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02 Dec2022
  • By Authored by CA Manish Gupta
  • Category International Taxation
  • Views 11568
An individual taxpayer might have multiple sources of income that may be subject to tax in India. Income that is not covered under the four heads, which are ‘Income from Salary’, ‘Income from House Property’, ‘Income from Capital Gains’ and ‘Income from Business or Profession’, is classified under the head ‘Income from Other Sources’. For an assessee, this head primarily includes incomes earned on savings and investments. It may be in the form of interest income from bank accounts, fixed deposits and dividends earned from investments made in India. In this blog, we will throw light upon the taxation of NRIs for income earned from such other sources.

For an individual who is a non-resident of India and a resident of any other country, the applicable tax rates on such income may vary under the Income-tax Act, 1961 and the relevant Double Taxation Avoidance Agreement (DTAA), which India has with various countries. Here, it is essential to understand who qualifies as a non-resident (NR) of India under the Act.

The category of non-residents not only includes an Indian citizen who stays out of India due to educational, employment, or business reasons but also includes all individuals, including foreign nationals, who might have visited India in a financial year but do not satisfy the physical presence test for that particular year as mentioned in the Act.

The principles based on which the residential status of a person is determined in India are laid down under Section 6 of the Income-tax Act.Let’s see what basic conditions are to be fulfilled for a person to become a resident in India.

So, a person will become a resident in India in any financial year if:

a) He has been in India during that financial year for a total period of 182 days or more, or

b) If he has been in India during the four financial years immediately preceding that year for 365 days or more and a minimum of 60 days in that year.

Hence, a person not satisfying either of the conditions mentioned above will become a non-resident in India for that financial year.

Also read: Residential Status of Certain Individuals under Income Tax Act, 1961

The assessment of the residential status in each financial year is important to correctly determine the scope of taxability of income, the applicable tax rates, disclosure requirements and the tax return form to be used to file the Return of Income in India.

Once the residential status has been evaluated, an individual should identify different sources of his income to ensure appropriate disclosure in the ITR form and payment of taxes thereon at the applicable rates in India. In the below article, we will focus on the taxation of NRIs with respect tothe two most common types of income for an NRI under the head ‘Income from Other Sources’, which are -

a) Interest income from different bank accounts and fixed deposits; and

b) Dividend income earned from investments made in India in the shares of Indian companies and the units of mutual funds. 

Let us start with discussing the taxation of non-residents for the interest and dividend income received/earned by them:

Interest from bank accounts and fixed deposits

Unlike resident citizens of India, NRIs cannot have regular savings accounts in Indian banks as per the guidelines of the Foreign Exchange Management Act, 1999 (FEMA). Hence, any person who qualifies as a non-resident of India has to convert his Indian savings account into specified non-resident accounts.

The types of accounts that a non-resident can open in India are as follows:

a) Non-Resident External Account (NRE), or
b) Non-Resident Ordinary (NRO), or
c) Foreign Currency Non-Resident (FCNR) Account

Let’s briefly understand the features of these accounts one by one in the following portion:

a) Non-Resident External (NRE) Account

* It is an Indian rupee-denominated account.
* It is used to park foreign earnings in India.
* Deposits in this account are exposed to currency fluctuations.

b) Non-Resident Ordinary (NRO) Account

* It is used to manage the income earned in India.
* If the deposit, as well as the withdrawal, is made in Indian Rupees, there is no exchange rate risk involved.
* It is an Indian rupee-denominated account.

c) Foreign Currency Non-Residential (FCNR) Account

* It is used to manage the income earned outside India in foreign currency.
* It can be opened only in the form of term deposits of 1 to 5 years.
* It is denominated in foreign currency.

Coming to the taxability of the interest income from these accounts, the interest income earned on the funds lying in NRE and FCNR Accounts is tax-free in India. However, interest earned on an NRO account is fully taxable in the hands of the NR at the applicable rates and is also subject to tax deduction by the bank.

Here it is worthwhile to know that for an assessee whose income is covered under a Double Taxation Avoidance Agreement (DTAA), i.e., for a non-resident of India, who is a resident of a nation that has entered into a DTAA with India, the provisions of the applicable DTAA or the provisions of the Income Tax Act, whichever are more beneficial to him, will prevail in India. Hence, such an assessee must also refer to the applicable DTAA to check if it provides a lower tax rate for the interest income. The same can be understood better with the following example:

As per the DTAA between India and the US, interest income arising in India and paid to an individual who qualifies as a non-resident of India and as a resident of the US will be taxable at 15% in India. Whereas as per the Income-tax Act, the interest income will be taxable according to the slab rates applicable to the assessee. Now, suppose the net taxable income of a non-resident, Mr. Singh, falls under the highest tax slab, and he is liable to pay tax at the rate of 30% plus surcharge (as applicable) and cess on his interest income as per the Act. In this case, Mr. Singh can avail of the benefit of the lower rate under the DTAA and pay tax at 15% on his interest income arising in India. However, in this case, Mr. Singh will need to obtain a Tax Residency Certificate (TRC) from the US tax authorities and furnish it to Indian tax authorities. Further, Form 10F also needs to be filed along with the TRC to avail of DTAA benefits.

