Also check out in this section... Definition of NRI Putting Money in Indian Banks Making a Gift to Someone in India Investment in Indian Real Estate Gift Tax Wealth Tax Return of Income Provision After change of Status Provision of Chapter-XIIA Tax on Investment Income Capital gains on transfer foreign Exchanges NRI Exempt from PAN File Tax Returns Filling Tax Returns Computing Capital Gains Income not part of total income

Definition of NRI

If you thought NRI is a self-explanatory expression? think again. A NRI is an Indian citizen or a foreign citizen of Indian origin who has been not "resident" in India under either the Indian Income Tax Act or the Foreign Exchange Regulation Act (FERA). These two Acts determine the "residence or non-residence" on diferrent touchstones.

I. NON-RESIDENT under the Indian Income Tax Act.

The Indian Income tax defines a non-resident in terms of two alternative tests which relate to the physical presence of the tax payer in India during the time period April 1 through March 31. A person is said to be "resident" in India in any "previous year" if he/she:

1. Is in India that year for an aggregate period of 182 days or more; OR
   

2. having within the four years preceding that year been in India for a period of 365 days or more, is in India that year for an aggregate period of 60 days or more.The above provisions are applicable to all individuls irrespective of their nationality. However, the 60 days period is extended to 182 days in 2 instances:  

1. When an Indian citizen leaves India for employment outside India, AND
   

2. where an Indian citizen or a foreign citizen of Indian origin who is outside India, come on a visit to India.  A non_resident is a person who is not resident under the above mentioned tests.

II. NON-RESIDENT under Foreign Exchange Regulation Act.

Under FERA, an Indian Citizen is deemed to be a "non-resident" if:
He leaves India for employment, business, vocation or some other purpose for an uncertain period. Visits to India, even for period more than 182 days in a year will not make the person a "resident" under the FERA.

A person becomes a "resident" of India for FERA purposes if:
1.  An Indian citizen returns back to India, in such circumstances as would indicate his intention to stay in India for an unspecified period.

2.  Foreign citizens are deemed citizens if they take up employment, business or vocation in India for an indefinite period.

What are the benefits?

You just got lucky! the Indian government is gracious enough to give you a few concessions which entitle you to keep your money to yourself, instead of the Governments coffers.

Here are some concessions:

• If you are a non-resident under the FERA, you are entitled for exemption of income tax in respect of NRE and FCNR deposits.
• If you are a non-resident under the income tax law, you are entitled for income tax exemption related to NRNR deposits, National Savings Certificates, Notified Government Bonds / securities and special tax rates on income and capital gains on some assets purchased in foreign currency.

• When you return back home for permanent residence, money and assets brought into India or assets purchased from foreign remittances are fully exempt from WEALTH TAX for a period of seven years after return to India.

RBI excercises broad controls over what the banks offer you. The limited options available currently are:

A. Non-Resident External Rupee Account (NRE)
You could keep your money in either a savings account or in fixed deposits. You can only credit this account with funds remitted from outside India and from local funds which are of repatriable nature and are due to you. Entire amount can be remitted back to you outside India the exchange rate prevailing at the time you make the withdrawal. Interest rates are usually about 2 to 3 percentage points lower than NRNR deposits but are substantially higher than FCNR deposits.

B. Foreign Currency Non-Resident account (FCNR)
Its a fixed deposit (CD). Your money is kept in either USD, Pound Sterling, Deutsche Mark or Yen as per your choice. Money is fully repatriable and you don't bear the currency risk. Interest rates are low but slightly higher than bank rates internationally for similar currencies (its fixed by the RBI). You might do better though if you chose a good mutual fund. Minimum time for a FCNR deposit is 6 months and the maximum is three years. Yes, you can keep rolling the deposits over and over for an indefinite period. If you break a deposit in between you are still paid the interest accrued if the deposit is held for over 6 months.

C. Non-resident Non-repatriable (NRNR) deposit.
It is actually the most popular "scheme". Did you notice 2 "non's" in that ? Well, inspite of that you are allowed to repatriate the interest earned on your deposits in what ever currency you wish. It is only the principal amount which is non-repatriable. RBI has no restrictions on the interest rates on NRNR deposits (something to do with "liberalisation" and so you can end up getting a good deal on the interest rates (depending upon the liquidity in the Indian banking sector). As with FCNR deposits, the Min. and Max. period of NRNR deposits is 6 months and 3 years.

