Benefits available to Non- Residents in Income TaxAct – 1961
Here is a compilation of all the Tax benefits available to Non Resident Indian (NRI).
Let us begin with the basics:
- Who is a Non-Resident
Section 2(30) defines non-resident as a person who is not a resident. Section 6 lays down the test of residency for different taxpayers as under:
An individual is said to be non-resident in India if he is not a resident in India. An individual shall be deemed to be resident in India if he satisfies any of the following conditions:
- If he is in India for a period of 182 days or more during the previous year; or
- If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
Condition no. 2 is not taken into consideration in cases given below:
- a) If an Indian citizen leaves India during the previous year for the purpose of employment outside India;
- b) If an Indian citizen leaves India during the previous year as a member of the crew of an Indian ship; or
- c) If an Indian citizen or a person of Indian origin comes on a visit to India during the previous year.
[A person shall be deemed to be of Indian origin if he or either of his parents or any of his grand-parents, was born in undivided India]
With effect from Assessment Year 2015-16, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.
- Partnership firm
A partnership firm is treated as non-resident in India if control and management of its affairs are situated wholly outside India.
An Indian company is always resident in India. A foreign company is treated as resident if, during the previous year, control and management of its affairs is situated wholly in India. In other words, a foreign company is treated as non-resident if control and management of its affairs is situated wholly or partly outside India.
With effect from Assessment Year 2017-18, a company is said to be resident in India in any previous year, if:
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
For this purpose, the “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.
- Scope of Total Income
As per Section 5 of the Income-tax Act, 1961, unlike a resident person who is liable to pay tax on his global income, a non-resident shall be liable to tax in India in respect of following incomes only:
1) Income received or is deemed to be received in India in such year; or
2) Income accrues or arises or is deemed to accrue or arise to him in India during such year.
- Indirect transfer of a capital asset situated in India
As per section 9(1)(i), any income accruing or arising, whether directly or indirectly, through transfer of a capital asset situated in India shall be deemed to accrue or arise in India.
The Finance Act, 2012 inserted Explanation 5 to section 9(1)(i) w.e.f. 01.04.1962 to clarify that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India, shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.
However, The Finance Act, 2017 inserted proviso to provide that Explanation 5 shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015.
A new Explanation 6 is inserted to section 9(1)(i) by the Finance Act, 2015 w.e.f 01.04.2016 to define the term “substantially”. It provides that share or interest in a company or entity registered or incorporated outside India shall be deemed to derive its value substantially from the assets located in India, if, on the specified date, the value of such assets:
(i) exceeds Rs. 10 Crore; and
(ii) represents at least 50% of the value of all the assets owned by the company or entity, as the case may be.
Further, a new Explanation 7 is inserted to provide that no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India, referred to in the Explanation 5:
(i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of such company or entity; or
(ii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds any right in, or in relation to, such company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India, nor holds such percentage of voting power or share capital or interest in such company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India;
In a case where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity referred to in the Explanation 5, are not located in India, the income of the non-resident transferor, from transfer outside India of a share of, or interest in, such company or entity, deemed to accrue or arise in India under this clause, shall be only such part of the income as is reasonably attributable to assets located in India and determined in such manner as may be prescribed.
- Certain activities not to constitute business connection in India
The Finance Act, 2003 has inserted Explanation 2 to section 9(1)(i) w.e.f. 01.04.2004 to broadly explain the term ‘business connection’.
After substituting the clause (a) of Explanation 2 to 9(1)(i) by the Finance Act, 2018,the term ‘business connection’ shall include any business activity carried out through a person who, acting on behalf of the non-resident::
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of non-resident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts are:
(i) in the name of the non-resident; or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or
(iii) for the provision of services by the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident.
Further, after Explanation 2, the following Explanation has also been inserted, namely:––
‘Explanation 2A.––For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean:
(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or
(b) Systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means:
The transactions or activities shall constitute significant economic presence in India, whether or not the agreement for such transaction is entered in India or non-resident has a residence or place of business in India or renders services in India.
