NRI status & Taxable Income in India effective from FY2020-21

NRI status & Taxable Income in India effective from FY2020-21

For non-resident Indians (Indian citizens or Persons of Indian Origin (‘PIO’) who have been residing outside India), until March 31, 2020, NRIs who visited India could stay in India up to 181 days in a financial year and still could maintain “Non-resident” status in India.

The Finance Act, 2020 and the Finance Act 2021 (assented by the President on 28 March 2021) have made far-reaching changes regarding the determination of the residential status of NRIs for the financial year ended March 31, 2021, and March 31, 2022. This change will directly impact the NRI community.

Highlights:-

⦁ Visiting NRIs whose total income (which is defined as taxable income) in India is up to Rs 15 lakh during the financial year will continue to remain NRIs if the stay does not exceed 181 days, as was the case earlier.

⦁ Dividends distributed by Indian companies would be taxable in the hands of the shareholders and as such, would form part of the taxable income. On the other hand, since interest on FCNR and NRE deposits are exempt it will not form a part of taxable income. This amendment is effective from the financial year 2020-21, viz. April 1, 2020, to March 31, 2021.

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⦁ An individual whose taxable income exceeds Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual will still be treated as “Resident but Not Ordinarily Resident (RNOR)”. In the case of RNOR individuals, the foreign income (i.e., income accrued outside India) shall not be taxable in India. Foreign sources mean income that accrues or arises outside India (except income derived from a business controlled in or a profession set up in

Scope of taxation in India based on Residential Status

1ROR – Resident and Ordinarily Resident,
RNOR – Resident and Not Ordinarily Resident and
NR – Non-Resident

Way forward :

NRIs need to carefully consider the total Indian income and plan their travel itinerary based on the amendment for their period of stay.

The Finance Ministry distributes Rs 13,386 crore to 25 states as an RLB award.

The positive aspect is that in most cases, NRIs can continue to visit India for up to 181 days in the financial year and even in other cases where the period of stay in India is 120 days up to 181 days (and also for 365 days or more in preceding 4 years) or more or in case of Indian citizens who are not tax residents of any other country and are deemed to be tax residents of India, the status would be RNOR (if their Indian Income exceeds INR 15 lakhs) and hence foreign income shall not be taxable in India.

CBDT grants further relaxation in electronic filing of Income Tax Forms 15CA/15CB

CBDT grants relaxation in electronic filing of Income Tax Forms 15CA/15CB

■ As per the Income-tax Act, 1961, there is a requirement to furnish Form 15CA/15CB electronically.

■ Presently, taxpayers upload the Form 15CA, along with the Chartered Accountant Certificate in Form 15CB, wherever applicable, on the e-filing portal, before submitting the copy to the authorized dealer for any foreign remittance.

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■ In view of the difficulties reported by taxpayers in electronic filing of Income Tax Forms 15CA/15CB on the portal www.incometax.gov.in, it had earlier been decided by CBDT that taxpayers could submit Forms 15CA/15CB in manual format to the authorised dealer till 15th July 2021.

■ It has now been decided to extend the aforesaid date to 15th August 2021. In view thereof, taxpayers can now submit the said Forms in manual format to the authorized dealers till 15th August 2021.

■ Authorized dealers are advised to accept such Forms till 15th August 2021 for the purpose of foreign remittances.

ET Financial Inclusion Summit: For a digital India, rules should aim at desired outcomes

■ A facility will be provided on the new e-filing portal to upload these forms at a later date for the purpose of generation of the Document Identification Number.

Income Tax Return filing for NRIs

Budget 2020 proposes amending section 115A of the Income Tax Act.The Finance Minister has introduced major changes to the existing provisions of the Income Tax Act, 1961 (the Act), to promote foreign investment into India

Significant proposals TO BOOST NRI’s within Income tax framework include

  • Abolishing the Dividend Distribution Tax (DDT) and
  • Switching to the classic shareholder tax system,
  • Expanding the lower withholding tax rate of 5% for defined interest income,
  • Lower withholding tax rate of 4% for interest income from long-term bonds / rupee-denominated bonds, etc.

Another welcome move introduced in Budget 2020 is an exemption in certain situations for non-residents to file tax returns in India. It subscribes to the position of not filing income returns to non-residents whose total income includes income through royalty or Fees for Technical Service (FTS).

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Any non-resident receiving taxable income from India is currently under an obligation to file income returns in India (except in certain specified cases).

  • The said condition of compliance places undue hardship upon non-residents.
  • In addition, there are serious criminal and prosecutorial implications for non-residents who fail to file tax returns in India.
  • There have been a large number of litigations and disputes over the filing of non-resident income returns.

Below are some practical scenarios in which tax treaty provisions provide for tax relief for non-residents on different income streams earned in India. Thus, in such cases, non-residents would still be required to file returns of income in India.

A. Non-resident earning income in the nature of FTS

Here are some of the illustrative cases where a non-resident may have to explore whether the exemptions are available under the tax treaty:

1. Availability of “make available clause” in the tax treaty (for example Australia, Singapore, Canada, the United Kingdom, the United States, Portugal, etc.)
2. Non-taxable management service in the tax treaty (for example the United States, Spain, the United Kingdom, Portugal, Canada).
3. Absence of the FTS provisions of the tax treaty (for example Philippines, Thailand, United Arab Emirates, Pakistan, Turkey, Libya, Mozambique, Myanmar, Nepal, etc.)
4. Most Favored Nation (MFN) clause in the tax treaty (for example Finland, Nepal, Sweden, France, Netherlands, Spain, Belgium, Hungary, Kazakhstan, Israel, etc.)

B. Non-residents earning income in the nature of royalty
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Similarly, non-residents receiving royalty income may need to investigate whether the exemptions available under the tax treaty, as mentioned below, could be opted for:

  1. Shrink-wrapped/off-the-shelf software (copyright vs. copyrighted article) – In most of India’s tax treaties, software profits will not be considered as “royalty” if the charge is for the usage of ‘copyrighted article’ rather than ‘copyright.’
  2.  The royalty of equipment will not be taxable for tax treaties entered into with Greece, Israel, Sweden, the Netherlands, etc.
  3.  The concept of royalty under the tax treaties may not include transmission by satellite, cable, optic fiber or similar technology.
C. Non-resident earning income from dividend

With the announced abolition of DDT, income from dividends would be taxable in the hands of non-resident shareholders and the Indian corporation would be liable to withhold tax on that income. The dividend is taxed at 20 percent (plus additional surcharge and cessation) under the Act. Moreover, some tax treaties entered into by India provide a much lower tax rate for income from dividends (i.e., 5%, 10%, 15%).

D. Non-resident earning income from interest

Current provisions of section 115A(1) of the Act provide for a 20 percent tax rate (plus applicable surcharge and cessation) on interest income earned by non-residents (except for certain specified interest income2). However, Some tax treaties signed by India,  provide a much lower interest income tax rate (i.e. 10 percent).

In addition to the above, it would also be worth considering the tax return filing in India in the following scenarios for the non-residents:

1. To Claim Refund in the return of income

2. Revenue from capital gains or income attributable to a permanent establishment (PE) in India

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