Individual taxpayers may have multiple sources of income, which could be subject to Indian tax. The head Income From Other Sources’ covers income that isn’t covered by the four headings – ‘Income form Salary’, ‘Income out of House Property’ (‘Income aus Capital Gains’), ‘Income Out Of Business or Profession’ and ’Income From Salary’. This head includes incomes from savings and investments. This could be interest income from fixed deposits, bank accounts or dividends from Indian investments. This blog will focus on the taxation of NRIs who earn income from other sources.
The applicable tax rates for income earned by a non-resident Indian individual and a resident from any other country may differ under the Income Tax Act, 1961, and the relevant Double Taxation Avoidance Agreements (DTAA) that India has with different countries. It is important to know who is a non-resident (NR), of India as per the Act.
Non-residents include Indian citizen who is not in India for educational, business, or other reasons. It also includes any foreign nationals who may have visited India during a financial year, but who do not meet the physical presence requirement as stated in the Act.
Section 6 of the Income-tax Act lays down the principles on which India determines a person’s residential status. Let’s look at the primary conditions that must be met for someone to become a resident of India.
In other words, an individual will be considered a resident of India for any given financial year if:
a) He was in India for at least 182 days during the financial year.
b) If he was in India for at least 60 days during the four years immediately preceding this year.
A person who does not meet the above conditions will be considered a non-resident of India for the financial year.
It is crucial to accurately determine the taxability of income and the applicable tax rates. This assessment must be done in every financial year.
After determining the resident status, the individual must identify all sources of income. This will ensure that the ITR form is completed correctly and taxes are paid at the Indian rates. Below, we will be discussing the taxation of NRIs regarding the most common income sources for NRIs under the heading “Income From Other Sources”. These are:
a) Interest income from different bank accounts and fixed deposits
b) Dividend income from Indian investments in shares of Indian companies or units of mutual funds.
Let’s start by discussing taxation for non-residents on dividend and interest income they receive/earn.
Fixed deposits and bank accounts earn interest
NRIs are not permitted to open regular savings accounts at Indian banks, unlike Indian residents. This is according to the Foreign Exchange Management Act of 1999. Any person who is not a resident of India must convert his Indian savings account to a non-resident account.
These are the types of accounts that non-residents can open in India:
a) Non-Resident External Account (NRE),
b) Non-Resident Ordinary (NRO),
c) Foreign Currency Non-Resident (FCNR) Account
In the next section, let’s take a look at the different features of each account.
a) Non-Resident External (NRE), Account
* This account is in Indian rupees.
* It’s used to store foreign earnings in India.
* This account is subject to currency fluctuations.
b) Non-Resident Ordinary (NRO Account)
* It’s used to manage income earned in India.
* There is no risk of exchange rate fluctuations if the withdrawal and deposit are made in Indian Rupees.
* This account is in Indian rupees.
c) Foreign Currency Non-Residential (FCNR) Account
* It’s used to manage foreign currency income earned outside of India.
* This can only be opened in term deposits between 1 and 5 years.
* It can be denominated using foreign currency.
The interest income earned from these accounts is not subject to tax in India. The bank can also deduct the tax from interest earned on NRO accounts. However, the interest earned on these accounts is fully taxable by the NR at applicable rates.
It is worth noting that for an assessee whose income falls under a Double Taxation Avoidance Act (DTAA), i.e. for a non-resident of India who is a resident in a country that has entered into a DTAA, either the Income Tax Act or the applicable DTAA will apply to him. To determine if the interest income is subject to a lower tax rate, the assessee should also consult the applicable DTAA. This is an example of how it can be explained:
According to the DTAA between India & the US, interest income arising from India and paid by an individual who is a non-resident Indian or a US resident will be subject to 15% tax in India. The Income-tax Act states that interest income will be subject to tax at the applicable slab rates. Let’s say Mr Singh has a net taxable income that falls within the highest tax bracket. He will be subject to tax at 30% plus any surcharge and cess as applicable on the interest income. Mr. Singh will be able to take advantage of the DTAA’s lower rate and pay 15% tax on any interest income he earns in India. In this instance, Mr. Singh will need a Tax Residency Certificate, (TRC), from the US tax authorities, and it must be provided to Indian tax authorities. To be eligible for DTAA benefits, Form 10F must also be filed with the TRC.
