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What are the types of non taxable incomes for NRIs?

The following are some items of income of NRIs that are exempt from tax under the provisions of the Income Tax Act.
  1. Interest on Non Resident External Account (NRE) in a Bank.
  2. Interest on foreign currency deposits-FCNR (B) deposits.
  3. Interest on notified Relief Bonds.
  4. Other notified Bonds and Certificates.
  5. Dividends on shares of domestic companies.
  6. Income from specified Mutual Funds.
  7. Long Term Capital Gains of sales of shares of Indian Co/Equity Oriented Mutual Funds on a recognized stock exchange.
  8. Other items specified in Section 10 of the Income Tax Act.

106. What are the tax benefits available to an NRI?

  • Bank Deposits investment in shares, units of Mutual Funds etc. are exempt from wealth tax in India.
  • Interest earned on NRE and FCNR accounts is completely tax-free.
  • Gift tax has been abolished for all types of gifts from the 1st October 1998.
  • However, gifts received on the occasion of marriage or from relative or under will or inheritance would not be subject to tax

107. Do I have to pay any taxes on the funds in my NRE Savings Account?

As per current guidelines, funds in NRE Savings Account are exempted from Income tax in India.

108. What’s the difference in the tax treatment for interest earned on an NRE and an NRO account?

The interest earned on any type of NRO deposits are taxed under the account holder’s tax bracket. On the other hand, interest earned on the NRE account is totally exempted from income tax, and the credit balances in the account don’t attract any wealth tax. Any gift given to a close relative doesn’t attract gift tax.

109. What is the special tax regime available to a NRI?

A special tax regime is available for NRIs in respect of income arising from investment in specified assets purchased with convertible foreign exchange. The specified assets are as under:
  1. Shares in an Indian company.
  2. Debentures issued by a public limited Indian company.
  3. Deposits with a public limited Indian company.
  4. Securities of the Central Government.
  5. Any other notified assets.
Income from the aforesaid specified assets shall be taxable as under:
  • Investment income: 20% of gross amount (without any deduction or allowance against such investment income)
  • Long-term capital gains: 10% (without indexation)
Exemption from long-term capital gains tax is available by investing the net consideration in any specified asset within a period of 6 months from the date of transfer of the capital asset.

110. What are the wealth tax provisions applicable to a NRI?

Wealth tax, in India, is levied under the Wealth-tax Act, 1957. NRIs are taxed for their wealth in India alone.

Wealth tax is payable on the aggregate value of chargeable assets as reduced by the value of debts owed on valuation date. The valuation date is uniformly fixed as 31st March.

Taxable Assets
  1. Any building or land annexed thereto used for residential or commercial purposes, but not including:
    1. Houses forming part of stock-in-trade.
    2. Houses occupied for business or profession.
    3. Residential property let out for a minimum of 300 days in the previous year.
    4. Commercial establishments and complexes.
    One house or part of a house or a plot of land not exceeding 500 square meters, belonging to an individual or an HUF is also exempt from wealth tax.
  2. Motor cars other than those used in the business of running them on hire or held as stock-in-trade.
  3. Jewellery, bullion, furniture, utensils or any other article made wholly or partly of precious metals other than those used as stock-in-trade.
  4. Yachts, boats and aircrafts other than those used for commercial purposes.
  5. Urban land subjected to certain exceptions.
Cash in hand in excess of Rs.50, 000 of individuals and HUF's and in other cases, amounts not recorded in the books of accounts.

111. What are the exemptions available from Capital Gains?

It should be noted that exemption are available only in respect of "Long-Term Capital Gains". There are no exemptions for "Short Term Capital Gains".

In respect of long-term capital gains, NRIs can claim exemption by investing the capital gainswithin the time limit in specified bonds of:

  • SIDBI (Small Industries Development Bank of India)
  • NABARD (National Bank for Agriculture and Rural Development)
  • NHAI (National Highways Authority of India)
  • RECL (Rural Electrification Corporation Ltd)
  • NHB (National Housing Bank)
Exemption is also claimed by investing the net consideration in a residential house.

In case of long-term capital gains arising from transfer of listed securities or unit, exemption can be claimed by investing the capital gains in acquiring equity shares forming part of an eligible issue of capital.

Capital Gains Accounts Scheme- If an NRI wants to avail the benefits of long term capital gains exemption by investing in a residential house, the same has to be invested within the stipulated time period as mentioned in that particular section. In case, the return of income is filed before the time limit specified for such investment, then the said amount can be deposited in the 'Capital Gain Deposit Account Scheme' with a nationalized bank.