D. Non-Resident Ordinary account (NRO).
No repatriation is allowed from this account at all. Usefull in crediting Indian origin funds which cannot be repatriated.

E. Resident Foreign Currency account (RFC)
Not really an account for the non-resident when he still is a non-resident. But if you are returning back to India after a minimum period of one year outside India, you can credit funds brought by you to India as well as funds balance in your NRE or NRNR account to your RFC account. RFC has been dealt with in some more detail latter on.

Typically you would have to give 30% of your gift value to the tax man, if the total of the gifts exceed Rs.30,000/- during the tax year. That's right, its your (donors) responsibility to pay the gift tax, but the Gift Tax Act does allow for collection from the recipient if collection is not possible from the donor. But, you are a NRI so ofcourse you are entitled to some privileges. What are they ?

For starters, You could gift money out of your NRE or FCNR account in any bank in India upto any amount, any number of times - Totally (gift) tax free. You can do this as long as you remain an NRI (as per FERA criteria) since as soon as you return back to India your NRE account is to be converted into a resident foreign currency account or a RFC account. [moral of the story: If you have to gift, gift before you return back to India].

1. I didn't miss the NRNR account. You can make a gift from your NRNR deposit but it has a one time exemption. Rest is same as above.
   On a practical front, it would be preferable to make a declaration of the fact of the gift before the Indian consulate nearest to you.

2. NRI's (as per Income Tax Act criteria) can gift a] money by way of direct remittances, b] shares, debentures etc. to their relatives in India. However, some technicalities require you to make the gift outside India (ie. it must be received by the donee outside India). Caution: Do not send a draft / cheque without completing this documentation: [a] Letter from you addressed to the donee stating your intention to donate the gift [b] a letter from the donee addressed to you stating that he is accepts such a gift and that the gift may be handed over to any courrier service / person in the country you (donor) are situated. [c] a short "received" letter from the courrier / person (if received by a person, the letter should specifically state that the gift has been received on behalf of the donee) [d] as in other cases, it is safer to make a declaration of the gift before the Indian conasulate nearest to you.
   

3. You could gift foreign exchange outside India to any resident Indian. RBI permission is not necessary. You can make some o one really happy by gifting immovable property outside India ! In this case, however, the person receiving the gift will have to take permission for holding such property from the powers that be at the RBI.
   

Two cautions would be in place at this point:

1. All gifts received by residents from NRI's may be subject to the tax authorities requiring the recipient to prove the identity and capacity of the donor and the genuiness of the gift.
   

2. The gifted foreign money or assets will become non-repatriable in the hands of the recipient.

Amendments to FERA have allowed NRI's to acquire residential/commercial properties without prior permission from RBI. You can even let out the property and credit the Income to your NRO account. A certain percentage of that income may be even repatriated abroad. The best part: there is no limit on the number of properties an NRI can buy.

If the property is for residential use and purchased after 26th May 1993, you are allowed to repatriate the "original investment" after a lock-in period of three years (its three years from the date of final sale deed or date of last payment whichever is later). You would, ofcourse pay capital gains tax on the profit you make on the sale. For NRI's who are foreign citizens of Indian origin repatriation is limited to two residential properties.

CAUTION: Repatriation is allowed only if payments have been made (for the purchase of the flat) through banks in India and from repatriable accounts (NRE/FCNR) [even if the purchaser pays through NRE account you would not be able to take funds out of India if you had not originally purchased from NRE/FCNR account. CAUTION 2: Prior permission of the Income tax department is necessary if the value of property being sold is more than certain limits (usually 10 lakhs for most cities. Value is more for the Metros). Permission is to be obtained by Filling Form 37-I with the IT department. CAUTION 3: Application for repatriation has to be made to the RBI within 90 days of the sale of the property.

If you wish to avoid capital gains tax on the sale of property, (20% for long term) you could use the funds from the sale of the property to purchase new property within two years from the date of sale of the first property. Don't use those funds ! you need to keep the proceeds in a separate account with a nationalised bank till you purchase the new property. CAUTION: This exemption is applicable only with respect of residential house and will not be applicable for sale of a plot of land or commercial property !

