1. TEST OF RESIDENCE

A. Individuals

a. An Individual is regarded as ‘Resident’ of India if:

1. He stays in India for 182 days or more during a previous year;
   OR
2. He stays in India for 60 days or more during a previous year, and 365 days or more during the 4 years preceding that previous year.

The short period of stay in India of "60" days, however gets extended to 182 days in following conditions (i.e., even though an Individual is in India for 365 days or more during preceding 4 previous years).

1. An Indian citizen who leaves India in any previous year for employment or as a member of the crew of an Indian Ship;
2. An Indian citizen or a person of Indian origin, who is abroad, comes on visit to India in any previous year.

Further, in case of an individual being citizen of India and member of crew of foreign bound ship leaving India, the period or periods of stay in India, in respect of such voyage shall be determined in manner and subject to conditions as may be prescribed.

b. An Individual is regarded as ‘Resident but not ordinarily Resident’ if:

1. He is a non-resident in India in 9 out of 10 previous years preceding the previous year;
   OR
2. He has stayed in India for 729 days or less during 7 years preceding the previous year.

c. An Individual is regarded as ‘Non-Resident’ if:

He doesn’t satisfy any of the conditions mentioned in (a) above.

B. HUF/FIRM/AOP

1. Resident – They are regarded as resident, even if part ‘control and management of its affairs’ is in India.
   [Note: An HUF will be ‘Resident but not ordinarily resident’ if it is a resident and its manager fulfils any one of the conditions as mentioned in A (b) above]
2. Non-resident – They will be regarded as non-resident, if control and management is wholly outside India.

C. Company

An Indian company is always treated as resident in India. Any other company would be a resident if its ‘place of effective management (POEM)’ is in India, .

For a company there could be many place of management but POEM will always be one. POEM is a place where key management and commercial decisions necessary for the conduct of the business as a whole are made. It is not sufficient to hold Board Meetings & AGM in the overseas jurisdiction but the team implementing such decisions should not be resident of India. Key Management Personnel such as CEO/CFO etc., should be resident of overseas jurisdiction where the foreign company is located.

2. TAX INCIDENCE

1. Resident & Ordinarily Resident – Global Income is taxable.
2. Resident but not Ordinarily Resident – Income earned/ received in India; or income which accrues or arises or is deemed to accrue or arise in India or income arising abroad out of business controlled in India is taxable.
3. Non-resident – Only income earned/received in India and income deemed to accrue or arise in India is taxable.

3. INVESTMENT INCOME OF A NON-RESIDENT

Interest income received by a non-resident from Government or from any other person in India is taxable in India.

Interest received by non-resident in certain case:

In terms of section 9(1)(v)(c) if any interest is payable by the branch offices of Non-Resident foreign banks to either the head office or to any other branch offices outside India, of the non-resident, then such interest shall be deemed to accrue or arise in India. Thus, the branch office in India shall be obligated to deduct tax at source on such interest payable. Interest so remitted shall be attributable to Indian Permanent Establishment (PE) as a separate and distinct person of non-resident of which it is a PE, in addition to its other income arising and accruing in India.

A. Exempt Investment Income

Following types of investment income are exempt:

1. Interest on NRE account paid or credited to individual non-residents Indian who are permitted by RBI to maintain such account. Section 10(4)(ii) (Including person who may be ‘Resident’ in India as per Income Tax law, but are resident outside India under FEMA).
2. Interest, premium on redemption or any other payment on NRNR deposit and other securities, bonds, annuity certificates, savings certificates, notified under section 10(15)(i). NRNR deposit interest is exempt in the hands of non-resident while he remains non-resident as per the Income-tax Act.
3. Sec 10(15)(ii)(c) – In the case of an individual or a Hindu undivided family, interest on such Relief Bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf.
4. Interest on ‘NRI Bonds 1988’ and ‘NRI Bonds (Second Series), issued by SBI purchased in foreign exchange, exemption continues even after person becomes resident. [Section 10(15)(iid)] However, no exemption under this clause will be available in the year of premature encashment.
5. Interest paid by a scheduled bank on RBI approved foreign currency deposit, FCNR & RFC A/c to Non-resident or Not Ordinarily Resident is exempt. [Section 10(15)(iv)(fa)].
6. Any interest received by a non-resident or a person who is not ordinarily resident in India on a deposit made on or after the 1-4-2005, in an Offshore Banking Unit referred in section 2(u) of the Special Economic Zones Act, 2005 is exempt u/s 10(15)(viii).
7. Any income by way of dividend referred to in section 115-O received by non-resident is exempt u/s. 10(34). Any income received in respect of the units of a Mutual Fund specified u/s. 10(23D) or from the Administrator of the specified undertaking as defined; or from the specified company is exempt u/s. 10(35).
8. Any income by way of long-term capital gains on sale of equity shares on a recognised stock exchange or on repurchase of units of equity oriented funds on which Security Transaction Tax (STT) is paid is exempt u/s. 10(38).
9. Any income earned in India from the sale of crude oil by a foreign company is exempt u/s. 10(48), provided the following conditions are satisfied:
   • The income earned by the foreign company is pursuant to an agreement with the Central Government or after taking approval of the Central Government.
   • The foreign company and the agreement should be notified by the Central Government.
   • The foreign company should only be engaged in the activity of receipt of such income in India.

