payable :

(a) through an agreement made before 1^st April, 1976 which is approved by the Central Government, and

(b) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer based equipment under approved specified scheme of the Government of India.

A person having been a non-resident for a continuous period of 2 years on his return, will remain "not ordinary resident" for all least for 8 subsequent years. A not ordinary resident person will have the advantage of both (1) he will be liable to pay income tax on his Indian income only and (2) his foreign income will be free from Indian income tax.

Nomination facility in Indian Banks

The Banking Companies (Nomination) Rules, 1985 framed under Banking Regulation Act, 1949 enable to accept nominations. Nomination can be made by the account holder or, as the case may be, by all the joint account holders together, in respect of an account held by them with a bank in India. The nomination can be made only in respect of a deposit held in the individual capacity as a holder of an office or otherwise. The nomination has to be made in favour of only one individual. The nominee may be a minor but in that case the account holder should, while making the nomination, appoint another individual (who is not a minor) to receive the amount of deposit on behalf of the nominee during his minority, in case of need. The nomination made can be varied or cancelled by the account holder any time during the currency of the account by filing an application in the prescribed form.
Nomination facility for non resident accounts
The nomination facility is also available to holders of non-resident accounts. However, in case of deposits held in FCNR and NRE accounts, the deceased account holders nominees (who could also be residents in India) would not be automatically entitled to the right of repartriation of the funds acquired by them. Similarly credit of the amount becoming payable to a nominee to his NRE/FCNR account requires prior permission of Reserve Bank of India. In such cases, the nominees are required to make separate applications to Reserve Bank of India, which would be considered in the light of the residential status of individuals nominees and the relevant Exchange Control Regulations. Utilisation of the funds in India by the nominees would not, however, need exchange control approval.
The forms prescribed for deposit accounts under the nomination Rules are for nominationForm D1, Form D2for cancellation and Form D3 for variation.
Remittance/Transfer of Funds to Non-Resident Nominees
The Banking Companies (Nomination) Rules, 1985 framed under Banking Regulation Act, 1949 enables banks to pay the amount standing to the credit of the deceased depositor to his nominee. Authorised dealers may allow remittance of funds lying in the NRE/ FCNR accounts of the deceased account holder to their non-resident nominees subject to the following conditions:
(i) Application in is submitted by the nominee (s).
(ii) A valid nomination has been registered in the banks record in favour of the nominees/s in confirmity with the provisions of the Banking Companies (Nomination) Rules, 1985.
(iii) The nominee continues to be non-resident at the time of the claim/remittance sought for from India and that the deceased depositor was non-resident at the time of his/her death.
(iv) All the legal heirs are non-residents. A signed declaration to the effect, duly witnessed, may be submiited by the nominee to the authorised dealer.
Applications in together with the documents/particulars mentioned therein received from the nominees should be scrutinized and after satisfying about the legality of the claim as per the internal guidelines, authorised dealers may settle the claim and allow transfer of fund to the extent of balance held in the deceased depositor’s NRE/FCNR accounts. All other cases which do not fulfill the aforesaid terms and conditions or where the amount in NRE/FCR account is claimed by a person other than the nominee, should be referred to the concerned Regional Office of Reserve Bank for prior approval by authorised dealer in supported by documents indicated therein together with the legal representation issued by an Indian Court.

Bank Accounts of NRI's Some details

Deposits under FCNR scheme were accepted by banks for maturities from 6 months to 3 years. Acceptance of deposits for shorter maturities was discontinued, in a phased manner and with effect from 15th February, 1994, deposits under FCNR scheme can be accepted only for a maturity period of 3 years. However, to enable to NRI depositors to continue with foreign currency deposits of shorter maturities, a new scheme known as Foreign Currency (Non-resident) Accounts (Banks) Scheme (FCNR (Banks) was introduced, with effect from 15th May, 1993. There is basically no difference for the depositor between these two schemes except the period of deposits.
For the banks accepting deposits under this scheme, there are a few changes. Exchange risk cover from Reserve Bank will not be available and will have to be borne by the banks themselves. There will be no obligation under the ‘Statutory Liquidity Ratio’ or priority sector lending. There is also no obligation for Cash Reserve Ratio. Resources mobilised under the scheme can be invested by the banks without any interest rate stipulation. However, non-resident depositors are not affected by these provisions.

Company formation by NRIs

Promotion Stage: The stage of conceiving an idea and its working is termed as promotion of a company. The person involved in this task is termed as “Promoter”. There are certain important decisions which are taken before the formation of the company. There first important matter to decide could be either :-

(1) To start a new business altogether, or
(2) To acquire an already running business, if it is available at considerable attractive terms and conditions. Some time it does happen that some people may start a business without having sufficient knowledge or sufficient experience or sufficient funds and later on they decide to dispose of that business to avoid huge losses. In such a case it may be better to acquire a running business with favorable terms and conditions and it may prove to be a good decision.

