NRI & Taxation
Who is an NRI?
A Non Resident Indian (NRI) as per India’s Foreign Exchange Management Act 1999 (FEMA), is an Indian citizen or Foreign National of Indian Origin resident outside India for purposes of employment, carrying on business or vocation in circumstances as would indicate an intention to stay outside India for an indefinite period. An individual will also be considered NRI if his stay in India is less than 182 days during the preceding financial year.
Who is a PIO?
A person who is not a citizen of India is deemed to be of Indian origin if he is not a citizen of Pakistan or Bangladesh and if he at any time held an Indian passport; or he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or Citizenship Act, 1955. A spouse (not being a citizen of Pakistan or Bangladesh) of an Indian citizen or of a Person of Indian Origin is also treated as a Person of Indian Origin for the purpose of NRI deposits if the accounts are held jointly with the NRI/PIO spouse. PIOs are extended the same facilities for bank account maintenance in India as NRIs and are also, for such purposes, called by the generic name as NRIs.
Residential Status and Taxability of NRI & HUF
In India, taxability of any income in the hands of a person (NRIs or their HUF) depends on the following 2 factors:
(1) Residential status of the person as per the Income-tax Law; and
(2) Nature of income earned by him.
For the purpose of Income-tax Law, an individual or HUF can have any one of the following residential status:
(1) Resident and ordinarily resident in India (also known as Resident)
(2) Resident but not ordinarily resident in India (R&OR)
(3) Non-Resident (NRI)
Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard and, hence, it may so happen that in one year the individual or HUF would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same. A person will be treated as a resident in India if he satisfies the criteria specified in this regard under the Income-tax Act.
Determination of the residential status of an Individual
To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident.
Step 1 given below will ascertain whether the individual is resident or non-resident and step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident.
Step 1: Determining whether resident or non-resident Under the Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy any one or may satisfy both the conditions):
(1) He is in India for a period of 120 (old 182) days or more in that year; or (2) He is in India for a period of 60 days or more in the year and for a period of 365 days or more in 4 years immediately preceding the relevant year.
If an individual does not satisfy any of the above conditions he will be treated as non-resident in India. Note: Condition given in (2) above will not apply to an Indian citizen leaving India for the purpose of employment or to an Indian citizen leaving India as a member of crew of Indian ship or to an Indian citizen/person of Indian origin coming on a visit to India. A person is said to be of Indian origin, if he or any of his parents or grand-parents (maternal or paternal) were born in undivided India. Note: 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.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies following conditions: (1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year. (2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.
A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident. In short, following test will determine the residential status of an individual:
If the individual satisfy any one or both the conditions specified at step 1 and satisfies both the conditions specified at step 2, then he will become resident and ordinarily resident in India.
If the individual satisfy any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2, then he will become resident but not ordinarily resident in India.
If the individual satisfy no conditions satisfied at step one, then he will become non-resident.
Tax residency rules for NRIs changed in 2020 & 2021
Budget 2020 amended the tax residency rules for NRIs. Till financial year (FY) 2019-20, an NRI who visited India would be considered a resident if they spent 182 days or more in the previous year in the country, in addition to an aggregate stay of 365 days or more in the preceding 4 years. Budget 2020 proposed to lower the threshold period of stay in the previous year to 120 days from 182 days. Budget 2020 proposed to amend the definition of “not ordinarily resident". Till FY20, an individual was classified as a “not ordinarily resident" if he was a non-resident in India for nine out of 10 preceding years. The budget proposal has reduced the numbers of years to seven out of the 10 preceding years. The government is seeking to tax NRIs who are carrying on substantial economic activities from India. Under the present residence criteria of a minimum stay of 182 days in an FY, NRIs remain non-resident in India perpetually. Consequently, they do not declare and pay tax on their global incomes in India.
They may be required to disclose their wealth and assets to the income tax authorities of the respective countries.
Budget 2021 change: Section 6 (1A)-Individual citizen of India is deemed Resident if he is “not liable to tax” in any country or territory by reason of his domicile or residence or any other criteria of similar nature. “Liable to tax” is defined to mean that there is a liability to tax on such person “under any law for the time being in force” in any country. And includes: subsequent to imposition of tax liability, an exemption is provided.
Determination of the residential status of a HUF
To determine the residential status of a HUF, the first step is to ascertain whether the HUF is resident or a non-resident. If the HUF turns to be a resident, then the next step is to ascertain whether it is resident and ordinarily resident or is resident but not ordinarily resident.
