We have addressed Frequently Asked
Questions by Non Resident Indians (NRIs) on
Taxation, Investment and FEMA. We hope this section would enable
more informed decision making by NRIs. It should not however
be viewed as a substitute for professional advice based on the
latest legal position and facts and circumstances of each case.
This is a Free Call !
Existing NRI
Mr. A is an existing Non resident Indian (NRI). He has queries
on the following issues:
The definition of a NRI is significant from the perspective
of FEMA, Investment and Taxation in India (See Benefits
associated with NRI status). The definition of a NRI under
the Income Tax Act is different from that under FEMA.
Under Section 115C (e) of the Income Tax Act,
a NRI is defined as ‘An individual being a citizen of
India or a person of India origin (PIO) who is not a resident’.
A person is deemed to be a PIO if he or either of his parents
or any of his grandparents, was born in undivided India.
The term NRI is defined under FEMA rules
and regulations as ‘A person resident outside
India who is either a citizen of India or is a person
of Indian origin (PIO).’ However the term PIO is defined
differently in different regulations & therefore the term
NRI will have different meaning under different regulations
i.e. the terms NRI & PIO are contextual.
Under the Foreign Exchange Management (Deposit) Regulations,
2000, which deal with banking accounts in India by NRIs,
the term PIO is defined as below:
A Person of Indian Origin (PIO) is a citizen of any country
other than Bangladesh or Pakistan, if
a) he at any time held an Indian passport or
b) he or either of his parents or any of his grandparents
was a citizen of India by virtue of the Constitution of India
or the Citizenship Act, 1955 or
c) he is spouse of an Indian citizen or a person referred
to in ‘a’ or ‘b’.
This is the most common definition adopted under most regulations.
Significantly, Foreign Exchange Management (Acquisition and
Transfer of immoveable property in India) Regulations, 2000
exclude clause c) above and further restrict clause b) to
paternal relationships i.e. father and grandfather only. In
Foreign Exchange Management (Transfer or issue of security
by a person resident in India) Regulations, 2000 that govern
investments in companies, stock market and other instruments
as also Foreign Exchange Management (Investment in firm or
proprietary concern in India) Regulations, 2000 the term excludes
a citizen of Sri Lanka.
For the purposes of levy of tax, the Income-tax Act in India
has classified the status of an individual assessee into three
viz.,
Resident and ordinarily resident (ROR)
Resident but not ordinarily resident (R but NOR)
Non-resident (NR)
The residential status of an Individual
is determined based on the number of days of stay
in India. Financial year (FY) is April to March.
*Not applicable to a resident going outside India for
employment, a resident who leaves India as a member of crew
of an Indian ship, an Indian citizen or person of Indian origin
who is abroad and comes to India for a visit i.e. if such
a person stays in India for less than 182 days, he would be
a non-resident.
In the case of a ROR, his global income is taxed in India.
Normally a returning Indian would be assessed
as RNOR on his return to India (See FAQs
Returning Indians for more).
In the case of a Non-resident, only the
income earned or received in India is taxed in India. Accordingly,
income earned outside India by ‘A’ would not be
taxable in India.
India has contracted Double Tax Avoidance Agreements (DTAAs)
with various countries. Taxability of A’s Indian income
would be decided as per the provisions of these DTAAs. Most
of these DTAAs contain provisions for lower rates of tax in
case of incomes like dividend, royalties, fees for technical
services etc. Provisions of some DTAAs provide interesting
opportunities for efficient tax planning. For instance, the
DTAA with Mauritius. Structuring of likely income in India
therefore requires a ‘case to case’ study depending
on facts of each case.
FEMA stands for Foreign Exchange Management
Act. Residential status and nature of transaction
i.e. capital account transaction (e.g. purchase/ sale of shares,
property) or current account transaction (e.g. remittance
of income on shares, property) are the cornerstones of FEMA.
The golden rule of FEMA is, “All capital account transactions
other than those permitted are prohibited while all current
account transactions other than those prohibited are permitted”.
Under FEMA, certain types of transactions do not require RBI
permission while others either require prior approval of RBI/
Government or it is mandatory to inform RBI of the same. Although
total capital account convertibility does not exist under
FEMA, there is full convertibility to the extent of USD
1 million per calendar year for NRIs- See Repatriation
for details.
Residential status under FEMA is the basis of applicability
of FEMA i.e. transactions of a resident even outside India
are covered by FEMA. The determination of residential status
under FEMA is substantially different as compared to that
under the Income Tax Act. Under the Income Tax act, residential
status is determined based only on the number of days of stay
in India. Under FEMA, residential status is primarily determined
based on the intention of the person.