THE GOOD NEWS: NRI's have now been permitted to undertake the business of real estate construction without specific permission of the RBI.Amendments to FERA have allowed NRI's to acquire residential/commercial properties without prior permission from RBI. You can even let out the property and credit the Income to your NRO account. A certain percentage of that income may be even repatriated abroad. The best part: there is no limit on the number of properties an NRI can buy.

If the property is for residential use and purchased after 26th May 1993, you are allowed to repatriate the "original investment" after a lock-in period of three years (its three years from the date of final sale deed or date of last payment whichever is later). You would, ofcourse pay capital gains tax on the profit you make on the sale. For NRI's who are foreign citizens of Indian origin repatriation is limited to two residential properties.

CAUTION: Repatriation is allowed only if payments have been made (for the purchase of the flat) through banks in India and from repatriable accounts (NRE/FCNR) [even if the purchaser pays through NRE account you would not be able to take funds out of India if you had not originally purchased from NRE/FCNR account. CAUTION 2: Prior permission of the Income tax department is necessary if the value of property being sold is more than certain limits (usually 10 lakhs for most cities. Value is more for the Metros). Permission is to be obtained by Filling Form 37-I with the IT department. CAUTION 3: Application for repatriation has to be made to the RBI within 90 days of the sale of the property.

If you wish to avoid capital gains tax on the sale of property, (20% for long term) you could use the funds from the sale of the property to purchase new property within two years from the date of sale of the first property. Don't use those funds ! you need to keep the proceeds in a separate account with a nationalised bank till you purchase the new property. CAUTION: This exemption is applicable only with respect of residential house and will not be applicable for sale of a plot of land or commercial property !

THE GOOD NEWS:  NRI's have now been permitted to undertake the business of real estate construction without specific permission of the RBI.

Gift Tax shall not be charged in respect of gifts made by a person :-

1. being a non-resident individual to any person resident in India, of foreign currency or other foreign exchange , remitted from a country outside India during the period from 26^th October, 1965 to 28^th February, 1966 or such later date as the Central Government may, by notification in the Official Gazette, specify in this behalf – Section 5(1)(iia)
2. being a person resident outside India out of moneys standing to his credit in a Non-resident(External) Account in any bank in India-Section 5(1)(iib)
3. being a non-resident Indian to any of his relatives in India, of convertible foreign exchange remitted from a country outside India- Section 5(1)(iic)
4. being a non-resident Indian to any of his relatives in India of property in the form of any foreign exchange asset-section 5(1)(iid)
5. regarding one time gift made out of any deposit held by him under the Non-Resident(Non-repatriable) Rupee Deposit Scheme, 1992 of the Reserve Bank of India-Section 5(1)(iie)
6. to any of his relatives in the form of notified NRI bonds specified under Section 10(15)(iid) of the Income tax Act- section 5(1)(iie)

Assets exempt from wealth Tax- Section 6

In case of an individual, who is not a citizen of India or a person of Indian origin who is not resident of India, the following are exempt from wealth tax: -

1. the value of the assets and debts located outside India; and
2. The value of the assets in india represented by any loan or debts owing to the assessee in any case where the interest if any, payable on such loans or debts is not to be included in the total income of the assessee u/s 10 of the IT Act.
3. Moneys lying to the credit in a Non-resident( External) Account belonging to a person resident outside India, is an exempted asset.

Tax on investment income are as follows :-

1. Where the total income of a non-resident Indian consists only of investment income or income by way of long-term capital gains or both, the income tax payable by him shall be calculated on such total income @ 20% of such income.
2. Where a non-resident Indian has the other income in addition to the income mentioned in para (a) above, the tax payable by him on his total income shall be :-

 

1. the aggregate of the income-tax payable by him in accordance with the provisions mentioned in para (a) above on investment income and income by way of long-term capital gains; plus
2. The amount of the income-tax chargeable on the total income as reduced by the amount of investment income and long-term capital gains, had the total income so reduced been his total income.

