presentation on investment and taxation of nri - special privileges

Investment & Taxation of NRI – SPECIAL PRIVILEGES

Gurgaon Branch of NIRC of ICAI

21st May, 2016 by CA Sanjay Agrawal

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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?

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Legal Framework of FEMA Governing NRI Investment

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Legal Framework of FEMA

• 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

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Legal Framework of FEMA….

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)

REGULATIONS DEFINITIONFEM (Deposit) Regulations NRI means a person resident

outside India who is a citizen of India

or is a person of Indian origin (PIO)

[PIO has been replaced by OCI for Transfer or Issue of Security Regulation as amended]

FEM (Investment in Firm or Proprietary Concern in India) Regulations

FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations

FEM (Borrowing and Lending In Rupees) Regulations

REGULATIONS DEFINITION

FEM (Remittance of Assets) Regulations

NRI means a person resident outside India who is a citizen of India

PIO


• 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


• Person Resident In India (PRI) S-2 (u)A person residing in India for more than 182 days during the preceding financial year.Exclusions

A person who has gone out of India or who stays outside India, in either case taking up employment outside India, or carrying on outside India a business or vocation outside India, or any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period

A person who has come to or stays in India, in either case, otherwise than taking up employment in India, or carrying on in India a business or vocation in India, or

any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period


Person Resident in India (PRI) Continued.......b) Any person or body corporate registered or incorporated in

Indiac) An office, branch or agency in India owned or controlled by a

person resident outside Indiad) 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)


Person of Indian Origin (PIOs)


FEM (Deposit) Regulations

PIO means a citizen of any country other than Bangladesh or Pakistan if(a) he at any time held Indian passport or (b) he or either of his parents or any of his grandparents was

a citizen of India or (c) the person is a spouse of an Indian citizen or a person

referred to in sub-clause (a) or (b)

FEM (Remittance of Assets) Regulations

FEM (Borrowing and Lending In Rupees) Regulations

FEM (Investment in Firm or Proprietary Concern in India) Regulations

PIO means a citizen of any country other than Bangladesh or Pakistan or Sri Lanka, if(a) he at any time held Indian passport or (b) he or either of his parents or any of his grandparents was

a citizen of India or (c) the person is a spouse of an Indian citizen or a person

referred to in sub-clause (a) or (b)


• Person of Indian Origin (PIOs) Continued………


FEM (Acquisition and Transfer of Immovable Property In India) Regulations

PIO means an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who (a) at any time, held Indian passport or (b) who or either of whose parents or

grandparents was a citizen of India

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; or3) 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


• Who is eligible for OCI Card? Continued….6) who is a minor child and whose both parents are citizens of

India or one of the parents is a citizen of India; or7) 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 –

Explanation1In 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.

In India for a period/periods of 182 days or more in that previous year OR

Having within 4 years immediately preceding that year been in India for 365 or more days and is in India for a 60 or more days in that year.

CONDITION 1 CONDITION 2


• 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

Particulars FEMA Act Income Tax ActPerson It 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) 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

It 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) every artificial juridical person, not falling within any of the preceding sub-clauses, and (vii) a local authority

Comparison under FEMA & IT Act

Particulars FEMA Act Income tax Act

Person Resident in India [PRI]

Person residing in India for more than 182 days in the preceding financial yearExclusionsA person who has gone out of India or who stays outside India, in either case taking up employment outside India, or carrying on outside India a business or vocation outside India, or any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

An individual is said to be resident in India in any previous year, if he—

(a) is in India in that year for a period or periods amounting in all to 182 or more days ; or

(b) having within the 4 years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India for a period or periods amounting in all to 60 or more in that year.

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)

Investment Privileges available to NRI in India

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

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TAXATION

Exemptions of Income - Section 10 Salary House Property PGBP Capital Gain Dividend Interest Concessional Rate of tax Special Provisions relating to certain incomes of

Non-Residents [Chapter XIIA] Relief under DTAA

Exemptions of Income - Section 10

Section Types of Income Exemption available to

10(4)(i) Interest on Bonds or securities before 01-06-2002 by CG including premium on redemption of such bonds

Non- Residents

10(4)(ii) Interest on NRE Account PROI as per FEMA

10(4B) Interest on notified savings certificates issued before 01-06-2002 by the CG & subscribed to in convertible foreign exchange

Non-Resident individual, being citizen of India or a person of Indian origin

10(6)(ii) Remuneration received by Foreign Diplomats/ Consulate and their staff (subject to conditions)

Individual not being a citizen of India

10(6)(v) Remuneration received by non-Indian citizen as employee of a foreign enterprise for services rendered by him during his stays in India ifa) Foreign enterprise is not engaged in any

trade or business in India


Section Particulars Exemption available to

b) His stay in India does not exceed in aggregate a period of 90 days in such previous year

c) Such remuneration is not liable to be deducted from the income of employer chargeable under this act

10(6)(viii) Salary received by Non-resident for services rendered in connection with his employment on foreign ship if his stay in India does not exceed 90 days in the previous year

Non-resident salaried employee, who is not an Indian citizen

10(6)(xi) Remuneration received by an individual, who is not a citizen of India, as an employee of the Govt of a foreign state during his stay in India in connection with his training in any Govt office/Statutory Undertaking etc

Salaried Employee who is not an Indian citizen

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Section Type of Income Exemption available to

10(15)(iid) Interest on Bonds issued(NRI Bonds by SBI) Individual being aa) NRI or nominee or

survivor of NRIb) Individuals to whom

bonds gifted by NRI10(15)(iv) (fa)

Interest on foreign currency deposit kept with Scheduled bank FCNR(B) Account

Non- Resident

10(15)(viii) Interest on deposit made on or after 01.04.2015 in an offshore banking unit.