B. Special Tax Rate and Surcharge applicable on Investment Income of non-resident

(Readers may consider provisions of Sec. 206AA – enumerated at point No. 12 hereunder)

Tax Rates

Sections 115A to 115AD prescribes tax rates for various types of investment income of different non-resident entities. However, if the non-resident is covered by a particular DTAA, he may apply the rates prescribed under that DTAA, if beneficial, without any surcharge and education cess. This position has been upheld in the case of Sunil V. Motiani vs ITO (ITA No. 276/Mum/2012).

1. Section 115A – Income tax payable on income derived by non-resident by way of:
   1. Dividend other than dividends referred to in section 115-O – 20% subject to applicable surcharge & education cess;
   2. Interest received from Government or an Indian concern on monies borrowed or debt incurred in foreign currency – 20% subject to applicable surcharge & education cess;
   3. Interest received from a notified Infrastructure Debt Fund referred to in section 10(47) – 5% subject to applicable surcharge & education cess;
   4. Interest income payable by a Specified Company (i.e. an Indian Company) or business trust (w.e.f. October 1, 2014) to a non-resident/foreign company is liable to deduct income-tax @5%, subject to applicable surcharge & education cess. This section is applicable if interest is paid or payable at approved rate. The interest should be in respect of monies borrowed in foreign currency from a source outside India –
      • Under a loan agreement (at anytime on or after 1st July, 2012 and 1st July, 2017) or
      • By way of issue of long-term infrastructure bonds (at anytime on or after July 1, 2012 but before October 1, 2014) or
      • By way of issue of long-term bonds including long-term infrastructure bonds (at anytime on or after October 1, 2014 but before July 1, 2017) or

      (Sec. 194LC)

   5. Interest paid to a Foreign Institutional Investor or Qualified Financial Investor on or after June 1, 2013 but before July 1, 2017 on account of investment made by them in Rupee denominated bonds of Indian currency or Government securities, will be liable to tax at a concessional rate of 5%, subject to applicable surcharge & education cess (Sec. 194LD).
   6. Income by way of interest received by the business trust from SPV is not taxable in the hands of the trust. [Sec 10(23FC)]. However, when such interest is distributed by business trust to unit holders, who are NR or foreign company, withholding tax @5% shall be applicable. (Sec 194LBA) This provision is applicable from 1st October, 2014.
   7. Income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under section 10(23D) or of the Unit Trust of India is taxable at the rate of 20% subject to applicable surcharge & education cess.
   8. Income other than Profits & gains of business of Alternative Investment Fund (Category I or II)is not taxable in the hands of fund [Sec 10(23FBA)]. However, income accruing or arising to or received by unit holder of an investment fund is taxable at the rate of 10% (194LBB).
   9. Income received by a business trust being a Real Estate Investment Trust (REIT) by way of renting, or leasing or letting out any real estate owned directly by such business trust is not taxable in the hands of such REIT [Sec 10(23FCA)]. However, when such income is distributed by REIT to unit holders, who are NR or foreign company, withholding tax @ 5% shall be applicable. (provisions of Sec 194LBA are amended effective from 1st June 2015),
2. Tax on overseas financial organisation (approved by SEBI) in respect of income by way of long-term capital gains arising on sale/ repurchase of units of mutual fund/ UTI purchased in foreign currency; is 10% subject to applicable surcharge & education cess. [Section 115AB].
3. Tax on non-resident in respect of interest on bonds of an Indian company issued in accordance with Central Government notification, on bonds of a public sector company sold by the Government, and purchased in foreign currency; dividends (other than dividends referred to in section 115-O) on Global Depository Receipts and long-term capital gains on sale of such bonds/Global Depository Receipts is 10% subject to applicable surcharge & education cess. [Section 115AC].
4. Tax on approved Foreign Institutional Investor (FII) is as follows:
   • Income by way of interest on securities – 20%
   • Short-term capital gain sale of other securities – 30%
   • Short-term capital gain sale of listed shares with STT, units – 15%
   • Long-term capital gain sale of other securities – 10%
   • Long-term capital gain sale of listed shares with STT, units – NIL
   • Interest referred to in section 194LD – 5% [Section 115AD]

   Further, Definition of the term “Capital Asset” has been amended to provide that securities held by FIIs in accordance with the SEBI regulations will be regarded as Capital Asset and not as stock-in-trade.