A new Section 9A is inserted by the Finance Act, 2015. It provides that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund (subject to certain conditions).
It further provides that an eligible investment fund shall not be said to be resident in India for the purpose of section 6 merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.
(Refer Section 9A for meaning of ‘Eligible Investment Fund’, ‘Eligible Fund Manager’ and other conditions).
- Exemption from applicability of section 206AAto non-residents
Section 206AA provides that where the taxpayer does not furnish its PAN to the person responsible for withholding of tax, tax shall be deducted at source at higher of the following rates:
(a) rate specified in the relevant provision of this Act;
(b) rate or rates in force; or
However, the provisions of section 206AA shall not apply to a non-resident, not being a company, or to a foreign company, in respect of—
(i) payment of interest on long-term bonds as referred to in section 194LC; and
(ii) any other payment subject to such conditions as may be prescribed.
As per Rule 37BC, if deductee is a non-resident or a foreign company, he is not required to furnish his PAN to the deductor if he is in receipt of following income:
- Fees for technical services
- Payments for transfer of any capital asset.
However, the deductee is required to furnish the following details and documents to the deductor:
- Name, e-mail id and contact number
- Address in the country of which he is a resident
- Certificate of Residence from the Government of his home country, if the law of that country provides for issuance of such certificate
- Tax Identification Number allotted in his home country and if such number is not available, then a unique number on the basis of which he can be identified by the Government of his home country.
- Relaxation to first time resident foreign companies
Section 115JH is inserted to provide relaxation to foreign companies from certain compliances if such company is held to be resident in India for the first time. It is provided that provisions relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, advance tax, TDS or transfer pricing shall apply to said company subject to such modifications or exceptions, as may be prescribed by the Government.
- Tax incentive to unit located in international financial services center
Rate of MAT and AMT shall be 9% in case of unit located in International Financial Services Center (‘IFSC’), provided such unit derives its income solely in convertible foreign exchange. A unit located in IFSC, deriving income solely in convertible foreign exchange, shall not be subject to dividend distribution tax on declaration of dividend out of its current income.
No Securities Transaction Tax (STT) and Commodities transaction tax would be levied on transactions undertaken on a recognised stock exchange located in IFSC if consideration is paid or payable in foreign currency.
7A. Exemption from condition of payment of STT by IFSC in case of capital gains taxable under Section 112A
As per Section 112A inserted by the Finance Act, 2018, the capital gains arising from transfer of long-term capital assets, being listed equity shares, units of equity oriented fund or unit of business trust, in excess of Rs. 1 lakh shall be chargeable to tax at the rate of 10%.
The capital gains shall be taxable under Section 112A if securities transaction tax (STT) is paid on acquisition and transfer of listed equity shares. While as in the case of unit of equity oriented fund or unit of business trust, the STT is to be paid at the time of transfer of such capital asset. However, this condition of payment of STT shall not apply to transfer undertaken on a recognized stock exchange located in IFSC and the consideration for such transfer is received or receivable in foreign currency.
7B. Exemption from MAT in case foreign companies opt for presumptive taxation scheme
The Finance Act, 2018 inserts a new Explanation 4A to Section 115JB to provide exemption from applicability of MAT provisions in case of a foreign company, if its total income comprises solely of profits from business referred to in Sections 44B, 44BB, 44BBA or 44BBB and such income has been offered to tax at the rates specified in those sections.