Let’s assume that Mr. Singh had a net income of Rs. 7 lacs. He opted for the new tax system and fell into the 10% tax bracket. In this instance, Mr. Singh could forego the DTAA tax rate and instead pay tax according to the Income-tax Act’s slab rates.
Non-residents must consider both the regular and applicable tax provisions when submitting their income for tax in India. This will allow them to wisely decide the tax rates at which they should pay.
2: Dividend on investments made in Indian shares or units of mutual funds
Let’s now discuss the taxability for dividends received from India by non-residents. Dividend income from investments in India are taxable at 20% plus any surcharge or cess. No deductions are allowed under Chapter VI-A. An example of this is a NR that has a dividend income in India only of Rs. 10,00,000. will need to pay Rs. 2,08,000 (5% tax + 4% cess). A person cannot claim a deduction for amounts invested in a national pension scheme, public provident funds, or life insurance premium.
We will continue with the DTAA example between India and the US. The tax treaty states that the Indian company’s dividend to a nonresident of India who happens to be a US resident will be taxable at 25% here. In this scenario, the NR will choose to pay taxes at 20% plus a surcharge (as appropriate) and cess according to the standard Income tax provisions. This is because he finds these provisions more advantageous.
After deducting tax as applicable, any balance taxes that remain unpaid can be paid by such a person by either paying advance tax or self-assessment tax. ITR in India must also be furnished before the payment is made. In accordance with the Act, interest will be charged for late payments if there is a delay in payment of self-assessment or advance tax.
Disclosure in the ITR Form
It is important to pay taxes at the correct rate. However, it is equally important to disclose income according to the ITR forms. This will ensure administrative compliance and help avoid any unnecessary notices or queries from the Indian tax authorities.
Non-residents should, for example, disclose dividend income under the column “Income Chargeable At Special Rates” under the schedule “Income From Other Sources”. This will ensure that the tax utility calculates the correct taxes at 20% on such dividend income. Similarly, if an NR chooses a favorable tax rate for any income, he must disclose such income under Schedule ‘Special Income’ of the ITR form. To ensure compliance with disclosure provisions, income that is not exempt from the hands of non-residents should be disclosed appropriately under the Schedule ‘Exempt Income’.
Here are some key points to remember
1:Annual Information Statement, (AIS), and Taxpayer Information Summary, (TIS).
The Indian tax department now has extensive access to financial transactions for an assessee’s financial year through the introduction of the Annual Information Statement and Taxpayer Information summary (TIS). Individuals, especially NRIs, might have missed reporting dividend income or savings bank interest correctly in their ITRs, due to access to their Indian financial accounts.
The new AIS records all incomes, making it easier to tax authorities and taxpayers to track the source and amount of income over a fiscal year. Before filing an ITR, it is necessary to reconcile all information in AIS and TIS. The Indian tax authorities might serve a notice to the assessee asking for explanations as to why certain statements are different from those reported in the ITR. It could also result in you having to pay additional taxes, interest, penalties and penalties for income that was not disclosed previously.
2:Lower deduction certificate
In some cases, the non-resident might estimate that his income for the financial year will be subject to tax at a lower rate than the rate at which income must be deducted under the Act. The NR can request a lower deduction certificate from the Income-tax department of India. This will allow the payer to deduct income tax at a lower rate. This would prevent the NR’s funds from being blocked by the government, and it would also save him the trouble of claiming a refund under his ITR.
3. Selection of the ITR form
Taxpayers must be careful when choosing the ITR form to file the Return of Income. It is crucial to choose the right ITR form in order to ensure proper disclosures and administrative compliance. Non-residents are not allowed to file ITR-1 or ITR-4 as they are only available to Indian residents. An NR must carefully analyze his income sources and choose the right ITR Form for each financial year.