‘A’ would be a non-resident under FEMA as soon
as he goes out of India for employment/ business outside India
irrespective of the duration of his stay in India. Accordingly,
‘A’ would be outside the ambit of FEMA as far
his transactions outside India are concerned (e.g. he can
freely invest or carry on business abroad out of his earnings
abroad).
Apart from various types of investments
in India, which ‘A’ can make, there are several
other advantages of the NRI status, which are outlined below:
‘A’ can freely acquire immoveable properties
abroad out of earnings abroad. He can invest anywhere in
the world. He can start any business abroad. He can become
trustee-beneficiary of a trust set up abroad. He can retain
all these even on his return to India and need not even
intimate RBI about his foreign assets.
‘A’ can set up family trusts abroad for education
of his children/ maintenance of his family members. Such
trusts can also be Asset Protection Trusts where the assets
held by the trust are free from attachment by the creditors.
‘A’ can bring 10 kgs. of gold (on payment
of duty of Rs. 250 per 10 gms.) & 100 kgs. of silver
(on payment of duty of Rs. 500 per kg.) once in six months
on his visit to India.
A’s foreign income is not liable to tax in India.
‘A’ can enjoy several tax concessions in India
on his assets in India.
‘A’ can seek Advance ruling from Advance Ruling
Authority on taxability (income tax) of transactions.
‘A’ can avail the benefits of the Double Tax
Avoidance Agreements (DTAAs) entered into by India with
several countries which attempt to minimise double tax on
the same income (i.e. if tax is payable in India by NRIs
on their income in India, credit for tax payable is available
against tax payable in foreign country on such income).
Also tax on dividends, royalty, fees for technical services
earned in India by NRIs are offered concessional tax treatment
under most DTAAs. Further, in few cases, tax may not be
payable at all on such income if the NRI is a tax resident
of a treaty country.
There are special reserve seats for children of NRIs for
Engineering/Medical/MBA courses in certain institutions
in India provided the fees are paid in foreign exchange.
Even in case of Initial Public Offerings (IPO’s),
there are special quotas for NRI.
In general, ‘A’ can freely invest in residential/
commercial property (subject to certain restrictions like
investment in agricultural land, plantation and farm house).
Besides the sale proceeds can be freely repatriated outside
India to the extent of the amount originally brought in from
abroad. Also sale proceeds of only two residential properties
can be repatriated.
Besides, housing loan can be availed in India against the
security of the immoveable property. Now loan for any bonafide
purpose may be obtained against the security of immoveable
property.
Profit on sale of property acquired out of forex resources
as above or even the sale proceeds of property acquired out
of Rupee resources can be repatriated in certain cases. To
know more about the same, read Investing
in real estate in India
'A’ can make investments or operate his business in
India in the following ways:
Branch/ Liaison office with prior permission of RBI (profits
of the branch can be freely repatriated).
Indian company- 100% wholly owned subsidiary/ Joint Venture
on repatriation and non-repatriation basis without permission
of RBI in most of the sectors. For investments on repatriation
basis, the prohibited sectors include retail trading, domestic
wholesale trading and print media besides a few others.
Partnership firm/ Proprietorship concern on non-repatriation
basis (income freely repatriable) in any activity except
agriculture, plantation and real estate (other than real
estate development) without permission of RBI.
It is significant to note here that now even sale proceeds
of investments held on non-repatriation basis can be repatriated
up to USD 1 million per calendar year. See Investment
opportunities for more on investment through Indian companies.
‘A’ can freely invest in the shares (equity and
preference) and convertible debentures of listed Indian companies
on repatriation (i.e. from NRE account/ remittance from abroad)
and non-repatriation basis (i.e. from NRO account/ NRE account/
remittance from abroad) subject to the following conditions:
One bank branch to be designated by the investor and
all transactions to be routed through that branch.
Transactions to be carried out through a registered broker
on a recognised stock exchange. Online trading
has made it easy for NRIs to transact on their own from
anywhere in the world.
All transactions must be delivery based i.e. speculative
transactions are not allowed.
Ceiling on investment in one company by one NRI and all
NRIs taken together at 5% and 10% respectively
Investment can be made in almost all sectors except companies
engaged in print media, chit fund/ nidhi, agriculture, plantation,
real estate (other than real estate development) and trading
of Transferable Development Rights (TDRs).
In our view, permission from or declaration
to RBI is not required to acquire or continue to hold jewellery
and other movable assets in India. Permission should be taken
while taking jewellery abroad so that there is no duty while
returning back. For repatriation of sale proceeds, see Repatriation.
