Income Tax Filing for NRI in India

 What is Income Tax?

Going with Article 366(28) of the Constitution of India ‘Taxation’ is explained as follows:

Taxation is inclusive of imposition of any tax or impost, whether general or local or special and tax is construed accordingly. It is also considered to be as cost of living in society and it is levied by the government for the good welfare of the society.

Taxation System of Inter-Country Transactions

Transactions which are made from one country to another country are taxed based on two concepts:

1. Residence based taxation
2. Source based taxation

Residence based taxation:

This is based that a person shall be taxed on the basis of their residence or domicile regardless of the source of income, for companies place of incorporation is key element to determine the tax.

Source based taxation:

As per this concept, a country considers income as taxable income, if such income arises within its jurisdiction.

To get a handle on tax responsibilities, you have to first figure out where you call home. India's Income Tax Act divides folks into three groups: Residents, Non-Residents, and Resident but Not Ordinarily Resident (RNOR). If you're not meeting the established qualifications for residency, then you're classified as a non-resident come tax season.

Determine Residential Status Under Income Tax Act

Residential Status of a person is determined as per Sec 6 of the Income tax Act. There are three broad categories of Residents as per the Act:

1. Non - Resident 
2. Resident and ordinarily resident
3. Resident but not ordinarily resident

Taxpayers excluding individuals and HUF are categorised in 2 main broad categories:

1. Resident 
2. Non-Resident

Determination of Residential Status of Individuals

1. Resident on the basis of number of days stayed in India:

An individual can be identified as a person resident in India on satisfaction of below 2 conditions:

1. Stayed in India during last year for a period of 182 days or more, or
2. Stayed in India during 4 years previous preceding the previous year for a total period of 365 days or more and has stayed in India for minimum 60 days in the previous year.

2. Resident but not ordinarily resident (Individuals and HUF)

1. Where such person has been non resident in 9 years out of 10 years preceding the relevant previous year, or
2. Stayed for maximum 729 days in 7 previous years preceding the relevant previous year or
3. Individual having income from India exceeding 15 lakhs in previous year and he has stayed in India for more than 120 days but less than 182 days.

Illustration 1: Maxwell, an Australian cricket player visits India for 100 days in every financial year. This has been his practice for the past 10 years.

Solution:

Residential Status of Mr. Maxwell foe the A.Y. 2024-25?

Calculation of stay during last 4 previous years (100*4=400 days)

Mr. Bret Lee has been in India for a period of more than 60 days during previous year 2023-24 and for a period of more than 365 days during the 4 immediately preceding previous year. Therefore, he satisfies one of the basic conditions under section 6(1), he is resident for the AY 2024-25.

Computation of period of stay during 7 preceding previous years = 100*7 = 700 days 

Since his period of stay in India during the past 7 previous years is less than 730 days, he is not ordinarily resident during the A.Y. 2024-25.

Therefore, Mr. Maxwell is a resident but not ordinarily resident during the previous 2023-24 relevant to the assessment year 2024-25.

Residential Status and Scope of Total Income

Exempted Incomes of Non-Residents

1. Interest on money standing to the credit of individual in his Non Resident External A/c (Section 10(4)(ii)) –

In case an Individual is having income by way of interest to his Non Resident External A/c in any bank in India as per Foreign Exchange Management Act, 1999 provided he satisfies two conditions:

1. Person is resident outside India as per FEMA or
2. Is a person permitted by RBI  to maintain such account

2. Interest Income of a non-corporate non resident or foreign company on specified offshore Rupee Denominated Bonds issued by an Indian company or business trust –

Interest payable by an Indian company or business trust to a non-corporate non resident or a foreign company in respect of money borrowed from a source outside India by way of issue of rupee denominated bond would be exempt.

