Global Status of Tax Exemption for NRIs.

Published On - October 24, 2015

admin Income-tax Act, 1961

Under Indian Taxation regime, the income tax is levied on all sources of income except on income derived from agricultural activities.In India, tax is levied on the income earned within the territory of India, based on the residential status of different categories of citizens. In this context, if somebody is an NRI (Non-Resident Indian), taxes have to be paid for the income that is earned in India.Broadly speaking, there are three main classifications for Non-Resident Indians. They are as under:

  1. Person of Indian Origin (PIO):

Persons of Indian Origin Card were a form of identification issued to a Person of Indian Origin who:

  1. Has ever held an Indian passport, or
  2. Has parents, grandparents or great grandparents born in and were permanent residents of India and never moved to Bangladesh and Pakistan,
  3. Is the spouse of a citizen of India or of a PIO and has been so for two years or more.

In January 2015, the PIO card scheme was withdrawn and was merged with the Overseas Citizen of India card scheme.

  1. Overseas Citizen of India (OCI):

The constitution of India does not allow dual citizenship, i.e. the applicable law does not allow Indians to hold the citizenship of a foreign country simultaneously with Indian citizenship. For the sake of convenience and benefit of Indians residing abroad, the Government of India decided to grant Overseas Citizenship of India (OCI) scheme. There is a requirement that the country of their current residence must allow dual citizenship under their national laws.An OCI cardholder can avail of:

  • A multiple entry, multi-purpose lifelong visa for visiting India.
  • Exemption from registration with local police authorities for any length of stay in India.
  • Parity with Non-resident Indians (NRIs) in respect of economic, financial and educational fields except in relation to acquisition of agricultural or plantation properties

Non-Resident India.(NRI):
For tax computation purposes, as per section 6 of the Income-tax Act of 1961, any Indian citizen who does not meet the criteria as a “resident of India” is a non-resident of India and is treated as an NRI. Accordingly, an Indian Citizen who stays outside India to carry on employment, vocation or trade activity is treated as non-resident. For the purpose of this Act, an Indian citizen who is in India in any previous year for a period or periods amounting in all to 182 days or more or who had been, within the 4 years preceding the that year, in India for a period or periods amounting in all to 60 days or more in the previous year.
For a NRI, only the following two heads of income are taxable in India:

  • Income received in India by the NRI himself or by someone on his behalf.
  • Income that accrues or arises in India.

Also, the income from the above 2 sources in aggregate must be more than the minimum exemption limit of Rs. 2,50,000 for it to be taxable in India.
Incomes treated as accrued or arisen in India–

  • Income from any property, asset or source of income in India.
  • Capital Gain on transfer of a capital asset, which is situated in India.
  • Income from Salary.
  • Income from a business connection in India.

Indian Citizens and double taxation:
There are cases where an Indian makes income in another country, on which he may be required to pay tax in India and the country where the income accrued. To avoid such double taxation, the Indian government has entered into Double Taxation Avoidance Agreements (DTAA) with 65 countries, including U.S.A, Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E, and Switzerland. DTAA ensures that India’s trade and services with other countries and the movement of capital is not adversely affected.
Benefits of DTAAs:
 Under Section 91 of the Income Tax Act, the Indian government can relieve an individual of double taxation irrespective of whether there is a DTAA between India and the other country concerned. Unilateral relief may be offered to a taxpayer if:

  1. The person has been a resident of India in any previous year and proves that the income arose or accrued during those years outside India.
  2. The income has been taxed in India and in another country outside India with whom there is no tax treaty in force.
  3. The non-resident person is assessed on his share in the income of a registered firm assessed as resident in India, which has paid tax under the laws of the foreign country in question not having any agreement under section 90 of Income Tax, 1961.

In short, any income earned by an NRI that does not fall in the above mentioned categories for taxable income shall be treated as non-taxable in India and is exempt from Indian taxes.