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.

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.

Accout Opening by NRIs in INDIA

When an Indian national or person of Indian origin residing in India leaves India for a foreign country (other than Nepal and Bhutan) for taking up employment, business or vocation outside India, or for any other purpose, indicating his intention to say outside India permanently or for an indefinite period, he becomes a person resident outside India. His bank account, if any, in India is designated as an Ordinary Non-resident Account (NRO Account). Such accounts can also be opened with funds remitted from abroad. . As funds in this type of account are non repatriable, they cannot be remitted abroad to the account holders or transferred to their NRE Accounts without the Reserve Bank’s prior permission. Interest earned on these deposits is not exempt from Indian Income-tax.

Type of Account

The accounts may be maintained in the form of savings or current or term deposit accounts. The accounts can also be opened jointly by non-residents with their close relatives resident in India and operations thereon by the resident account holders can be made freely. If an account is used only for the personal or business needs of the resident account holder, it may be opened jointly even with a person who is not a close relative but this needs prior permission of the Reserve Bank. Interest earned on balances in NRO Accounts is not exempt from Indian Income-tax instead Income-tax (at present @ 20%) is deducted at source i.e. at the time of payment of interest by the bank. Balance held in NRO Account can neither be repatriated nor any remittance in foreign currency is allowed without prior approval of Reserve Bank.

Operation of the Account

There are not many restrictions on the operation of this account and a number of credit and debit transactions can be made after filling up Form A4. The following credit transactions can be made :

(a) Proceeds of remittances received in any permitted form through normal banking channels.

(b) Proceeds of foreign currency notes/traveller cheques tendered by the account holder during his temporary visit to India.

(c ) Remittance by way of transfer from rupees accounts of non-resident banks.

(d) Legitimate dues in rupees of the account holder in India.

Certain credits to the accounts such as proceeds of foreign inward remittances, dividend and interest earned on shares/securities acquired with the Reserve Bank’s permission (wherever necessary ) and held in India by the account holder, sale proceeds/maturity proceeds of shares/securities, surrender value of life insurance policies of the account holder and proceeds of cheques for small amounts upto specified limits can be made by banks without the Reserve Bank’ permission.

Following debit transactions can also be made after filling Form A4

(a) All local payments in rupees.

(b) Debits for investment and credits representing sale proceeds of investments may also be permitted by banks.

Withdrawals from these accounts can be freely made for local disbursements as well as for investments in Units of UTI, Government securities and National Plan/Savings Certificates, without prior approval of the Reserve Bank.

Change of Status from Resident to Non-resident Account vice versa

All resident accounts of a person with banks in India will automatically be treated ordinary non-resident accounts on his becoming non-resident.

Similarly NRO account may be redesignated as resident accounts on the account of holder becoming resident in India. It may be noted that residential status of a person will be determined as per the definition under Foreign Exchange Regulation Act, 1973.
With a view to providing further incentives and wider options to persons of Indian Nationality/Origin residing abroad (NRIs) and Overseas Corporate Bodies predominantly owned by NRIs (OCBs) as well as giving opportunities to persons of non-Indian origin and overseas corporate bodies owned by them for making investments in India, Reserve Bank has formulated Non-resident (Non-repatriable) Rupee Deposit Scheme. The Scheme came into effect from 15th June, 1992.

The scheme is open to all non-residents including foreign citizens of non-Indian origin (except Pakistani and Bangladeshi Nationals) and Overseas Corporate Bodies owned by them. Accounts under the Non-resident (Non-Repatriable ) Rupee Deposit Scheme may be opened in Indian rupees by authorised dealers out of the funds in freely convertible foreign exchange transferred for the purpose to India in an approved manner from the county of residence of the prospective non-resident account holder or from any other country. Accounts may also be opened by transfer of funds from the existing NRE/FCNR Accounts of the non-resident account holder. No penal interest is charged in case of premature withdrawal of existing NRE/FCNR deposits for the purpose of making investment under the scheme.

Letting out Immovable property

Reserve Bank of India has granted general permission to Foreign Citizens of Indian Origin (whether resident in India or not) and Non-residents of Indian nationality and origin (except citizens of Pakistan, Bangladesh, Nepal, Bhutan, Afganistan and Sri Lanka ) to let out, either their commercial or residential premises, to persons in India, subject to the following conditions:

a) The rental income and the proceeds of any investment, out of such income, shall be repatriable (due to current account convertibility); otherwise

b) The rental income shall be credited in the owner’s Non-Resident (Ordinary) Rupees Account or to the Non-Citizen’s Resident Rupee Account maintained with a Bank in India.

