The Indian income-tax law has several provisions dealing with the income of Non Resident Indians (NRIs). This article discusses the potential liabilities of NRIs under the Indian Income Tax Act 1961 (the “Act”).
Broadly speaking, the world income of a resident is taxed while for the NRIs only income accruing or arising in India or received in India or deemed to accrue or arise or received in India is taxed.
Who is an NRI?
An NRI for the purposes of the Act is defined, as a person who is not a resident and for certain purposes include a person who is not ordinarily resident within the meaning of the Act.
A person is considered a resident in India if: (i) he is in India in the relevant previous year for a period aggregating to 182 days or more; or (ii) he is in India for a period aggregating to 60 days or more in the relevant previous year and has been in India for an aggregate period of 365 days or more in the 4 years preceding the relevant previous year.
The exceptions to this rule are: (i) in case of an individual or a crew of an Indian ship who leaves India in any previous year for the purpose of employment outside India, he will beconsidered a resident only if they are in India for 182 days and not 60 days; (ii) the above exception also applies to an individual who is a citizen of India or is a person of Indian origin who, being outside India, comes on a visit to India in the previous year.
A person is considered to be a resident but not ordinarily resident if he has been a non- resident in India 9 out of 10 previous years preceding that year or has been in India for a period or periods amounting in all to 729 days or less during the 7 previous years preceding that year.
Assessment of non-residents
Under section 5(2) of the Act persons who are NRIs in the accounting year are charged to: (i) income received or deemed to be received in India in the previous year, the date or place of its accrual being immaterial; (ii) income which accrues or arises or is deemed to accrue arise in India during the previous year, the date or place of its receipt being immaterial.
In summary, all assessees, whether resident or not or not, are chargeable in respect of income accruing, arising or received, or deemed to accrue or arise or to be received, in India, while residents alone are chargeable in respect of income which accrues or arises or is charged outside India.
Income received or deemed to be received in India- The Act, for the purpose of taxation bases its liability where income is received. Where the income is received in India, it is taxable in India irrespective of residential status of the taxpayer. A receipt may be in kind as well as in cash. It may be an actual receipt or a constructive receipt.
Constructive receipts include the transfer of wealth through arrangements such as the adjustment of cross-claims or paying an adjustment of the books, or through an agent, trustee or an authorized person of the NRI. It is to be noted that what is taxed is the first receipt. Thus payment received outside India which is then remitted to India, would not be treated as income received in India because it was first received outside India.
Generally speaking, the following income of a resident or an NRI is deemed to accrue or arise in India: Income, through, or from, any business connection in India; Income, through, or from, any property in India; income, through, or from, any asset or source of income in India; income through the transfer of a capital asset situated in India; dividend paid by an Indian company outside India; income payable by way of penalty or fees for technical services by an Indian company or from an Indian source; and income by way of salary, if it is earned in India.
It should be noted that income, which is deemed to accrue or arise in India is wholly taxed in India.
In certain cases, even though the income appears to be arising in India, it is not construed as such e.g. Income of an NRI running a news agency or publishing magazines etc, from activities confined to the collection of news and views in Indian, for transmission outside India.
Income accruing or arising outside India- Income that accrues or arises outside India is taxable only if it accrues or arises to a person who is a resident of India. Therefore, income that accrues to an NRI outside India is not taxable in India.
Assessment to NRIs through ‘Agents’
An NRI may also be assessed for tax in India through an agent. The following people may be treated as ‘agents’ of an NRI: Employee or trustee of the Non-resident; Any person who has any business connection with the NRI; Any person from or though whom the non-resident is in receipt of any income; Any person who ahs acquired a capital asset in Indian from the NRI.
The author is a legal practitioner admitted to practice both in India and Australia. She has significant experience in India in general litigation and also corporate and commercial having practiced in the Supreme Court of India (with matters being reported in the newspapers) and then in the corporate area in a top law firm and also as an in-house counsel for a big business group. She is now working as a Principal Solicitor with the Victorian Government Solicitor’s Office(Department of Justice), having practiced as a mergers and acquisition lawyer with Minter Ellison Lawyers in Melbourne and also worked in the banking and finance area with Clayton Utz, Melbourne. The opinions contained in the article are the personal views of the author.