Surcharge & Education cess

Education Cess of 3% is split as 1% Secondary & 2% Higher education cess.

Effective rate of tax

3. Income of non-resident sportsmen (who is not citizen of India) or sports associations or institutions, by way of participation in India in any game other than section 115BB or sports; or advertisement; or contribution of articles in newspapers, magazines or journals, is chargeable to tax @ 20% subject to applicable surcharge and education cess (mentioned 10 in last year) [Section 115BBA].
4. Income of Non-Resident entertainer (who is not citizen of India) such as musicians, radio, television or theatre artists) arising from performance in India, is chargeable to tax @ 20% subject to applicable surcharge & education cess [Section 115BBA].
5. Winning from lotteries, crossword puzzles, or race including horse race (not being income from activity of owning and maintaining race horse) or card game and other game of any sort or from gambling or betting of any form or nature is chargeable to tax @ 30% subject to applicable surcharge & education cess [Section 115BB].
6. Where an Indian Company receives dividend from a foreign company (where Indian company holds 26% or more stake), such dividend shall be chargeable to tax @ 15%. However, such benefit was available only up to 31st March, 2014 which has now been made available for all the future assessment years without any sunset clause [Sec 115BBD].

4. SALARY INCOME OF NON-RESIDENT DURING SHORT STAY IN INDIA

Any remuneration received by foreign citizen as an employee of a foreign enterprise for services rendered by him in India is exempt, provided the following conditions are fulfilled—

1. the foreign enterprise is not engaged in any trade or business in India;
2. his stay in India does not exceed in the aggregate a period of 90 days in such previous year; and
3. such remuneration is not liable to be deducted from the income of the employer chargeable under the Income-tax Act [Section 10(6)(vi)].

5. BUSINESS INCOME OF NON-RESIDENT

1. Income from business of operation of ship taxable at 7.5% of the gross receipts from such business [Section 44B].
2. Income from business of providing services or facilities in connection with plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils including petroleum and natural gas is taxable at 10% of gross receipt from such business, unless the assessee claims lower profits and gains by maintaining proper books of account and other documents, get the same audited and file the audit report along with return of income. [Section 44BB].
3. Income from business of operation of aircraft taxable at 5% of the gross receipts from such business [Section 44BBA].
4. Income of foreign company from business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government is chargeable at 10% of the gross receipts from such business, unless the assessee claims lower profits and gains by maintaining proper books of account and other documents, get the same audited and file the audit report along with return of income. Such income tax return will be subject to scrutiny assessment [Section 44BBB].
5. In any other case, for computing the business income of non-resident, expenditure in the nature of head office expenses is allowable at least of the:
   • Up to 5% of the adjusted income as specified in section; or
   • Actual expenditure attributable to business in India [Section 44C].

   Fund managers in India not to constitute Permanent Establishment (PE)
   Section 9A has been inserted w.e.f. April 1, 2016 which states that –

   1. In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund and
   2. An eligible investment fund shall not be said to be resident in India for the purpose of section 6 merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.

In order to avail the above benefit, the offshore fund and the fund managers are required to fulfil several conditions like having minimum 25 members who are not connected, any member along with connected person shall not have more than 10% participating interest, aggregate participating interest of 10 or less members along with connected persons shall be less than 50% etc. The said conditions of minimum members and participating interest has been relaxed and done away with in case of an investment fund set up by the Government or the Central Bank of a foreign state or a sovereign fund or such other fund as the Central Government may subject to conditions, if any, by notification in official gazette, specify on this behalf.

6. INDIRECT TRANSFER OF SHARES

The Finance Act, 2012 had inserted certain clarificatory amendments in the provisions of section 9. The amendments, inter alia, included insertion of Explanation 5 in section 9(1)(i) w.r.e.f. 1-4-1962 . The Explanation 5 clarified that ‘an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

It is now provided that the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets (without reducing the liabilities) exceeds the amount of 10 crore rupees; and represents at least 50% of the value of all the assets (without reducing the liabilities) owned by the company or entity, as the case may be.