Further, it must be noted that there seems to be no direct reference to Foreign Citizens of Non-Indian Origin, for the above relaxation. In their cases, therefore, it may be necessary to take Reserve bank of India’s prior approval before renting out their properties.

Acquisition of Immovable property by NRIs(Contd..)

The relatives of NRIs often wish to bequeath properties to non-residents in their wills. For such cases, Reserve Bank of India has granted general permission to non-residents of Indian Origin (irrespective of their citizenship) to acquire immovable properties by way of inheritance and also to hold and enjoy these properties acquired by them.

However, Reserve Bank of India has not granted any repatriation facilities for sale proceeds of such inherited properties. This is because there is no convertibility of the Indian Rupee on capital account.

Acquisition of Immovable property by NRIs by gifts

Non-residents have also been granted general permission to acquire such properties by way of gifts. However, the gift must be from/to a relative who may be either an Indian Citizen or a person of Indian Origin who may or may not be a Resident in India. “Relative” is to be construed as per definition given under section 6 of the Companies Act, 1956.

Acquisition of immovable properties by NRIs

There are no formalities under FERA in case of a Non-Resident Indian who is an Indian Citizen and who wishes to sell his immovable property in India. Even if the non-resident is a foreign citizen (regardless of origin), he has been granted general permission by Reserve Bank of India to sell his immovable property situated in India.

However, while a Non-Resident Indian can sell his immovable property without Reserve Bank of India’s permission, as per FERA, a Resident Indian cannot make any payment including the purchase price for the property to a non-resident without RBI’s prior permission. Section 9 of FERA prohibits any payment by a resident to any non-resident except with prior general or special permission from Reserve Bank of India. For purchase and sale of a flat, while the non-resident is under no obligation to obtain any permission from Reserve Bank of India to sell his flat, the resident should seek prior permission to make payment (including the purchase consideration) to a non-resident. The resident should not pay without RBI’s permission, even the earnest or token money to the non-resident, as a mark of completion of the negotiations for the transaction.

NRIs Investment oppertunities

NRIs can make direct investments in proprietary / partnership concerns in India as also in the primary issues of shares / debentures of Indian companies. They can also make portfolio investments, i.e. purchase of shares / debentures of Indian companies through stock exchanges in India. These facilities are available on both repatriation and non-repatriation basis.

In order to facilitate NRIs to set up new companies in India, Reserve Bank vide its Notification NO. FERA 143/93 RB dated 26^th April 1993, has granted general permission to NRIs to subscribe to the Memorandum and Articles of Association and to take up the shares of Indian companies for their incorporation. The general permission empowers such Indian companies to issue shares to NRIs provided the total face value of the shares to be issued does not exceed Rs. 10,000/- and the company is not engaged into activity relating to agricultural and plantation.

A. DIRECT INVESTMENT

NRIs are permitted to make direct investment in partnership/ proprietorship concerns in India as also by way of subscription to shares/ debentures of Indian companies. They are also permitted to place funds in company deposits. Similar facilities are also available to OCBs with certain exceptions. Investments made will either be on repatriation or on non repatriation basis depending on the terms and conditions applicable under the existing schemes for NRI investment Wherever the investments are allowed with repatriation benefits, the funds for the purpose should be received by inward remittances from abroad or from the investor’s NRE/ FCNR Accounts. However, in respect of investment on non repatriation basis, funds in NRO Accounts could also be used.

Non resident Indians resident in Nepal will be permitted to make investments in India provided the funds for the purpose are remitted in free foreign exchange through proper banking channels.

I. Investments Without Repatriation Benefits NRIs / OCBs who undertake not to seek at any time repatriation of the capital invested in India and the income earned thereon are permitted to invest on non repatriation basis. The income earned on these investments as and when accrued are required to be credited to the Ordinary Non Resident Rupee (NRO) account of the investor. Reserve Bank would, however, permit repatriation of the net (i.e. after payment of tax) income / interest earned during the financial year 1994/95 and onwards on such investments/ deposits in accordance with the procedure laid down. The categories of investment under this head are the following

Investment in Partnership/ Proprietorship Concerns

Investment in New Issues of Shares/ debentures of Indian Companies

Investment in Non Convertible Debentures of Indian companies

Purchase of Shares of Indian Companies by Private Arrangement

Investment in Domestic Public Sector and Private Sector Mutual Funds

Investment in Money Market Mutual Funds (MMMFs)

Acceptance of deposits by proprietary concerns/firms/companies in India on Non-repatriation basis.

and meny more to add.. The above topics will be discussed in detail frm tommrow on wards