Let’s now assume in the same example discussed above that Mr. Singh’s net total income was Rs. 7 lacs and he opted for the new tax regime and consequently fell under the tax bracket of 10%. In this case, it would be beneficial for Mr. Singh to forgo the tax rate specified in the DTAA and pay tax as per the slab rates applicable to him as per the Income-tax Act.

Hence, a non-resident, while offering his income to tax in India, must take both the applicable DTAA and the normal tax provisions into consideration and wisely choose what rates to pay the taxes at.

2: Dividend from investments made in shares of an Indian company or units of mutual fund

Now let’s discuss the taxability of dividend received by non-resident from India. So, for a non-resident, dividend income from investments made in India is taxable at 20% plus surcharge (as applicable) and cess without providing for any deductions under Chapter VI-A of the Act. For example, an NR who has only dividend income in India of Rs. 10,00,000 will be required to pay taxes of Rs. 2,08,000 (20% tax + 4% cess) on the entire dividend income. He shall not be allowed to claim a deduction for any amount invested in public provident fund, life insurance premium, national pension scheme, etc.

Continuing with our example of DTAA between India and the US, as per the tax treaty, the dividend paid by an Indian company to a non-resident of India who is a resident of the US will be taxable at 25% in India. Under this scenario, the NR shall opt to pay taxes at the rate of 20% plus surcharge (as applicable) and cess as per the normal Income-tax provisions as they prove to be more beneficial for him in this case.

Any balance taxes remaining unpaid after deduction of tax, as applicable, by the recipient of the above incomes can be discharged by such person by paying advance tax or self-assessment tax before furnishing ITR in India. Any delay in the payment of advance tax or self-assessment tax will attract interest for the late payment as per the relevant provisions of the Act.

Disclosure in the ITR Form

While paying taxes at the right rates is most important, disclosing income under appropriate schedules of the ITR form is also vital to ensure administrative compliance, which will help avoid unnecessary queries and notices from the Indian tax authorities.

For example, a non-resident should disclose dividend income under the column ‘Income Chargeable at Special Rates’ under the schedule ‘Income from Other Sources’ to ensure that the tax return utility calculates the proper taxes at 20% of such dividend income. Similarly, where an NR opts for a beneficial tax rate for any income under the applicable DTAA, he should disclose such income under the schedule ‘Special Income’ of the ITR form. Even if an income is exempt in the hands of the non-resident, the same should be appropriately disclosed under the schedule ‘Exempt Income’ to ensure compliance with the disclosure provisions.

Some Key Points to Remember

1:Annual Information Statement (AIS) and Taxpayer Information Summary (TIS)

With the introduction of the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS), the Indian tax department has access to extensive information regarding the financial transactions of an assessee during a financial year. The individuals, particularly NRIs living outside India, may have inadvertently missed reporting savings bank interest or dividend income correctly in their ITRs in the past years due to a lack of access to their financial accounts in India.

However, the new AIS captures the details of all such incomes in one place, making it easier for both the taxpayer and tax authorities to track the source and quantum of income during a financial year. Therefore, one must reconcile the information reported in AIS and TIS before filing the ITR. Otherwise, the assessee might be served a notice from the Indian tax authorities seeking an explanation for the omission or variance in such statements vis-à-vis details reported in the ITR. Consequentially, it may also lead you to pay interest, penalty, and additional taxes on such income not disclosed earlier.

2:Lower Deduction Certificate

There might be situations where the non-resident estimates that his total income during a financial year will be taxable at a rate lower than the rate at which tax is required to be deducted by the payer of the income under the provisions of the Act. In such cases, the NR can file an application before the Income-tax department in India to obtain a lower deduction certificate which will allow the payer of income to deduct tax at a lower rate. It would save the NR from unnecessary blockage of his funds with the government and the hassle of claiming a refund in his ITR.

3:Selection of the ITR Form

The taxpayers must also be mindful while selecting the ITR Form for filing the Return of Income. Choosing the correct ITR form is important to provide proper disclosures and ensure administrative compliance. A non-resident is not eligible to file ITR-1 and ITR-4 since the same are available only to persons who qualify as residents of India. Thus, an NR should carefully analyse his sources of income and accordingly select the correct ITR Form for any particular financial year.

Also read: NRI Income Tax Returns

Summing Up

Given the multiple provisions for taxation of NRIs under the Income-tax Act and DTAAs, taxpayers, especially non-residents who might not be very familiar with the various reporting requirements under the Indian tax system, should always exercise caution while filing ITR. If required, they can also consider consulting a tax professional who can guide them through the complex laws on taxation of income from other sources for NRIs and help taxpayers avoid the risk of receiving any notice from the tax authorities or being classified as a non-compliant assessee by the Income-tax department.

Understand tax rates, residency criteria, and reporting obligations. Ensure compliance and avoid unnecessary notices. For More Info, Contact us today at info@manishanilgupta.com

Disclaimer: This content is purely for knowledge and educational purposes. It contains only general information and references to legal content. It is not legal advice, and should not be treated as such

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