Investment & Taxation of NRI – SPECIAL PRIVILEGES

WHAT SHOULD BE OUR TAKE AWAYS?

Meaning of NRI, PIO, OCI, PRI, PROI under FEMA?
Investment privileges available to NRI in India?
FAQs relating to Investment under regulations provided by RBI?
Meaning of NRI, NR, NOR, ROR under Income tax Act?
Special privileges under Income Tax Act for NRI?
Taxability of NRI under different heads of income?
Reliefs available under DTAA?

Legal Framework of FEMA Governing NRI Investment

FERA 1973 was replaced with FEMA 1999…
FEMA contains 7 Chapters into 49 Sections..
5 set of rules made by Ministry s-46 (Delegated Legislation)
23 set of regulations made by RBI s-47 (Subordinate Legislation)
Master circular issued by RBI Every Year…
FDI Policy is issued by DIPP.
Notification & circular issue by RBI.
Enforcement Directorate ED

NRI Investment is governed by various regulation issued by RBI, the relevant regulation for our discussions today are:

FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations;
FEM (Investment in Firm or Proprietary Concern in India) Regulations;
FEM (Deposit) Regulations;
FEM (Acquisition and Transfer of Immovable Property In India) Regulations;
FEM (Remittance of Assets) Regulations;
FEM (Borrowing and Lending In Rupees) Regulations.

WHAT SHOULD BE OUR TAKE AWAYS?

Meaning of NRI, PIO, OCI, PRI, PROI under FEMA?Who is NRI?
Who is PIO?
Who is OCI?
Who is PRI?
Who is PROI?

Definitions under FEMA
Non Resident Indian (NRI)

Definitions under FEMA

Person includes- S-2 (v)
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(vii) any agency, office or branch owned or controlled by such person

Definitions under FEMA

Person Resident In India (PRI) S-2 (u)

A person residing in India for more than 182 days during the preceding financial year. Excluding

Definitions under FEMA

Person Resident in India (PRI) Continued…….

b) Any person or body corporate registered or incorporated in India
c) An office, branch or agency in India owned or controlled by a person resident outside India
d) An office, branch or agency outside India owned or controlled by a person resident in India

Person Resident Outside India (PROI) – It means a person who is not resident in India. S-2(w)

Definitions under FEMA

Person of Indian Origin (PIOs)

Definitions under FEMA

Person of Indian Origin (PIOs) Continued………

Definition under Citizenship Act

Overseas Citizens of India (OCI)

A person of Indian Origin who is foreign national and gets registered as Overseas Citizen of India Cardholder under Section 7A of the Citizenship Act,1955 as amended w.e.f. January 6, 2015

Who is eligible for OCI Card?

Following categories of foreign nationals are eligible for registration as Overseas Citizen of India (OCI) Cardholder:-

1) Who was a citizen of India at the time of, or at any time after the commencement of the Constitution i.e. 26.01.1950; or

2) who was eligible to become a citizen of India on 26.01.1950; or

3) who belonged to a territory that became part of India after 15.08.1947; or

4) who is a child or a grandchild or a great grandchild of such a citizen; or

5) who is a minor child of such persons mentioned above; or

6) who is a minor child and whose both parents are citizens of India or one of the parents is a citizen of India; or

7) Spouse of foreign origin of a citizen of India or spouse of foreign origin of an Overseas Citizen of India Cardholder registered under section 7A of the Citizenship Act, 1955 and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the presentation of the application.

Note: On January 9, 2015, GOI (MHA) issued notification to rescind the PIO scheme and provided that all exixting PIO cardholders registered till January 9, 2015 should be deemed to be the OCI cardholder.

Benefits available to OCI

*Multiple Entry, multiple purpose life long visit to visit India
*Exemption from reporting to police authorities for any length to stay in India
*Parity with NRIs in financial, economic, and educational fields except in the acquisition of agricultural or plantation properties.
*Parity with Resident Indians in Domestic Affairs
*Parity with Indian National in entry fees for national Parks and Wild Life Sanctuaries.
*Parity with NRIs in respect of –

*Entry fees for visiting the national monuments, historical sites & museums in India
*Pursuing the professions of doctors, dentists, nurses and pharmacists, advocates & chartered accountants.
*Appearance for All India Pre-Medical test
*Inter Country Adoption

Definitions under Income Tax Act

Person includes-

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iV) a firm,

(V) an association of persons or a body of individuals, whether incorporated or not,

(Vi) a local authority, and

(Vii) every artificial juridical person, not falling within any of the preceding sub clauses

Person Resident In India

An Individual is said to be resident in India in any Previous year if he satisfied any condition –

Explanation1
In the case of an individual,—

(a) being a citizen of India, who leaves India in any previous year as a crew member of an Indian ship, or for the purposes of employment outside India, the provisions of condition 2 shall apply in relation to that year as if for the 60 days occurring therein,182 days has been substituted.