The value of assets shall be Fair Market Value (to be computed as per method to be notified in the rules).

It is further clarified that the term “specified date” shall be the last date of the previous accounting period of the company/entity or, in cases where the total book value of the assets on date of transfer exceeds the book value on the last day of previous financial year by 15%, then the specified date shall be the date of transfer.

However, ‘book value’ of the assets is to be considered as against ‘FMV’ in case where the date of transfer is taken to be the ‘specified date’ as above.

7. TAXATION OF ROYALTY & FEES FOR TECHNICAL SERVICES (FTS) RECEIVED BY NON-RESIDENTS

(Readers may consider provisions of Sec. 206AA – enumerated at point No. 12 hereunder)

1. Royalties and fees for technical services received by non-residents (not being company) or a foreign company (provided income is not attributable to a permanent establishment in India) from an Indian concern or the Government are taxed at a uniform rate of 10%. The date of agreement under which such income is received will henceforth be irrelevant [Sec 115A(1)(b)]
   Section 9(1)(vi) of the Act defines the taxability of royalty income in India and had defined royalty to include transfer of all or any rights (including the granting of licence) in respect of patent, invention, model, design and secret formula or process or trademark or similar property.
   Section 9(1)(vii) of the Act defines FTS, as fees for rendering of Managerial, Technical or Consultancy services. It is interesting to note that these three categories of services do not include ‘commercial services’ such as services provided by Commission Agents, Freight & Forwarders, Transportation services and similar other services.
   Non-resident earning income in the nature of Royalty & FTS is required to file Return of Income u/s. 139(1). The relaxation of not filing of Return of Income is available only in respect of Dividend Income (referred to in Sec 115-O) and Interest Income on which tax has been deducted [Sec. 115A(5)].
2. Royalties and fees for technical services received by non-resident (not being company) or a foreign company from an Indian concern or the Government in pursuance of agreement entered after 31-3-2003, if the non-resident has a Permanent Establishment in India or renders professional services from a fixed place shall be taxed on net income [Section 44DA].
3. Any income by way of royalty or fees for technical services arising to any foreign company (as may be notified by the Central Government from time to time) under an agreement entered into with that Government for providing services in connection with security of India is exempt [Section 10(6C)].

8. ACTUAL COST OF AN ASSET BROUGHT INTO INDIA BY A NON-RESIDENT

1. For the purpose of computation of business income, actual cost of any asset brought into India by non-resident would be computed as actual cost of acquisition to the non-resident as reduced by the notional depreciation as provided in the Income-tax Act, 1961 from the date of its acquisition as if the asset has been used in India [Section 43 Expl. 11].
2. Where an imported capital asset is acquired on deferred payment terms or out of the foreign loan the actual cost would be after taking into account the fluctuation in exchange rate. For this purpose, actual payment will be considered [Section 43A].

9. DOUBLE TAXATION RELIEF – Section 90/90A

All provisions discussed above are subject to DTAA entered into with various countries or with any specified association in a specified territory outside India. The provision of the relevant tax treaty or domestic law provision whichever is beneficial to the taxpayer would be applicable.

In order to claim treaty benefits the non-resident taxpayer shall be required to provide certificate of his being a resident of country outside India (Tax Residency Certificate) as well as such other documents and information, ‘as may be prescribed’. In furtherance of this provision, Rule 10F prescribes the information to be provided by a taxpayer in a prescribed format. However, a taxpayer may not be required to provide the information in Rule 10F, or any part thereof, if it is already contained in the Tax Residency Certificate.

Form 10F can be accessed at following link –

http://www.incometaxindia.gov.in/forms/income-tax%20rules/103120000000007197.pdf

10. SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAIN ON SHARES & DEBENTURES OF INDIAN COMPANIES

First proviso to section 48 provides that while computing capital gain/loss, if any, on sale of shares or debentures purchased by a non-resident in foreign currency, the sale proceeds, expenditure on transfer and cost of acquisition of such shares or debentures must be converted in the same currency in which the original investment was made. Resultant capital gains/loss then need to be reconverted into rupee to arrive at taxable capital gain/loss. The benefit of indexation will not be available in such cases.

11. SPECIAL PROVISIONS FOR NRIs – CHAPTER XIIA

A. Section 115C –

1. "Non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a "resident". 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.
2. "Investment Income" means any income derived (other than dividends referred to in section 115-O) from a foreign exchange asset.
3. "Foreign Exchange Asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to, in convertible foreign exchange.
4. "Specified asset" means any of the following assets, namely :—
   • shares in an Indian company;
   • debentures or deposits with an Indian company, not being a private company;
   • any security of the Central Government;
   • Other notified assets (no such asset has yet been notified).

