Sandesh Kumar & Anupama Muralidharan
Gaurav Bhandari wishes to return home to India. A first generation Indian, he has lived and worked in the UK for the past ten years. With improved professional opportunities and lifestyle changes, he thinks it is not a bad idea to return with his family. A prudent man, he is seeking advice on how his financial planning is pitted against tax and other regulations that he would face on returning.
Non Resident Indians ('NRI's) find a special mention in the Indian Income-tax law. For income tax purposes, an NRI is a citizen of India or a person of Indian origin who is not resident in India.
This brings us to the concept of "residency" which would help returning Indians like Gaurav determine the scope of income that could be taxable in India in the year of return and subsequently.
Residency matters -
An individual's physical presence in India during a particular year determines whether he will be a "resident" or a "non resident" (NR). If a person crosses the threshold limit stipulated for physical stay and becomes a "resident", he would need to probe further into details of total physical stay in India in the past years, to determine if he would become "resident and ordinarily resident" (ROR).
If Gaurav were to enter India on or before 1 October 2008, his physical presence during the India financial year 2008-09 would exceed 181 days. Let us say his short trips in the past 7 years add up to 730 days, or make him a resident in 2 of the past 10 years. He would then become an ROR in the first year itself. This is bad news as an ROR's global income is taxable in India.
Typically Indians returning after a decade long stint abroad, find themselves qualifying as an ROR only in the third year. As an NR or RNOR, they would need to offer to tax only their India sourced income, i.e., income accrued or received in India or deemed to be so accrued or received. NORs are additionally taxed on income from an overseas business controlled or profession setup in India.
Gaurav is now doubly worried because he has employment income in the UK for the period till he quit his job in order to leave for India. He is aware that such income would be regarded taxable as per UK tax laws. In a situation where his income is subject to "double taxation", Gaurav can turn to the "double taxation avoidance agreement", also referred to as a "treaty", between India and UK.
Treaty protects -
The treaty is binding on the governments of the signatory countries and provides relief by exempting the doubly taxed income from taxation in 1 of the 2 countries. Alternatively it directs one of the countries to grant credit for taxes paid in the other country.
What happens to Gaurav who qualifies as a "resident" of both India and UK in 2008-09 as per the respective domestic tax laws? The tie-breaker rule under the treaty then helps Gaurav select the country of which he will be treated resident as per the treaty. The country of residence and the country where the income is sourced then have to share taxing rights on Gaurav's doubly taxed income as stipulated under the treaty.
Benefit from being an NRI -
As he packs his bags, Gaurav must make investment decisions that will make his savings tax protected as well as productive in the future years. Let us say, Gaurav times his date of return, so as to qualify as an NR (refer discussion on "residency matters"). As an Indian citizen, he becomes an NRI in the tax lingo.
In a move to incentivize NRI investment into the country's capital markets, NRIs were offered beneficial tax rates in respect of certain incomes. Concessional rates of income-tax apply on investment income and long term capital gains of NRIs on assets acquired with foreign exchange.
For instance interest income on debentures of a public company in India acquired with foreign exchange may be taxed at a flat rate of 20% instead of a higher rate that may apply on his total income.
This facility, available at the option of the NRI, may be continued by him even after he becomes a resident in India and until he holds the specified foreign exchange asset. At their choice, NRIs may choose to pay tax at the normal rates applicable to resident taxpayers.
An NRI is given the option not to file a tax return provided he does not earn any income taxable in India other than investment income and / or long term capital gains where the latter incomes are subject to tax deduction at source by the payers.
Further, the government has notified a string of investment instruments from which an NRI can earn tax free income. A select pick of such income avenues would include -
1. Interest on specified NRI Bonds issued by State Bank of India purchased in foreign exchange. The exemption continues even after the person becomes tax resident.
2. Interest on deposit in a Non Resident External Rupee (NRE) Account, for the period till he becomes a resident under exchange control laws. Hence the benefit may accrue long after he becomes a tax resident.
3. Interest on deposit in a Non Resident Non Repatriable Rupee Account, while he remains an NR.
Not all investments are easy. As an NRI, he cannot invest in agricultural land, plantation property or a farm house. On the good side, any foreign currency, foreign security and immovable property situated outside India which Gaurav acquires before he becomes a resident as per exchange control laws, may be retained or transferred by him without restrictions.
Certain exemptions available to residents are also extended to NRIs, such as tax exemption for dividend income, income received in respect of units of specified mutual funds, any income by way of long term capital gain on transfer of equity shares on a recognised stock exchange or on re-purchase of equity oriented fund on which Security Transaction Tax is paid. Gaurav would do well to update himself with the exempt streams of incomes and invest accordingly.
There is a tax on wealth too -
Net wealth in excess of Rs 15,00,000 of each financial year, is subject to wealth tax @ 1%. However even here, the NRIs are treated favourably.
Money and value of assets brought into India by an Indian citizen or a person of Indian origin1 who is ordinarily resident abroad and returns to India with an intention of permanently residing in India, are totally exempt from wealth tax for a period of 7 years from the date of return. Works perfectly for Gaurav. In fact the value of the house purchased by him in India within a year prior to the date of his return is also exempt from wealth tax for 7 years beginning 1 April 2010 (if we assume that he returns in the financial year 2008-09). NRIs could explore similar exemptions for moneys brought into India within a year prior to return and for the value of assets acquired out of such moneys within the said one year and thereafter.
Gaurav's residential status under the wealth tax law will be the same as under the income-tax law. The year in which he qualifies as an ROR, he would have to offer his global wealth to tax in India after reducing the value of debts owed (whether in or outside India) in relation to assets included in such global wealth. As an NR and NOR, wealth consisting of assets located outside India are tax exempt.
With the rest of the world watching out for the booming Indian economy and the Indian Government hailing the NRIs to aid the pace of growth, it may be a good time for people like Gaurav to be homeward bound.
The authors are senior tax professionals with Ernst & Young India
7 months ago