The Finance Bill, 1997 has amended section 115E so as to provide that :-

Where the total income of an assessee, being a non-resident Indian, includes-

 

1. any income from investment or income from long-tern capital gains of an asset other than a specified asset
2. income by way of long-tern capital gains,

The income tax payable by him shall be the aggregate of :-

1. the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income @ 20%,
2. the amount of income-tax calculated on the income in respect of investment income referred to in clause (b) ,if any, included in the total income @ 10%, and
3. the amount of income tax with which he would have been chargeable to tax, had his total income been reduced by the amount of income referred to in clauses (a) and (b)

1. if the cost of the new asset is not less than the net consideration in respect of the foreign exchange asset, the whole of such capital gains shall not be charged u/s 45;
2. if the cost of the new asset is less than the net consideration of the foreign exchange asset, so much of the capital gains as bears to the whole of the capital gains the same proportion as the cost of acquisition of the new asset bears to the net consideration shall not be charged u/s 45.

However, where the new asset is transferred or converted (otherwise than by transfer) into money, within a period of 3 years from the date of its acquisition, the amount of capital gains arising from the transfer of the foreign exchange asset, not chargeable u/s 45 on the basis of the cost of such new asset as detailed above shall be deemed to be income chargeable under the head ‘Capital Gains’ relating to capital assets other than short term capital assets of the previous year, in which the new asset is transferred or converted ( otherwise than by transfer ) into money.

Deduction from Gross Total Income- Section 115 D:

No deduction is allowed under Chapter VIA against investment income or income by way of long term capital gains of foreign exchange assets. However, in cases where the gross total income includes long term capital gains or/and investment income, then the gross total income shall be reduced by the amount of such income and remaining part of gross total income will be entitled to deduction under Chapter VIA.

A non-resident Indian having taxable income exceeding Rs. 50,000 during the previous year 1998-99 has to file a return.

However, a non-resident Indian covered u/s 115 G i.e., having income only from investments in specified assets and long term capital gains on transfer of foreign assets and having opted for being assessed under the special provisions of Chapter XII-A need not file a return, if the tax has already been deducted at source.

Besides, a non-resident shall not be required to file a return of income u/s 139 (1), if his total income consists only of dividend, interest income from units of mutual fund/ UTI, interest or dividends on bonds or shares of an Indian company issued under a notified scheme and purchased in foreign currency, and the tax has been deducted therefrom at source.

Computation of Capital Gains on transfer of shares/debentures

Capital Gains arising to non-resident assessees from the transfer of a capital asset being shares in or debentures of an India Company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or arruring as a result of the transfer of the capital asset into the same foreign currency as was initially utilized in the purchase of shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency. Moreover, the aforesaid manner of computing capital gains shall be applicable in respect of capital gains accruing from every reinvestment thereafter in and sale of shares or debentures of an Indian Company.

Note:

 

1. The benefit of indexed cost of acquisition shall not be available to non-residents on long-term capital gains from the transfer of shares, debentures of an Indian Company.
2. In case of long term debentures and bonds (except capital indexed bonds), the cost of acquisition/improvement shall not be indexed, even in case of resident assesses.

This special procedure of using foreign exchange rate has been prescribed to protect non-resident assessees from fluctuation of rupee vale against foreign currency, in order that the NRI pays tax only on the actual capital gains in foreign currency and not on the gains computed in rupees.

Computation of Capital Gains on transfer of other Capital Assets

Capital gains arising from the transfer of capital asset other than shares/ debentures shall be computed in the usual manner, by deducting cost of acquisition, cost of improvement and expenditure incurred in relation to such transfer from the total sale consideration. However, for computing capital gains on transfer of Long Term Capital gains, indexed cost of acquisition and indexed cost of improvement shall be considered.