‘A’ can hold insurance
policies in India and pay premium thereon without any permission.
Settlement of claims in foreign currency by insurance companies
is permitted in certain cases where the premium has been paid
in foreign currency or remittance from abroad. See also Repatriation.
'A' can acquire and continue
to hold both domestic and international credit cards issued
by banks in India. He can pay for the same from his NRE/ NRO
account or by way of remittance from abroad.
To close relatives on repatriation basis for their personal/
business purpose (agriculture and few other businesses prohibited)
in foreign exchange up to USD 2,50,000 provided the loan
is interest free and the minimum maturity
period of loan is one year.
By way of non-convertible debentures denominated in Rupees
and issued by public companies in India on repatriation
and non-repatriation basis with a minimum maturity of three
years. The interest rate cap is Prime-lending rate of SBI
plus 300 basis points.
By way of loan/ deposits in Rupees on non-repatriation
basis to residents with a maximum maturity of three years.
The interest rate cap is Bank rate plus 200 basis points.
Significantly, even loans/ deposits on non-repatriation basis
can now be repatriated under the USD 1 million
per calendar year route.
Banks in India can lend to NRIs for
any bonafide purpose (other than investment in capital market
and for prohibited business activities viz. agriculture, plantation.
chit fund/ nidhi, trading in TDR) against any acceptable security
based on their commercial judgement. Banks can even lend outside
India to NRIs trough their overseas branches/ correspondents
against securities provided in India. Other residents cannot
lend to NRIs in general.
Loan given to another person against the collateral security
of shares/ immoveable property of ‘A’ is permitted.
‘A’ can also provide a guarantee in relation to
loan to a resident in general provided no direct or indirect
outgo from India is involved by way of guarantee commission
or otherwise.
A resident other than a bank can provide guarantee in favour
of a NRI only with prior RBI permission.
To act/ continue as a director of
an Indian company, no permission from RBI is required. The Indian
company can make payment in Rupees to its non-wholetime director
towards travel expenses to n fro and within India, sitting fees,
commission or remuneration as agreed which can be repatriated
abroad by ‘A’ after payment of taxes.
NRIs can acquire assets by way of
inheritance and continue to hold them without RBI permission.
Further sale proceeds of assets can be repatriated abroad up
to USD 1 million per calendar year without
RBI permission. Repatriation in excess of
the abovementioned limit requires prior RBI approval. Tax will
be payable by the legal heirs on the income accruing from such
asset after the date of death as also on gains from the sale
of assets.
There is no restriction on gifts by NRIs to resident Indians
in foreign exchange or Indian Rupees or in the form of assets.
All sorts of gifts from relatives (as defines under Income Tax Act) are tax free. All that is required is an
offer by the donor and acceptance thereof by the in black
and white. To safeguard against any hassles, the donee should
request the donor for a gift and then the donor should remit
the amount to the donee. Alternatively, the donor can offer
the gift. In either case, it is necessary for the done to
accept the gift in writing (maybe through a thank you note).
There are no restrictions on repatriation of current income
i.e. rent, dividend, interest etc. net of Indian taxes. Only
an undertaking by the remitter and CA certificate as to the
payment/ deduction of tax is required.
Repatriation of sale proceeds of investments acquired out
of forex resources/ NRE funds has been discussed in Investment
opportunities.
Now full capital account convertibility is available to NRIs
to the extent of USD 1 million per calendar
year for any bonafide purpose out of:
Balances held in NRO account;
Sale proceeds of assets like shares and securities, deposits,
PF, immoveable property* etc. which are otherwise held on
non-repatriation basis;
Sale proceeds of assets acquired by way of inheritance
or legacy.
*However in case of immoveable property acquired out of Rupee
funds, the sale proceeds can be repatriated only if the 'property/
sale proceeds' were 'held/ retained in NRO account' cumulatively
for a minimum period of 10 years.
‘A’ has to produce the requisite documentary
evidence in support of the acquisition/ inheritance/ legacy
of funds/ assets proposed to be remitted besides the undertaking
and CA certificate for tax compliance to avail of this facility.
It is recommended that ‘A’ should execute a power
of Attorney (general or special) in favour of a trusted friend/
relative/ professional to undertake certain transactions on
his behalf. The power of attorney holder can operate bank
account for local disbursement (for expenses) but can not
make remittance outside India nor can make a gift or extend
a loan to any person Resident in India / Resident outside
India. In case of NRO account, joint account with a resident
is permitted. Accordingly, in such a case, a power of Attorney
need not be executed for operation of bank account if there
is a joint account holder.