The other important matters be decided before the formation of the company could be the decision regarding the product to be produced, the size of the company, the capital involved in the project, the sources of the capital and whether it shall be a Private Company or a Public Company.

Any of the above decisions i.e., to start a new business altogether or to acquire an already running business, along with the other matters shall have to be taken by some person or persons who are at the helm of the affairs. They are called PROMOTERS.

Where it has been decided to form a Private Company 2 persons and where it has been decided to form a Public Company at least 7 persons shall subscribe their names to a Memorandum of Association and they shall also comply with the other formalities in respect of the registration of the company under the Indian Companies Act, 1956.

Document to be filed with the Registrar: It is desirable to ascertain from the Registrar (Registrar of the State in which the Registered office of the company shall be situated) of the companies that whether the proposed name of the company shall be approved if registration is sought for a new company with such name.

Where already a company with such name is existing, it shall not be allowed by the Registrar, because tow companies with the similar name cannot be registered.

But if he says yes, because no other company is registered with that name, an application for the registration of the company should be presented to the Registrar of the State in which the Registered office of the company shall be situated. The appl9ication along with necessary fee shall be presented along with the following documents :

(1) The Memorandum of Association.
(2) The Articles of Association, if any which should be signed by the subscribers to the Memorandum of Association.
(3) Any agreement with the individual persons who are proposed to e appointed as Managers, Directors or Managing Director of the company.
(4) A statement of the nominal capital of the Company.
(5) A notice of address of the registered office of the company.
(6) A list of the Directors who have agreed to become the first Directors of the company along with their consent to act as Directors and to take up the qualification shares of the company in the case of a public company.
(7) A declaration that all the requirements of the Companies Act have been complied with, shall also be submitted, which shall be signed by one nay of the following persons :

(i) An advocate of the Supreme Court or High Court, or
(ii) An attorney or a pleader entitled to appear before a High Court, or
(iii) A Secretary or a Chartered Accountant in whole time practice in India, who is engaged in the formation of the company, or
(iv) A person named in the Articles as a Directors, Manager or Secretary of the company.

Where the Registrar of Companies is satisfied that all the requirement have been complied with, he will register the company and enter the name of the company in the Register of Companies.

2. Incorporation Stage : Where the Registrar of Companies is satisfied that all the requirements have been complied with, he will register the company, and enter the name of the company in the Register of Companies.

When a company is registered and its name in entered in the register of companies, the Registrar will issue a Certificate of Incorporation in which he certifies that the company is incorporated under his hand and in the case of a limited company that the company is a Limited Company.

Effects of Registration and Incorporation of A Company
Distinction Between A Public Company And a Private Company
Company Law - Tips for Lawyers and Layman

NRO Account

The depositor under both the schemes are accepted in Indian rupees on non-repatriation basis. The main points of distinction under both the schemes are as under :

(a) Accounts under NR (NR) Scheme can be opened only with proceeds of fresh remittances from abroad or by transfer from existing NR (E) FCNR Accounts of the depositor, whereas legitimate local resources may be utilised to open NRO Accounts.

(b) Advances against security of deposit under NRO Scheme are governed by directives of Reserve Bank of India, whereas banks have freedom to determine rates of interest, margin etc. while granting advances against security of deposits held under NR (NR) Scheme.
In order to simplify the procedures applicable to operation of bank accounts and financial transactions in India by non-resident individuals of Indian nationality/persons of Indian origin, it was decided to introduce, with effect from 15th April 1999, a new type of account viz., Non-Resident (Special) Rupee (NRSR) Account for such persons who would voluntarily undertake not to seek repatriation of funds held in these, with the exception that investment of funds held in these accounts in shares/securities and immovable property will be governed by the extant exchange control regulations. For opening of NRSR account, the applicant should submit an application in Form NRSR to an authorised dealer, together with the undertaking contained therein duly signed. Authorised dealers may, on receipt of the application and the undetaking open the account and allow all financial transactions therein freely without going into the details of sources of credits and purposes of debits. This facility will, however, not be available to overseas corporate bodies.

The non-resident individuals of Indian nationality /persons of Indian origin maintaining Non-Resident (Ordinary) Account have the option of converting these accounts into Non-Resident (Special) Rupee Accounts. Similarly, when a resident becomes a non-resident by virtue of going abroad on emigration/employment etc. he will also have an option of designating his account as Non-Resident Ordinary Account or Non-Resident (Special) Rupee Account. There will be no need for completion of Form A4 either for approval or for reporting the transactions in Non-Resident (Special) Rupee Accounts.

NRSR accounts may be current, savings, recurring or fixed deposits accounts. Requirements in regard to resident accounts, including nomination facility, shall apply to NRSR accounts. Opening of and operations on the accounts of individuals of Pakistani/Bangladeshi/Sri Lankan nationality require approval of Reserve Bank.