Non- resident

10(34)/(35) Dividend received from Indian companies and any income from specified mutual funds

Non- resident

10(34A) Buy back of shares of unlisted Indian company provided additional tax paid u/s 115QA

Non- resident

Salary

• Section 9(1)(ii) - Salary earned in India Salary payable for services rendered in India; and The rest period or leave period which is preceded and

succeeded by services rendered in India and forms part of the contract of employment

• The place of accrual of Income is the place where services are rendered

• 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 valueb) 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 acquisitionii. Expenditure incurred wholly and exclusively in

connection with such transfer andiii. 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

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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

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• 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 Governmentv. 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


• 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


• 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.

• 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.

• 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.

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• 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

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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

• DIVIDEND [ARTICLE 10]DTAA Income Tax Act Effect of DTAA1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2) If recipient is the beneficial owner of dividend, the tax so charged shall not exceed –a) 10% if beneficial owner is a company holding at least 25% shares of the companyb) 15% - other cases

As per Section 10(34)/(35), any income by way of dividends referred to in section 115O

Dividend is already exempt in India so no need to refer DTAA.


• INTEREST [ARTICLE 11]DTAA Income Tax Act Effect of DTAA

1) Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2) If Beneficial owner is resident of other contracting state, the tax so charged does not exceed:-a) 10% - Interest on loan granted by bank carrying on a bonafide banking business or by a similar financial institution (including an insurance company)b) 15% - Other cases

Specified rates mentioned in Section 115A.Otherwise tax @ 30%

1)If Indian income tax rate is lower than the rate specified in DTAA then tax will be deducted at the rate specified in Indian income tax.2)Indian income tax rate is higher than DTAA rate then apply DTAA rate


• INTEREST [ARTICLE 11]

DTAA Income Tax Act Effect of DTAA

3) ) If beneficial owner has PE or fixed base in other contracting state in which FTS arise & Interest is also connected with it, then apply ARTICLE 7 or ARTICLE 13 as the case may be


• FEES FOR TECHNICAL SERVICES [ARTICLE12]

DTAA INCOME TAX EFFECT OF DTAA

1) FTS arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.2) If recipient is the beneficial owner, the tax shall not exceed 10%3) If beneficial owner has PE or fixed base in other contracting state in which ARTICLE 13 as the case may be. FTS arise& FTS is also connected with it, then apply ARTICLE 7 or

Section 115A – Tax @ 10%

Tax will be deducted @ 10%


• CAPITAL GAIN [ARTICLE 13]DTAA INCOME TAX EFFECT OF DTAA

Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.

LTCG @ 20% as per Section 112(More than 3 years) STCG @ 30.99%(Within 3 years)

Payer or payee will go to AO for determine the amount chargeable to tax in India.According tax @ 20% will be deducted on the determined amount.If payer or payee both do not go to AO then tax will deducted on whole consideration.No specified rate is mentioned in DTAA so tax will be deducted at the rate specified in Indian Income tax.


• Independent Personal Services [ARTICLE14]DTAA INCOME TAX EFFECT OF DTAA

individual who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that State Exceptions:-1) Fixed base in other contracting state & income attributable to that or2) Stay in other contracting state – 90 days or more in a fiscal year[Please refer DTAA for the definition of Professional service]

Section 115A – TDS @ 10%

Non- Taxable in India(if not covered under exceptions) Taxable in India (if covered under exceptions)Taxable @ 10%


• Dependent Personal services [ARTICLE15]DTAA INCOME TAX EFFECT OF DTAA

1) Salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If employment is exercised, then it may be taxed in other state.

As per Slab rate 1) If Employment is not exercised in India, then it is not taxable in India. 2) If employment is exercised in India & the 3 conditions are satisfied then not taxable in India


• Dependent Personal services [ARTICLE15]DTAA INCOME TAX EFFECT OF DTAA

2) Notwithstanding the paragraph 1, remuneration shall be taxable only in that state if- a) Stay does not exceed 183 days in

other stayb) Employer is not resident of other

statec) Remuneration is not borne by a

PE which the employer has in the other state

3) In Other cases, apply slab rate

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Open house

Questions…

CA Sanjay AgrawalParner

Dinesh Mohan & Co.Chartered Accountants

Tel (Direct): +91 124 4604 126Cell: +91 9810116321

email: [email protected]

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Thanks

presentation on investment and taxation of nri - special privileges

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