The Tax liability of a person under the Income Tax Act depends on the residential status in the financial year (1st April to 31st March) in which the income accrues or arises to him or is received by him.

For income tax purposes the residential status of an individual generally depends on his physical presence or stay in India and not on his nationality or domicile.

• Resident

  An individual is said to be a resident in India in any financial year if he has been in India during that year:

  • for a period of 182 days or more ; or
  • for a period or periods of 60 days or more and has also been in India within the preceding four years for a period or periods of 365 days or more.

  However, the period of 60 days is increased to 182 days in the case of: -

  • a citizen of India or person of Indian origin who has been outside India and comes on a visit;
  • when a citizen of India leaves India for purpose of employment outside India or as a member of a crew of an Indianship.
    
    
• Resident but Not Ordinarily Resident
  
  
  • An individual is said to be 'not ordinarily resident' any financial year if:
    • he has not been resident in India in nine out of ten financial years preceding that financial year; or
    • has not during the seven financial years preceding that year, been in India for a period or periods of 730 days or more.
    An individual would be "not ordinarily resident" if he fulfills either of the above conditions.
  • A Hindu Undivided Family is said to be 'not ordinarily resident in India if its manager is ' not ordinarily resident' in India. For calculating the length of the manager's stay in India periods of stay in India of successive managers of a Hindu Undivided Family have to be added up.

  The status of 'resident but not ordinarily resident' is available only to individual and Hindu Undivided Families.
  
  

• Non Resident

  A person who is not resident in India is a 'non-resident'

EXTENT OF TAX LIABILITY

Based on the residential status of a tax payer and the place where the income is earned, the income that is included in the total income is as under :

RESIDENTIAL STATUS NATURE OF INCOME

• Resident All income whether earned in India or outside India
• Not Ordinarily All incomes: -

  Resident

  • earned in India and
  • all income earned outside India if the same is derived from a business which is controlled in India or from a profession which is set up in India.
• Non-resident All income earned in India

DOUBLE TAXATION AVOIDANCE

Since a resident is liable to pay tax in India on his 'total world income', it is possible that he may have to pay tax on his foreign income in that country also. To avoid such a situation the Government of India has entered into agreements for avoidance of 'double taxation' with different countries.

SPECIAL PROVISIONS APPLICABLE TO NON RESIDENT INDIANS

With a view to attract investment by Non-Resident Indians(NRIs), certain relieves, exemptions and incentives have been provided (Chapter XII A of Income Tax Act).

For Income Tax purposes, a Non-resident Indian has been defined as an individual being a citizen of India or a person of Indian origin who is not a resident. A person is considered to be of Indian Origin if he or either of his parents or his grand parents was born in undivided India.

20% TAX SCHEME

Income from foreign exchange assets (any specified asset which the assessee has acquired or purchased or subscribed to in convertible foreign exchange) comprising of shares/debentures/deposits with Indian companies, Central Government securities or any other notified assets subscribed to or purchased in convertible foreign exchange can be charged at a flat rate of 20%.

No deduction, basic exemptions etc. will be available under the 20% scheme.

LONG TERM CAPITAL GAINS

Long term capital gains on specified foreign exchange assets such as Units/Bonds/Shares and listed securities as specified by the Government held by NRIs are taxable @ 10%.

Minimum holding period for allowing this rate is one year for shares and other securities listed in stock exchanges in India and units of specified mutual funds. For other assets the minimum holding period is 36 months.

If the proceeds are reinvested within six months of such transfer in any specified securities and new assets are retained for 3 years, the proceeds are exempted from payment of Income Tax.

Income from units of UTI are totally exempted from payment of Income Tax.

On short time capital gains, NRIs are liable to pay capital gains tax at the same rate that is applicable to residents i.e. @ 30%.

TAX EXEMPTIONS

Income from following investments made by NRIs out of convertible foreign exchange is totally exempt from income tax.

• Following Bank Accounts :
  NRE, FCNR,
• Units of UTI
• Specified securities, bonds, saving certificates

The above exemptions will cease immediately on the NRI becoming resident.

Where the NRI has income from only foreign exchange assets or income by way of long term capital gains from foreign exchange assets or both, and tax deductible at source from such income has been deducted he is not required to file return of income as otherwise required under the Income Tax Act.

The special provisions in relation to investment income from foreign exchange assets (other than shares of an Indian company)will continue , even after the NRI becomes resident till transfer or conversions of such assets into money, if the NRI so wishes.

WEALTH TAX

Wealth Tax is levied only on non-productive assets like urban land, buildings (except one house property),jewellery, bullion, vehicles, cash over Rs.50,000 etc. Wealth Tax is levied @ 1% over aggregate value of chargeable assets in excess of Rs. 1.5 million.

ADVANCE RULINGS

NRI/OCB desirous of obtaining advance ruling may make an application stating the question on which the ruling is sought.

The question which could be of law or fact should relate to a transaction undertaken or proposed to be undertaken by the applicant.