The rates of tax applicable to such income may vary under the provisions of the Income Tax Act 1961 (the Act) and the applicable double taxation avoidance tax treaty (DTAA) which the India has concluded with various countries for a person who qualifies as a non-resident (NR) of India (and a resident of any other country) vis-à-vis a natural person who qualifies as a resident of India (having no cross-border tax implications). Here it is important to understand who qualifies as NR of India under the law.
An NR not only includes an Indian citizen who stays outside India (commonly referred to as Non-Resident Indians or NRIs) for education, employment or business purposes, but it also includes all persons (including foreign nationals) who may have visited India in a given fiscal year, but do not meet the physical presence test provided by law.
To assess residency status, a person should refer to Section 6 of the Act which sets out the principles on the basis of which residency status is determined in India for each financial year. This assessment is important to correctly determine the scope of taxation, the applicable tax rate, disclosure requirements and the type of tax return form to be used for the filing of income tax return (ITR) in India.
Once residency status has been assessed, a person must identify different sources of income in India to ensure proper disclosure in the form of ITRs and payment of tax at applicable rates in the case of NR. The two most common types of income for an NRI under “other sources” are (i) interest income from bank accounts and term deposits; and (ii) dividend income from investments made in India in shares of Indian companies and units of mutual funds. The impact on taxation, disclosure requirements in the ITR form and other cautionary points have been discussed below.
Taxability
1. Interest income from bank accounts and term deposits: An Indian citizen who travels abroad for study/employment/business purposes is required to convert his savings bank account into specified non-resident accounts in accordance with the provisions of the foreign exchange management (FEMA). Some of the commonly used accounts are Non-Resident Ordinary Account (NRO) and Non-Resident External Account (NRE), while Non-Resident Foreign Currency Account (FCNR) is used to open a Fixed Currency Deposit Account foreign.
Interest income earned on the NRO account is fully taxable in the hands of the NR at the applicable rates and is subject to TDS deduction by the bank. Interest income earned on the NRE Account is exempt from tax pursuant to Section 10(4)(ii) of the Act, provided the person qualifies as an NR pursuant to FEMA provisions or is authorized by the Reserve Bank of India to maintain such an account. . In addition, interest income earned on the FCNR Account is exempt from tax under Section 10(15)(iv)(fa) of the Act for a person who qualifies as an NR or resident but does not is not ordinarily resident in India pursuant to Section 6 of the Act.
One can also refer to the provisions of the applicable DTAA to see if the interest income is taxable at a more advantageous rate for the NR. For example, according to the DTAA between India and the United States, interest income originating in India and paid to a person who qualifies as an NR of India and also as a resident of the States United States may be taxable at the rate of 15% according to the DTAA. although the maximum tax rate in India as per law may be 30% plus surcharge (if any) and tax. In this case, the NR can avail himself of the advantages of the DTAA because it is more advantageous to him. However, the NR will need to obtain a Tax Residency Certificate (TRC) from the US tax authorities and provide it to the Indian tax authorities if requested. In addition, it should also be checked whether a Form 10F must be filed in addition to the TRC. The NR, however, may need to analyze the cost and effort of obtaining a TRC in the United States versus the tax savings in India if an advantageous tax rate under the DTAA is chosen.
2. Dividend income from investments made in shares of an Indian company or shares of mutual funds: For an NR, dividend income from investments made in India is generally taxable at 20% with no deductions available under the law. For example, an NR who only has a dividend income in India of INR 10,000,000 will be liable to pay taxes of INR 2,080,000 (20% tax + 4% contribution) without deducting any amount for the investment made in the form of life insurance premium, public provident fund, national pension system, etc.
Continuing with the example of DTAA between India and the United States, dividends paid by an Indian company to an individual who qualifies as an NR of India and a resident of the United States may be taxable at 25% . In this scenario, the NR can choose to pay taxes at the rate of 20% (plus cess) as per the provisions of the law, as these provisions are more beneficial to him.
Any tax balance remaining to be paid after deduction of TDS, if any, by the payor of the above income may be discharged by paying an advance tax or as a self-assessment tax before filing an ITR in India. Any delay in the payment of withholding tax or self-assessment tax will incur interest for late payment of tax, in accordance with the relevant provisions of the law.
Disclosure in the form of an ITR
While paying taxes at the correct rates is most important, disclosure of income in the appropriate schedules of the ITR form is also very important to ensure administrative compliance, which will help avoid unnecessary queries from Indian tax authorities. For example, the NR should report dividend income in the column “Income taxable at special rates” in the schedule “Income from other sources” to ensure that the usefulness of the tax authorities’ income statement Indian companies calculates the taxes applicable to 20% of these dividends. revenue. Similarly, where an advantageous tax rate under the applicable DTAA is elected, the NR must report the income in the “Special Income” schedule of the ITR form. Even if the income is exempt in the hands of the NR, it must be reported appropriately on the Exempt Income Schedule to ensure compliance.
Other Cautionary Points
1. With the introduction of the Annual Information Statement (AIS) and the Taxpayer Information Summary (TIS), Indian tax authorities have access to detailed information regarding a taxpayer’s financial transactions during a financial year. Individuals, especially NRIs living outside India, may have inadvertently failed to report interest income or savings bank dividend income in their ITR due to lack of access to their financial accounts in India.
However, the new AIS and TIS capture the details of all such income in one place, making it easier for the taxpayer and the Indian tax authorities to have visibility into the source and amount of income during a financial year. . Thus, one must reconcile the information reported in the AIS and TIS documents before filing the ITR, failing which there is an increased risk of receiving an opinion from the Indian tax authorities to explain the omission or discrepancy in these documents versus details. reported in the ITR and the consequent impact of paying interest and penalties as well as additional taxes on such income not previously disclosed.
2. In the event that the NR believes that his total income in a financial year will be taxable at a lower rate than the rate at which the TDS must be deducted by the payer from income under the provisions of the Act, the NR can apply to the Indian tax authorities for a lower withholding tax certificate which will allow the income payer to deduct the TDS at a lower rate and thus avoid the administrative hassle for the NR to claim a refund within its ITR.
3. Selecting the correct type of RTI form is necessary to ensure administrative compliance. An NR is not eligible to file Forms ITR-1 and ITR-4, as these only apply to persons who qualify as Resident and Ordinary Resident of India. Therefore, an NR should carefully analyze his sources of income and select the right type of ITR form that is applicable to him for a particular financial year.
Considering the multiple complexities of reporting requirements, it is always advisable to exercise caution when filing ITRs, which can help taxpayers avoid the risk of not complying with the provisions of tax laws.
With contributions from Akshay Sharma, Manager, People Advisory Services, EY India