- Provisions for taxability of Non-residents
|S.N.||Section||Particulars||Limit of exemption or deduction or Computation of income||Available to|
|A. Income not chargeable to tax|
|1.||10(4)(i)||Interest on bonds or securities notified before 01-06-2002 by the Central Government including premium on redemption of such bonds.||Interest amount||Non resident|
|2.||10(4)(ii)||Interest on money standing to the credit in a Non-resident (External) account in India.||Interest amount||Person resident outside India (under FEMA Act) and person who has been permitted to maintain said account by RBI|
|3.||10(4B)||Interest on notified savings certificates issued before 01-06-2002 by the Central Government and subscribed to in convertible foreign exchange.||Interest amount||Individual, being a citizen of India or a person of Indian Origin, who is a non resident.|
|3A.||10(4C)||Interest on Rupee Denominated Bonds (as referred to in Section 194LC) issued outside India during the period 17-09-2018 to 31-03-2019 by an Indian company/business trust||Interest amount||Non-resident person or foreign company|
|3B.||10(4D)||Capital gain arising on transfer of a capital asset, being bonds, GDRs, rupee denominated bonds or derivatives, as referred to in Section 47(viiab) by Category-III Alternative Investment Fund (AIF) located in IFSC||Capital Gain||Category III Alternative Investment Fund (AIF) of which all the units are held by non-residents|
|4.||10(6)(ii)||Remuneration received by Foreign Diplomats/Consulate and their staff (Subject to conditions)||Remuneration||Individual (not being a citizen of India)|
|5.||10(6)(vi)||Remuneration received by non-Indian citizen as employee of a foreign enterprise for services rendered by him during his stay in India, if:
a) Foreign enterprise is not engaged in any trade or business in India
b) His stay in India does not exceed in aggregate a period of 90 days in such previous year
c) Such remuneration is not liable to be deducted from the income of employer chargeable under this Act
|Remuneration||Individual – Salaried Employee (not being a citizen of India)|
|6.||10(6)(viii)||Salary received by a non-resident, for services rendered in connection with his employment on a foreign ship if his total stay in India does not exceed 90 days in the previous year.||Salary||Non-resident Individual – Salaried Employee (not being a citizen of India)|
|7.||10(6)(xi)||Remuneration received by an Individual, who is not a citizen of India, as an employee of the Government of a foreign state during his stay in India in connection with his training in any Government Office/Statutory Undertaking, etc.||Remuneration||Individual-Salaried Employee (not being a citizen of India)|
|8.||10(6A)||Tax paid by Government or Indian concern on royalty or FTS from Government or Indian concern under agreement made before 1-6-2002 which either relates to a matter included in the industrial policy of the Government and is in accordance with that policy or is approved by Central Government||Tax liability of foreign company borne by taxpayer||Foreign Company|
|9.||10(6B)||Tax paid by Government or Indian concern under terms of agreement entered into before 1-6-2002 by Central Government with Government of foreign State or international organization on income derived from Government or Indian concern, other than income by way of salary, royalty or fees for technical services||Tax liability of non-resident borne by taxpayer||Non-resident|
|10.||10(6BB)||Tax paid by Indian company, engaged in the business of operation of aircraft, who has acquired an aircraft or its engine on lease, under an approved (by Central Government) agreement entered into between 31-3-1997 and 1-4-1999, or after 31-3-2007, on lease rental/income||Tax liability so borne by Indian Company||Government of foreign State or foreign enterprise|
|11.||10(6C)||Income by way of royalty or fees for technical services rendered in India or abroad in projects connected with security of India pursuant to agreement with Central Government||Royalty and fee for technical services||Notified foreign company|
|11A||10(6D)||Income by way of royalty or FTS for services rendered in or outside India to the National Technical Research Organization.||Entire Income||Non-resident or Foreign Company|
|12.||10(8A)||Foreign income and remuneration received by consultant (agreement relating to his engagement must be approved) out of funds made available to an international organization (agency) under a technical assistance grant agreement between that agency and the Government of a foreign State (Subject to certain conditions).||Entire Amount||Individual, being a:
a) A non-resident engaged by the agency for rendering technical services in India;
b) Non-Indian citizen; or
c) Indian citizen who is not ordinarily resident in India
|13.||10(8B)||Foreign income and remuneration received by an employee of the consultant as referred to in Section 10(8A) (contract of service must be approved by the prescribed authority before commencement of service).||Entire Amount||Individual, being a:
a) Non-Indian citizen; or
b) Indian citizen who is not ordinarily resident in India
|14.||10(15)(iid)||Interest on notified bonds (notified prior to 01-06-2002) purchased in foreign exchange (subject to certain conditions)||