112. What are the different rates of tax applicable for NRIs?

Depending upon the kind of income, the tax rate will vary as under:
  1. Long Term Capital Gains: On assets other than specified assets @ 20% (with indexation benefits).In case the gains arise from transfer of listed securities or unit or zero coupon bond, there is an option to be taxed @ 10% without indexation benefits. Long term Capital Gains arising on sale of listed equity shares and units of an equity oriented fund are exempt from tax with effect from1.10.2004
  2. Short Term Capital Gains: Such gains are taxable as per the normal rates of Income Tax applicable to the total income of the NRI. However, short term Capital Gains arising on sale of listed equity shares and units of an equity oriented fund is liable to tax @ 10%.
  3. Dividends (other than dividends from domestic companies) and Interest income: 20% of gross amount.
  4. Dividends on GDRs and Interest on Foreign Currency Convertible Bonds:>10% of gross amount.
  5. Long Term capital gains from the transfer of GDR or FCCBs:10%
When the income of an individual exceed Rs.10,00,000/-, surcharge @ 10% will be levied on the above tax rate. Education cess @ 2% is levied on the total tax, plus surcharge.

Note: Where rates prescribed under the relevant Double Tax Avoidance Agreement are lower, the same would apply.

113. Is it compulsory for a NRI to file tax returns?

An NRI is required to furnish his return of income if his total taxable income exceeds the maximum amount which is not taxable.

A non-resident Indian is not required to furnish return of income, if -
  1. Total income consists only of investment income from foreign exchange assets or long-term capital gains under special tax regime or both.
  2. Tax has been deducted at source on such income.
  3. NRI has opted to be governed by the special tax regime.

114. How can NRIs, residing in other countries, take benefit of ‘Double Taxation Avoidance Agreements (DTAA)?

To avail benefit of lower rates of tax as per double taxation avoidance treaty entered in by India, NRIs need to submit the Residency Certificate issued by Tax Authorities of the country of his residence. These documents should be submitted to the designated bank branch at the time of opening the bank account or subsequently. New TDS rate shall be applied only after the acceptance of the Residency Certificate by the designated bank.

115. Who can apply for Tax Exemption Certificate?

Any NRI who has obtained Exemption Certificate needs to submit it to the Payer of the income who will follow the certificate and not deduct tax or may deduct at a lower rate as given.

116. What action is to be taken after obtaining exemption certificate?

Any NRI who has obtained Exemption Certificate needs to submit it to the Payer of the income who will follow the certificate and not deduct tax or may deduct at a lower rate as given.

117. What investment options are available to me for my repatriable corpus?

  • Non Resident Indians can invest in Government Securities and Treasury Bills through a Primary Dealer. The same will be issued to Non Resident Indians in a dematerialized form, and Non Resident Indians have to establish to the primary dealer that the source of funds is external in order to allow Non Resident Indians to put the proceeds on maturity into an NRE account.
  • Non Resident Indians can purchase and redeem units of domestic Mutual Funds, by simply mentioning Non Resident Indians status as NRI in purchase form, and by issuing a cheque from Non Resident Indians NRE account. However, if Non Resident Indians invest in the Money Market Mutual Fund, they will not be permitted to repatriate proceeds of redemption.
  • Non Resident Indians are also permitted to invest in Bonds issued by public sector undertakings (PSUs) in India from Non Resident Indians NRE account and credit the proceeds back into the NRE account.
  • Non Resident Indians can purchase Shares, both in the Primary as well as the secondary market.

Primary Market
In the primary market, Non Resident Indians may invest either through an Initial Public Offer (IPO) of Public Limited companies, or in Public Sector Enterprises being dis-invested by the Government of India. This will be mentioned in the prospectus/application form and the company will have taken the approval to invite Non-resident funds.

Secondary Markets / On a stock exchange
Non Resident Indians are permitted to trade in shares listed on the Stock exchange under what is called the Portfolio Investment Scheme (PIS). Non Resident Indians will simply have to open a separate NRE savings and an NRE Demat account and obtain a permission (through us) to do so.

Non Resident Indians are also entitled to place Non Resident Indians money in Deposits with Indian companies, non-banking finance companies registered with RBI, housing finance companies and other financial institutions. The company will have taken the permission for RBI to allow Non Resident Indians to invest, and will then make an appropriate mention / invitation to Non Resident Indians.

118. Which NRI account attracts TDS (tax deduction at source)?

NRO (savings & term deposit) account will attract TDSNRE deposit: No TDS will be deducted 


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