Definitions under Income Tax Act

Person Resident in India Continued…….

(b) being a citizen of India or person of Indian Origin comes to India for visit purpose in any previous year the provisions of condition 2 shall apply in relation to that year as if for the words “60 days”, occurring therein, the words “182 days” had been substituted.

- Non-Resident means a person who is not a “resident” ,and for the purposes of sections 92, 93 and 168, includes a person who is not ordinarily resident in India.
- Non-Resident Indian – As per Section 115C(e) “NRI means an individual, being a citizen of India or a person of Indian origin who is not a “resident”.
Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India;

Comparison under FEMA & IT Act

Investment Privileges available to NRI in India

-Deposits in special bank accounts NRO, NRE, FCNR;
-Equity shares both listed and unlisted;
-Bonds and Government Securities;
-Mutual funds;
-Immovable property;
-REITs
-Gold Exchange Traded Funds (GETF)
-Gold Monetization and Sovereign Gold Bond
-Debentures
-National Pension Scheme (Circular 24 dt. 29.10.2015)
-Chit Funds on non repatriation basic; (Circular 107 dt. 11.06.2015)

Modes of Investment in shares & Securities:

Portfolio Investment Scheme (PIS);
Foreign Direct Investment (FDI);
Foreign Venture Capital Investment(SEBI Approved FVCIs)
Investment on Non Repatriation basis;
Other Investments;

Investment Privileges available to NRI in India-General Permission

On Non Repatriation basis (Schedule 4 of TISPRO Regulation)

*An NRI, including a company, a trust, and a partnership firm incorporated outside India and owned and control by NRI, may acquire and hold equity shares, convertible preference shares, convertible debenture, warrants or units without any limit.
*An NRI or PIO may contribute to the capital of partnership firm, a proprietary firm or LLP without any limit.
*Provided the investment is not for prohibited sectors like Nidhi company, any entity engaged in agriculture/plantation or real estate business or construction of Farm houses or dealing in TDRs.
*The sale/maturity shall be credited only to NRO accounts and which is not to be repatriated abroad.
*Exchange Traded Derivatives approved by SEBI out of Rupee fund available in India.

Investment Privileges available to NRI in India-Generally Prohibited

No Capital Investment allowed for:

1: Chit Fund;
2: Nidhi Company;
3: Agriculture or plantation activities;
4: Real estate business or construction of farm house;
5: Trading of TDRs

Framework of Taxation

TAXATION

1: Exemptions of Income – Section 10
2: Salary
3: House Property
4: PGBP
5: Capital Gain
6: Dividend
7: Interest
8: Concessional Rate of tax
9: Special Provisions relating to certain incomes of Non-Residents [Chapter XIIA]
10: Relief under DTAA

Exemptions of Income – Section 10

Salary

Section 9(1)(ii) – Salary earned in India

1: Salary payable for services rendered in India; and
2: The rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the contract of employment
3: The place of accrual of Income is the place where services are rendered
4: Salary will be taxable in India on the basis of services rendered in India irrespective of Residential status of employees (except to the extent of short stay exemption)

House Property

Section 24 – Income shall be computed after making the following deductions, namely-

a) 30% of the annual value
b) Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital with borrowed capital, the amount of any interest payable on such capital subject to some conditions.

Business Income

Non- resident has permanent establishment in India or performs professional services through a fixed place of profession situated in India & right, property or contract in respect of which royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession

Section 44DA shall apply. Income shall be computed after deducting all expenses relating to that income.

Tax will be levied at the normal rate.

Capital Gain

Following transactions not regarded as “Transfer” for the purpose of section 45.