B. Section 115D & Section 115E – Computation of Income

The above rates are subject to applicable surcharge and education cess & provisions of Sec. 206AA – enumerated at point No.12 hereunder

C. Section 115F – Exemption of long-term capital gains

Capital gain arise from transfer of foreign exchange asset, is exempt from tax if the following conditions are fulfilled:

1. The asset transferred must be a long-term capital asset;
2. Net consideration must be invested in certain specified assets;
3. Investment to be made within 6 months of transfer;
4. If only a portion of the net consideration is reinvested, then proportionate exemption is allowed;
5. New asset must be held for at least three years.

D. Section 115G – Option not to file income tax return

NRI need not file an income tax return if –

1. his total income consists only of investment income or income by way of long-term capital gains or both; and
2.  TDS has been deducted from such income as per the provision of Income-tax Act.

E. Section 115H – Continuation of benefit after NRI becomes resident

Chapter XIIA shall continue to apply to investment income even after NRI becomes a resident, if he furnishes a declaration along with return of income to that effect. The benefit shall continue to apply to him in relation to such income until the transfer or conversion into money of such asset. This benefit does not apply to dividend income from shares, however, this doesn’t have any impact, since dividend (with DDT) is exempt.

F. Section 115I – NRI may opt out of Chapter XIIA

A non-resident Indian may elect not to be governed by the provisions of Chapter XIIA for any assessment year by furnishing a written declaration to Assessing Officer with his return of income. If he does so, his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act.

12. Mandatory quoting of PAN by non-resident to avoid tax withholding at higher rate

The Finance Act, 2009 has introduced a new section 206AA in the Income-tax Act, 1961 ("the Act") making it mandatory for payers from India to withhold tax at a higher rate if the payee (including non-resident) does not provide PAN. Condition of mandatory quoting of PAN if tax withholding is to be done at normal (prescribed) rate has become effective from April 1, 2010.

Provisions of mandatory requirement of PAN as per Section 206AA are as follows:

• The payee should furnish its PAN to the payer, failing which the payer would be liable to withhold tax at the higher of following rates –
  1. at the rate specified in the relevant provision of this Act; or
  2. at the rate or rates in force; or
  3. at the rate of 20%.
• The Revenue Officers are prohibited from issuing any certificate for NIL withholding or lower withholding of taxes if the application filed u/s. 197 for this purpose does not contain the PAN of the payee.
• Declaration furnished u/s. 197A shall not be valid unless the person furnishes his PAN in such declaration.
• The PAN of the payee must be referred in all correspondence, bills, vouchers and other documents exchanged between the parties.
  PAN would be required if tax is ‘deductible’. In case where tax treaty provisions are more beneficial and because of access to treaty (for accessing treaty TRC is MUST) tax is not deductible, the provisions of 206AA would not be applicable.
  Higher rate of tax prescribed by Income-tax Act cannot override Tax Treaty Rate:
  Pune ITAT in case of DDIT vs. Serum Institute of India Limited, ITA No. 792/PN/2013 dated 30.03.2015 (A. Y. 2011-12) has addressed the uncertainty on whether provisions of Section 206AA override section 90(2) which provides tax treaty shelter to non-residents. The tribunal held that while section 206AA is not a charging section, it contains procedural provisions dealing with collection of taxes and hence, Sec 206AA which provides for a higher rate of tax (20%) in cases where PAN details are not provided, does not override Sec 90(2) of the Act.

Following table illustrates applicable tax rate for Royalty & FTS in various situations of Non-Resident with respect to PAN and TRC.

In the first scenario (NR providing both TRC & PAN), where the treaty rate is adopted, there is no need to add surcharge and education cess. [Refer Sec 2(37A) – definition of ‘Rates in force’]

13. DISCLOSURE BY RESIDENT INDIAN OF OVERSEAS ASSETS AND AUTHORITY TO SIGN ANY OVERSEAS ACCOUNT

Resident Indians having overseas assets or having an authority to sign any overseas account will have to disclose such facts in Return of Income. The provision will also apply in a situation where resident is otherwise not required to file return of income; however, in the situation referred above, it will be mandatory for such Resident Indian to file Return of Income.

The format prescribed for disclosing above particulars is as under :

A. Details of foreign bank accounts

B. Details of financial interest in any entity

C. Details of immovable property

D. Details of any other asset

E. Details of any account in which you have signing authority (other than those mentioned in A to D)