By CA Naveen Wadhwa

An NRI, or Non-Resident in India, is an individual who is considered a non-resident as per Section 6 of the Income Tax Act. He can be an Indian citizen living abroad or a foreign citizen but earning income from India. To understand this in perspective, Priyanka Chopra, who is now settled in the USA, or Rihanna, who performed at Ambani’s pre-wedding, are the NRIs for income tax purposes as they have income sourced in India.

The Indian Income Tax Act contains specific rules for the taxation of NRIs. These rules determine how much tax they must pay on the income they earn in India. Knowing the rates is not enough. It is essential to understand the whole picture, including the residential status, taxable income, taxing rights under the DTAA and the tax rates.

This article explains all these essential concepts to determine the tax liability of an NRI.

Residential Status

A person is said to be non-resident if he is not a resident in India as per Section 6 of the Act. The residential status of an individual is determined on the basis of his physical stay in India. An individual is treated as a resident in India if he stays in India for 182 days or more during the relevant previous year or 60 days or more (but less than 182 days) during the relevant previous year and for 365 days or more in the last 4 years. An individual is considered a non-resident if he does not satisfy any of the conditions required to become a resident.

It must be noted that an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding Rs 15 lakh during the previous year shall be deemed to be a resident in India if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

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Taxable Income

The income tax liability of an assessee is calculated based on ‘Total Income’. What is to be included in the total income is greatly influenced by the residential status of the assessee in India. As per Section 5, the total income of a non-resident person of any previous year shall include the income that is received or is deemed to be received in India or income which accrued or arose or is deemed to accrue or arise in India.

Section 9 contains provisions for when certain income shall be deemed to accrue or arise in India. This provision provides a deeming fiction that even if an income is received outside India, it shall be taxable in India. However, the ultimate tax liability of a non-resident person shall depend upon the DTAA that India has entered into with various countries. For example, the dividend, interest, capital gains, royalty or fees for technical services shall be deemed to accrue or arise in India if these incomes are earned from an Indian source, such as the payer is a resident or asset is in India.

Computation of taxable income

The total income of an assessee is computed under five headings: salary, business income, income from house property, capital gains, and residual income.

* Salary

Income under the head ‘salary’ is deemed to accrue or arise in India if it is earned in India. Salary is deemed to be earned in India if it is payable for services rendered in India, even if it is paid in India or outside India. Further, any salary paid by the Government of India to Indian citizens outside India is deemed to accrue or arise in India even though the services have been rendered outside India.

* Income from house property

Income from Indian house property (say, rental income, etc.) is deemed to accrue or arise in India as it is earned from property held in India. Thus, if a non-resident earns income from a house property situated in India, it shall be taxed in India irrespective of whether it is received outside India. Meanwhile, income arising from foreign house property may be taxable in India if such income hits the Indian bank account first, subject to the right allocated by the DTAA.

* Business or Professional Income

Any income accruing or arising through or from any business connection in India is deemed to accrue or arise in India. Most DTAAs also allocate the taxing right to the source country to tax the income arising through a permanent establishment or fixed place of profession in India. In such cases, the income attributable to a permanent establishment or fixed place of profession is taxable under the head business or profession. Where any income is taxable under the head business or profession, it is generally chargeable to tax on a net basis. The assessee is allowed to deduct the expenses incurred to earn such income.

* Capital Gains

Any income accruing or arising through transferring a capital asset situated in India is always deemed to accrue or arise in India. The provisions of DTAA shall also play a role in determining the taxability of capital gains. Most DTAAs give India the right to tax any capital gain arising from the transfer of immovable property situated in India or shares/interests in an Indian entity.

* Income from other Sources

Where an income is not taxable under any of the aforesaid heads of income, it is chargeable under the head of other sources. This includes dividends, interest, royalties or fees for technical services. Where such income arises from an Indian source, it shall be taxable in India. Most DTAAs also give the right to India to tax such income, however, at a concessional rate.

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Tax rate

Where an income is taxable in India, it is taxable at the rate specified in the Income Tax Act, subject to the maximum rate prescribed under the DTAA. Where the DTAA prescribes the lower rate, such income shall be taxable at the lower rate.

(CA Naveen Wadhwa is Vice-President, Taxmann. Co-authored by CA Manila Mehta, Assistant Manager, Taxmann.)

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