–Any transfer of bonds or GDR referred to in section 115AC, made outside India by a NRI to another NRI or NR

–Any transfer of a capital assets under a gift or will or an irrevocable trust*

* Section 56(2)(vii) – Receipt of sum of money specified property and immovable property, without consideration, more than INR 50,000 is however taxable in the hands of recipient (certain exemptions to transfer from any relative, on the occasion of marriage, under will or by way inheritance, trust etc

Capital Gain

Section 48 – Mode of Capital gain

First Proviso to Section 48

An assessee who is non-resident, capital gain arising from the transfer of shares or debentures in an Indian company shall be computed by converting

i.the cost of acquisition

ii.Expenditure incurred wholly and exclusively in connection with such transfer and

iii.the full value of the consideration received or accrued as a result of transfer

In the same foreign currency as was initially utilised in the purchase of shares or debentures. The capital gain so computed in the foreign currency shall be reconverted into Indian currency.

Dividend

Section 9(iv) – Dividend Income paid to non-resident by Indian company is deemed to accrue in India only on the payment and not on declaration.
This is in contradistinction to section 8 which refers to a dividend declared, distributed or paid by a company
Dividend income in the hands of shareholder is exempt if the dividend declared by the company is subject to dividend distribution tax in India

Interest

Payable by-

(a) the Government; or

(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) a person who is a non-resident, where the interest is payable in respect of any debts incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India

Concessional Rate

Section 111A – STCG where transaction is subject to STT to be taxed @ 15%
Section 112 – LTCG to be taxed @ 20% [10% in the case of unlisted shares without indexation]
Proviso to section 112(1) – Long-term capital gains from transfer of listed securities or unit or zero coupon bonds to be taxed @10% of capital gains without indexation benefit
Section 115A – Interest received from Govt or an Indian concerned on monies borrowed or debt incurred by such Govt or Indian concern in foreign currency @ 20% [in the case of ECB & issue of long term infrastructure bonds @ 5% (Section 194LC)]
Section 115AC – Interest, Dividend and long term capital-gains (Without Indexation) earned from bonds and GDR respectively issued by Indian company to be taxed @10% (no need to file the income tax return is income is subject to tax)

Special Provisions relating to certain incomes of Non Resident [Ch – XIIA]

Section 115C – Definitions
Section 115D – Special Provisions for computation of total income of non-residents
Section 115E – Tax on investment income & Long term Capital gains
Section 115F – Capital gain on transfer of foreign exchange assets not to be charged in certain cases
Section 115G – Return of Income not to be filed in certain cases
Section 115H – Benefit under chapter to be available in certain cases even after assessee becomes resident
Section 115I – Chapter not to be apply if the assessee so chooses

Special Provisions relating to certain incomes of Non Resident [Ch – XIIA]

Section 115C

-“Specified Asset” means any of the following assets, namely :—

i.shares in an Indian company;

ii.debentures issued by an Indian company which is not a private company

iii.deposits with an Indian company which is not a private company

iv.any security of the Central Government

v.such other assets as the Central Government may specify in this behalf by notification

-“Foreign Exchange Asset” means any specified asset which the assessee has acquired or purchased with or subscribed to in, convertible foreign exchange

Special Provisions relating to certain incomes of Non Resident [Ch – XIIA]

Section 115D

-No deduction of any expenditure or allowance in computing the investment income

-GTI consists of only Investment income & LTCG then deduction under Chapter VI-A is not allowed

-Other Income – deduction under chapter VI-A is allowed

Section 115E

-LTCG on sale of specified assets – 10%

-Any income from Investment or income from LTCG of an asset other than specified assets – 20%

-Other income – Normal slab rate

Special Provisions relating to certain incomes of Non Resident [Ch – XIIA]

1: Section 115F – Capital gain tax exemption on sale of long term foreign exchange assets if the capital gains is reinvested in any specified assets or any saving certificates specified in Section 10(4B), subject to certain conditions.

2: Section 115G – No return is required to be filed if income consisted of only from LTCG or from investment income or both; and tax has been deducted at source from such income.

3: Section 115H – Benefit under Chapter XII-A can still be available to NRI who has become resident in India on income from the specified assets till the date of transfer or conversion into money of such specified assets, provided such declaration is to be filed along with the return of income.

4: Section 115I – NRI has an option to be governed by the normal provisions of the Income tax act provided such declaration is to be filed along with the return of Income

Relief under DTAA

Taxability of Non-Resident is to be examined under the Income-tax Act,1961 vis-à-vis the Double Taxation Avoidance Agreement (“DTAA”)
The Non-Resident can choose between the two, whichever is more beneficial [Section 90(2)]
Tax Residency Certificate is must in order to avail Treaty benefits [Section 90(4)]

Relief under DTAA Based on Singapore-India DTAA