From the various queries I receive from Non-resident Indians (NRIs), I find that there is quite a lot of perplexity in respect of Special Provisions under Chapter XIIA of the Income Tax Act whereby an NRI can opt for concessional flat rate of 20 per cent tax on investment income from specified foreign exchange assets (FEA "" shares, debentures, bonds, units and Co-FDs purchased through foreign exchange).
He also can opt for the normal rates, if it is advantageous for him to do so. As long as he continues to hold the status of NRI, he will find that it is advantageous for him to opt for the special provisions when his annual income from these sources is over Rs. 1.65 lakh.
This is clear. The main confusion arises only after he returns to India and continues to have the option between the concessional and normal tax rates.
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This is an attempt to clarify many of the queries asked to me by returning NRIs.
Concessions: Sec. 115C(fiii) embraces deposits with an Indian company which is not a private company as defined in the Companies Act as a specified asset.
Thus, all the banks i) shares of which are listed in the stock market (e.g. SBI, HDFC bank) ii) which continue to be Indian Companies (such as The Saraswat Cooperative Bank Ltd. and United Western Bank Ltd.) and iii) nationalised banks which were incorporated as Indian Companies before nationalisation (such as. Canara Bank, Bank of Baroda) are eligible for the concessional tax of flat rate of 20 per cent, even after an NRI becomes assessable as resident in India. It may be noted that the Unit Trust of India (UTI) is deemed to be a public company as perthe UTI Act, 1963.
This concession is available until the deposit is transferred or converted into money.
When an NRI becomes a resident assessee, the special provisions continue to be available in relation to the investment income derived from foreign exchange assets except shares of an Indian company, until the conversion (other than by transfer) to cash of such assets.
For this purpose it is necessary to give a declaration along with the tax return of the year in which the status has changed from non-resident to resident seeking application of the 20 per cent tax rate.
Status of residentship: Note that the status of residentship is applicable for income tax purposes, unlike in the case of FERA (Foreign Exchange Regulatory Act), for the entire assessment year. Therefore, if you are an NRI, even after you return to India permanently, by virtue of your being outside India for 182 days, the income is free from tax and you can start claiming the benefits of these special provisions from April 1 of the year when you become an RNOR.
If you read the provisions carefully, you will find that the benefit of flat rate of 20 per cent is available even after you become a full-fledged resident, unless you have encashed or transferred these deposits. This concession is not applicable if the deposits are renewed.
It is evident that none of the foreign banks are eligible for this facility, a point which dawns on them, unfortunately only when it is too late.
In case you have opted for cumulative deposit, realise that the interest, though not paid, accrues on the dates when the interest on regular deposit becomes payable. If such accrued interest is liable to tax, the assessee will have to include the same in his tax returns. The bank, on a request, will furnish the details of such accruals for income tax purposes.
Anomalies: Now, a little confusion. Under section 10(ii) an individual is entitled to tax-free income from NRE provided such a person is Resident outside India as per FERA. Let us examine this stipulation carefully.
An OCB can also open an NRE account. The freedom from tax is available only to an individual. This implies that OCBs do not enjoy this freedom.
Immediately after an individual returns to India permanently, he loses his status under FERA. Within a reasonable time, he is required to inform the bank about the change in his status. Upon receiving this intimation, the bank will redesignate his NRE and NRNR accounts as a resident one. Though the original contracted rate will continue to apply, the interest earned will become taxable.
In the case of FCNR, the account holder has two options. One where he is required to close the account and receive rupees. He has to pay the penalty for premature withdrawal.
Alternatively, he can convert it into an RFC account without the penalty. However, the banks insist on the term of RFC to be the same as the original term of FCNR without taking into consideration the period elapsed. For instance, if the FCNR term was for 3 years, and if 2 years have elapsed, bad luck! The term of RFC has to 3 years or more from the date of its opening.
Interest: That is the next point of confusion. Under section 10(15fa) interest paid to an NRI or an NROR (as defined by ITA) on deposits in foreign currency enjoys freedom from tax. Now, deposits in foreign currency includes FCNR, NRNR and also NRE. I repeat, also NRE. This means that an OCB can claim exemption on income from NRE, though it is not an individual!!
This also means that if an individual returns to India, say in August and immediately informs the bank about his change of status, both under FERA as not a resident outside India and as an RNOR under ITA, he can still claim freedom from tax on interest he has received upto August.
Can he claim this freedom on interest he receives after August of the year when he returns to India on the basis of his being an RNOR? Well, I do not know. I am confused.
I only wish the authors of the legislation are a little more careful.
If you are an NRI, even after you return to India permanently, by virtue of your being outside India for 182 days, the income is free from tax and you can start claiming the benefits of these special provisions from April 1 of the year when you become an RNOR.