Non-resident under Income Tax Act

CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)

09 August 2010

Non-resident under Income Tax Act

Non-resident - definition:

There has been confusion and consequent litigation regarding the status of 'Not Ordinarily Resident'. This has now been clarified to mean the following:

A person, who has been non-resident in India in 9 out of the 10 preceding previous years.
a person, who has been in India for less than 730 days in the 7 years, preceding the year in question.

In the past, if a person was non-resident for 2 years, he could stay in India for as many as 9 years and be treated as 'Resident' but 'Not Ordinarily Resident' for those 9 years. Now, this has been reversed. Only a person, who has been non-resident for 9 years, will be entitled to the facility of 'Resident'. He will be granted the status of Not 'Ordinarily Resident' only after 2 years

Similarly, a resident Hindu Undivided Family is treated as 'not ordinarily resident' in India, if the manager of the family satisfies either of the above two conditions. To further clarify the issue, a resident individual will be 'ordinarily resident' in India if he satisfies the following two additional conditions:

As on March 31, 2003- i.e. for the assessment year 2003-04:

He has been resident in India for at least 9 out of the 10 previous years, immediately preceding the relevant previous years.
He has been in India for a period of 730 days or more during the 7 years, immediately preceding the relevant previous year.

From April 01, 2003- i.e. for the assessment year 2004-05 onwards:

He has been resident in India for at least 2 out of the 10 previous years, immediately preceding the relevant previous year.
He has been in India for a period of 730 days or more during the 7 years, immediately preceding the relevant previous year.

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The tax laws that affect NRIs and their investments, business and income in India are given below

The Income Tax Act, 1961: It deals with the levy, assessment, collection of tax, appeal etc. It is supplemented by the Income tax rule, 1962.

The Wealth Tax Act, 1957: It regulates the levy and collection of wealth-tax of individuals, HUF and companies. It is also supplemented by the Wealth Tax Rules, 1957.

Finance Act: Every year, the Parliament passes a Finance Act, which lays down the rates of Income-tax and Wealth-tax for a particular financial year or the assessment year. Amendments to the various direct tax laws are also passed through the Finance Act and sometimes, through a Direct Tax Law Amendment Act.

Circulars: The Central Board of Direct Taxes, New Delhi is the apex administrative body for the different tax laws. It often issues circulars, interpreting the provisions of the law, which give relief and grant tax concessions. These circulars are binding on the different tax authorities.

Notifications: The Government of India issues notifications, which are published in the Official Gazette e.g. granting special exemption etc.

Relevant Points for NRIs

Income tax is payable by any tax payer on the total income as computed and approved by the assessing officer under the provision of the Income-tax Act.

Only Indian income is liable to Income-tax in India in the case of Non-resident Person.

There is no Income-tax in India on a foreign income merely because it is remitted to India during that year.

In the case of a person who is resident but not ordinarily resident in India, no income-tax is payable by him in the income which accrues or arises to him outside India, unless it is derived from a business controlled or a profession set up, in India.

Tax Deduction At Source For NRIs

Section 194I of the Income-tax Act provides for deduction of tax at source on rental income. This states that the rate for deduction on payments to individuals will be 15% (plus surcharge). Section 194 - I will now be amended to provide that in t case a non-resident receives rental income, TDS will not be @ 15% but the rate would be 30% plus surcharge.

Here is the table that provides with all the details:

Persons who are liable to deduct:- Any person responsible for paying to a non-corporate, non-resident assessee or to a Company other than a domestic company.

Persons from whom deduction is to take place:- Non-corporate, non-resident assessee or a Company other than a domestic company.

Nature of Income from which deduction is to be made:- Any interest or any other sum (not being income chargeable under the head ''Salaries'').

Amount on which tax has to be deducted:- Any sum chargeable under the provisions of the Act other than interest on Securities and Salaries.

Time when tax is to be deducted:- At the time of Credit of the income to the account of the Payee or even a Suspense account or at the time of payment in cash or by issue or a Cheque or a draft, or by any other mode, whichever earlier.

Rates at which tax is to be deducted:-

Investment Income 20%
Long Term Capital Gain (U/S 115E) 10%
Long Term capital Gain in respect of Assets other than those specified in clauses 33 and 36 of section 10. 20%
Interest payable in Foreign Currency 20%
Any other income chargeable to tax 30%
Surcharge is payable at 10% on the tax in case of Non-resident for the financial year 2003-2004 i.e. assessment year 2004-2005 of income exceeds Rs 8.5 lacs.

Time within which the tax deducted is to be paid:- When payment is credited on the last day of the accounting year, the tax deducted has to be paid within 2 months from the end of the month in which the credit is made.
In any other case: Within one-week from the last day of the month in which the deduction is made.

Returns & Form No.:- Form No. 27

Due date for filing of the Return:- Within 14 days from the end of the quarter.

Time limit to issue TDS Certificate in Form No.16A:- Within one month from the end of the month in which credit is given or the amount is paid.

Form for application of lower rate of tax:- Application has to be made in Form Nos. 13, 15C/D to the ITO for NIL deduction or deduction of tax at a rate lower than the prescribed rate.