3. Income from a specified fund on transfer of certain asset:

Following income accrued or received by specified fund would be exempt:

1. On transfer of a capital asset like Indian bond or GDR or rupee denominated derivative or security.
2. Any income from transfer of securities excluding Indian company
3. Any income form security issue by non resident and income is not accrued in India
4. Any income from a securitisation trust chargeable under Profits from Business and Profession 

4. Income form a non resident as a result of transfer non-deliverable forward contracts/ offshore derivative instruments entered with an offshore derivative unit of an IFSC –

Any income received by a foreigner as a result of the following, shall be exempt:

1. Transfer of non delivarable forward contract or offshore derivative instrument
2. Distribution of income on offshore derivative instruments  

5. Income received by a foreigner or a unit of an IFSC

Advance Tax Provisions for Non Residents

In certain circumstances, Non-Resident Indians (NRIs) could have to pay advance tax in India. The method of paying income tax in installments over the fiscal year as opposed to one installment at the end of the year is known as advance tax. This applies to individuals, including non-residents people (NRIs), if their tax due for the fiscal year beyond a specific threshold.

These are important things to remember:

Threshold for Advance Tax: Nonresident Individuals (NRIs) must pay advance tax if their forecasted total tax due for the fiscal year exceeds ₹10,000.

Due Dates for Advance Tax Payments: Throughout the fiscal year, advance tax is normally paid in installments. The following are the typical deadlines for advance tax payments:

Yes, Non-Resident Indians (NRIs) may be required to pay advance tax in India under certain circumstances. Advance tax is the system of paying income tax in installments throughout the financial year, as opposed to a lump sum at the end of the year. This is applicable to individuals, including NRIs, whose tax liability for the financial year exceeds a certain threshold.

Here are key points to consider:

Threshold for Advance Tax: If the total tax liability of an NRI for the financial year is expected to be ₹10,000 or more, they are required to pay advance tax.

Exemptions and Special Cases: If an NRI's income is liable to Tax Deducted at Source (TDS) at the correct rates, they may be released from the obligation to pay advance tax. In addition, the need to pay advance tax may be affected by specific provisions or exemptions under Double Taxation Avoidance Agreements (DTAA).

Filing Income Tax reports: If an NRI's total income above the maximum amount exempt from taxation, they must file income tax notifications just like locals do. In order to ascertain any further tax liability or refunds, as well as to balance the advance tax payments got, tax returns must be filed.

To guarantee compliance with Indian tax rules, NRIs should stay up to date on the most recent tax legislation and seek advice from tax experts.

General Anti Avoidance Agreement

The Indian Income Tax Act includes standards known as the General Anti-Avoidance Rule (GAAR) that have the goal to prevent tax evasion and aggressive tax planning. In order to enable tax authorities to deny or categorize transactions deemed to be unlawful avoidance arrangements, the main goal of GAAR is to address contracts made principally for the purpose of obtaining tax benefits.

Significant features of India's GAAR regulations include:

Applicability: All taxpayers, including people, companies, Hindu Undivided Families (HUFs), and other entities having tax obligations in India, are subject to these regulations.

Unauthorized Avoidance Organization: GAAR targets arrangements or transactions that have no real business value or that are done primarily for tax purposes. A designated 'Approving Panel,' comprising officers from the Indian Revenue Service, is empowered to assess the applicability of GAAR.

Procedure: When an assessing officer finds cause to believe that an unlawful avoidance arrangement is present, they submit the matter to the Approving Panel, which assesses the arrangement and decides whether or not GAAR has to be used. Requirements for Calling When an arrangement meets a number of criteria and its primary objective is to receive a tax benefit, GAAR may be applied.

Effect on Tax Obligation: Tax authorities may recharacterize, ignore, or treat the agreement differently when GAAR is in effect, which might result in the denial of tax benefits that would have been earned otherwise.

An exception: The GAAR provisions contain a few exceptions. For example, GAAR may not be applicable if the primary objective of an arrangement is not to obtain a tax benefit.

Reporting Conditions: In their tax filings, taxpayers must disclose any arrangements that can be construed as avoidance strategies; otherwise, they risk fines.

The purpose of GAAR rules is to combat transactions with minimal economic substance and aggressive tax planning. Their aim is to ensure that taxpayers comply with tax rules and discharge their tax obligations in a suitable way. For taxpayers and tax professionals to structure transactions in compliance with the law, they must be aware of the GAAR rules.

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