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Tax filings by Non Resident Indians

May 27, 2011, 07.37pm IST

By Shankar P B
Senior Tax Professional with Ernst & Young
With the growing employment and business opportunities overseas, Indians have
migrated to various foreign countries and some of them also have obtained citizenship
or permanent residence in such countries. However, they continue to invest into India
and enjoy higher returns on their investments when compared to other countries.
From an Indian tax context, such individuals are often called as Non Resident Indians or
NRIs, who are typically Indian citizens or persons of Indian origin and visiting India for
less than 182 days in tax year (April - March). NRIs have to pay taxes on income
earned from Indian sources/assets and also income received in India.
Such income would generally include salary for services rendered in India, return on
investments in India and sale of such investments in India. NRIs would also need to pay
wealth tax on their net wealth comprising of specific category of assets in India after
excluding any debt incurred on such assets.
Wealth tax is computed on the wealth as on March 31 of each year at the rate of 1% in
excess of INR 30 lakhs. However, NRIs who intend to permanently reside in India can
also claim exemption from wealth tax for a period of 7 years on returning to India.
Accordingly, NRIs would need to pay Indian income tax and wealth tax and file the tax
returns for both income tax and wealth tax separately. The due date for filing both the
tax returns is July 31 following the tax year (April - March). While NRIs have the option
to file the income tax return online, the wealth tax would still need to be filed in hard
copy with the tax office. Delay in filing tax returns would lead to interest and penal
consequences resulting in heavy cash outflow.
Before filing taxes, one needs to know the specific benefits or caution points which are
specific to NRIs. Let's take a look at certain key points an NRI has to bear in mind while
filing taxes in India.
Indian tax system provides an option to NRIs to tax income from specified assets at
reduced tax rates on gross basis without going through the cumbersome process of
computing the taxable income. This benefit is available for interest income (around
20%) and capital gains on sale of specified assets held for more than one year (around
10%) and where the assets are acquired using convertible foreign exchange.
Also, the capital gains are exempt from income tax if the sale consideration is
reinvested again in the specified assets within a period of six months subject to certain
lock in conditions. Specified assets include shares in Indian company, debentures and
deposits issued by Indian public company, and Central Government Securities.

On opting the above, NRIs need not file income tax return if they have only the above
income (from specified assets) in the tax year and entire tax has been withheld at the
time of receiving the said income.
NRIs would need to exercise the above option cautiously. This can be done after
comparing the taxes under the normal provisions, which provide for taxing income on a
slab rate basis after specified deductions based on
expenditure/investments/contributions.
In addition to the above special scheme, NRIs would also be eligible for exemptions on
income arising in India in case there are residents of countries where India has signed
tax treaty with favourable provisions (as compared to the Indian income tax). Such
provisions would include:
-- exempting a particular source of income from tax in India. For example, residents of
Singapore would not be subject to capital gains tax in India on sale of assets in India on
satisfaction of prescribed conditions. Taking another example certain countries (like
USA, UK, Australia, etc) exempt salary income from Indian taxes in case services are
rendered to foreign employer on satisfaction of prescribed conditions;
-- taxing a particular income at a reduced tax rate;
-- relief in the resident country for the taxes paid in the source state (India). For
example, a Citizen of US, would get credit for Indian taxes while computing the total tax
liability on his worldwide income in US, thereby avoiding double taxation on Indian
income.
Hence an NRI would need to take into account the beneficial provisions of the
respective tax treaty to claim benefit and avoid double taxation.
Last but not the least, NRIs should obtain tax registration number (PAN) to avoid higher
tax deductions in certain cases. For instance, at the time sale of unlisted Indian shares
held for more than one year, tax is deducted on the capital gains at a higher rate of
around 20% (instead of around 10%), in case NRI does not have PAN.
With the growing focus by the Indian tax authorities to tax NRI income, NRIs should not
only stay abreast with the tax filings but also ensure right options are selected and tax
benefits/exemptions are appropriately claimed.
(The views expressed are personal.)

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