An Exemptions exclusively for non-residents/ foreigners

1. Any Interest on or premium on redemption of such bonds or securities as the Central Government may notify.
2. Interest on Non-Resident (External) Accounts in any bank in India by NRIs. The exemption is valid only so long as the individual resides outside India. When he returns to India, he will no longer be entitled to such exemption. However, if he applies to the RBI to maintain or continue the NRE account, the exemption will be available so long as the permission remains valid-Section 10(4)(ii).
3. Interest on Foreign Currency Non-Resident Accounts
4. Interest on Foreign Currency ( Ordinary Non-Repatriable) Deposit Scheme
5. Interest on Non-Resident ( Non-Repatriable ) Rupee Deposit Scheme
6. Dividend on units of Unit trust of India provided the units are purchased from proceeds of foreign exchange remittance or from balances held in NR(E). FCNR accounts of the investor.
7. Interest on specified Saving Certificates received by Non-Resident Indian citizens or Persons of Indian Origin provided such certificates have been subscribed in convertible foreign exchange remitted from outside India through official channels.
8. Any allowance or perquisite paid or allowed as such outside India by the Government to a citizen of India for rendering services outside India- Section 10(7).
9. Tax on remuneration to a non-resident technician- tax paid to the Central Government by the employer ( being the Government, local authority, any corporation set up under special law or any approved institution or body carrying on scientific research), on remuneration payable to a technician ( being an individual) not resident in India in any of the four financial years immediately preceding the year in which he arrived in India and whose service as such commences after 31.3.1993, shall be exempt for a minimum period of 48 months commencing from the date of his arrival in India.- Section 10(5B)
10. Income exempt in respect of foreigners:

 

1. Passage money- Section 10(6)(I)
2. Remuneration of an official of an Embassy, High Commission, Legation, Affairs, Commissioner, Consulate or Trade Representative of a Foreign State or as a member of Staff of any of these officials.- Section 10(6)(ii)(iii)(iv)(v)
3. Remuneration received by employee of foreign enterprises- Section 10(6)(vi).
4. Salaries to non-residents employee on a foreign ship- Section 10(6)(viii).
5. Income of individuals engaged in research work in certain cases- Section 10(6)(x)
6. Remuneration received by certain foreigners, on traveling in certain establishments. – Section 10(6)(xi)

 

1. Tax paid on behalf of a foreign Company- the amount of tax paid by Government or an Indian concern on behalf of a foreign company in respect of royalty or fees for technical service paid under the agreement approved by the Central Government will not be included in computing the total income of foreign company.- Section 10(6A)
2. Tax paid by Government or an Indian concern on behalf of a non-resident or a foreign company in respect of its income.- Section 10(6B)
3. Income by way of fees for technical services received by a foreign company under an agreement the Central Government in connection with Indian Security. – Section 10(6C)
4. Income of an individual, and his family member assigned to duties in India in connection with any co-operative technical assistance programme or project under agreement between Government of India and the Government of a foreign State, received directly or indirectly from such foreign government, and any other income of such individual members which accrues or arises outside India and is not deemed to accrue or arise in India and such income is liable to tax in that foreign country. – Section 10(8) and (9)
5. Income of a consultant under a Technical Assistance Grant Agreement:

 

1. Any remuneration or fees received by a consultant, directly or indirectly, out of the funds made available to an international organization under a technical assistance agreement between that agency and the Government of a foreign State will be exempted from income-tax. The expression, consultant has been defined for this purpose to mean any individual who is either not a citizen of India or, being a citizen of India, is not ordinarily resident in India, or any other person who is a non-resident and is engaged by the agency for rendering technical services in India in accordance with the agreement entered into by the Central Government and the agency and the agreement relating to engagement of the consultant is approved by the prescribed authority.Also, any other income accruing outside India to the consultant and taxable in the country of his origin, shall be exempt. – Section 10(8A)
2. The remuneration received by an employee of the consultant referred to in para (I) above will be exempted from income-tax, provided such employee is either not a citizen of India or, being a citizen of India is not ordinarily resident in India and the contract of his services is approved by the prescribed authority before the commencement of his service.- Section 10(8B)
3. The income of any family member of such individual as is referred to in the above para accompanying him to India, which accrues or arises outside India, and is not deemed to accrue or arise in India, in respect of which such member is required to pay any income or social security tax to the country of his origin. – Section 10(9)

   Interest on notified bonds. - NRI Bonds 1988 of State Bank of India/ NRI Bonds Second Series by SBI- India Development Bonds, arising to non-resident Indian or his nominee or survivor or the person to whom such bonds have been gifted by the non-resident, provided such bonds are purchased in foreign exchange and the principal and interest thereon, are not allowable to be taken out of India. – Section 10(15)(iid)

The Authority for Advance Ruling has held that interest on India Development Bonds is not taxable even when the non-resident becomes resident.

17. Any interest payable by the Government or a local authority, industrial undertaking, specified financial and banking institutions or scheduled Banks or a public company engaged in the business of providing long term housing finance, on moneys borrowed from sources outside India, exempt in the hands of the payee. - Section 10(15)(iv)