Step 1 given below will ascertain whether the HUF is resident or non-resident and step 2 will ascertain whether the HUF is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the HUF turns to be a resident.
Step 1: Determining whether resident or non-resident For the purpose of Income-tax Law, a HUF will be treated as resident in India, if the control and management of the affairs of the HUF is located (partly or wholly) in India.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident A resident HUF will be treated as resident and ordinarily resident in India during the year if its manager (i.e. karta or manager) satisfies both the following conditions:
(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.
A resident HUF whose manager (i.e. karta or manager) does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident. In short, following test will determine the residential status of a HUF:
If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies both the conditions specified at step 2, then the HUF will become resident and ordinarily resident in India.
If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies none or only one condition specified at step 2, then the HUF will become resident but not ordinarily resident in India.
If the control and management of the affairs of the HUF is located wholly outside India, then the HUF will become non-resident.
Incomes charged to tax in India in the hands of a taxpayer
The following chart highlights the tax incidence in case of different persons:
Nature of income Residential status
Nature of income
ROR RNOR NR
Income which accrues or arises in India Taxed Taxed Taxed
Income which is deemed to accrue or arise in India Taxed Taxed Taxed
Income which is received in India Taxed Taxed Taxed
Income which is deemed to be received in India Taxed Taxed Taxed
Income accruing outside India from a business controlled from India or from a profession set up in India Taxed Taxed Not Taxed
Income other than above (i.e., income which has no relation with India)
Taxed Not Taxed Not Taxed
ROR means resident and ordinarily resident.
RNOR means resident but not ordinarily resident.
NR means non-resident.
Incomes -deemed to be received in India
Following incomes are treated as incomes deemed to be received in India:
· Interest credited to recognised provident fund account of an employee in excess of 9.5% per annum.
· Employer's contribution to recognised provident fund in excess of 12% of the salary of the employee.
· Transferred balance in case of reorganisation of unrecognised provident fund.
· Contribution by the Central Government or other employer to the account of the employee in case of notified pension scheme referred to in Section 80CCD.
Incomes deemed to have accrue or arise in India
Following incomes are treated as incomes deemed to have accrued or arisen in India:
· Capital gain arising on transfer of property situated in India.
· Income from business connection in India. o Income from salary in respect of services rendered in India.
· Salary received by an Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case.
· Income from any property, asset or other source of income located in India.
· Dividend paid by an Indian company. o Interest received from Government of India.
· Interest received from a resident is treated as income deemed to have accrued or arisen in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and used by resident for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.
· Interest received from a non-resident is treated as income deemed to accrue or arise in India if such interest is in respect of funds borrowed by the non-resident for carrying on any business/profession in India.
· Royalty/fees for technical services received from Government of India.
· Royalty/fees for technical services received from resident is treated as income deemed to have accrued or arisen in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.
· Royalty/fees for technical services received from non-resident is treated as income deemed to have accrued or arisen in India if such royalty/fees is for business/profession/other source of income carried by the payer in India.
Income from Retirement benefit funds maintained Abroad
Background: Individuals are presently residents but earlier nonresidents had opened fund accounts abroad in respect of their retirement benefits. Income from such funds are taxable in India (based on residential status), and in the foreign country (based on source). FTC is available in home country. Taxation in India is on accrual basis while taxation abroad on receipt basis. Due to Timing mis match there is practical difficulties in claiming FTC.
Amendment in 2021: Income accrued in specified account shall be taxable as per prescribed Rules w.e.f. April 1,2022(i.e.AY 2022-23).
TDS on Sale of Property
TDS on Sale of Property @ 1% under section 194IA for Residents.
However for NRI it is @ 20.66% under section 195 for a Property held for more than 2 years.
However for a property held for less than 2 years it will be 33.33% (plus Surcharge for transactions above Rs.50 lakhs)
Incidence of such higher TDS can be reduced by making application to concerned Income Tax Officer.
Long Term Capital Gains on Property:
Holding period 2 years
Long Term Capital Gain Tax @ 20% with Indexation benefits
Short Term Capital Gain Tax on holding period below 2 years taxed as normal Income and slabs are applicable.
Capital Gains: Short Term or Long Term on Financial Assets
Shares (STT Paid) & Equity MF: Short Term < 1 year @ 15%.
Long Term > 1 year @ 10% with all gains earned until 31 January, 2018 protected as tax free.
Debt Mutual Fund: Short Term < 3 years@ applicable Slab
Long Term > 2 years @ 20% with Indexation
Detailed write up separately given
Taxation Slabs
See separate chapter on Tax Rates, slabs