There are various reasons why people from India decide to migrate to different countries like the USA, UK, Canada, Australia, Germany and Gulf Countries, including higher education, better job opportunities, better quality of life, better rates of taxation etc.
While many young people seek to emigrate to a foreign country for the purpose of higher education and securing job opportunities, many High Net-worth Individuals (HNIs) migrate overseas with a road to citizenship by investment, golden visa, permanent residency through investment etc.
Introduction
Whatever the reason may be for migrating out of India, one must be aware of changes in his rights and obligations under the Income Tax Act and other rights and obligations pertaining to holding bank accounts in India, limits of remittance of funds, carrying out business in India while not being the resident of India, making investments in Indian and holding of the assets in India, etc. In this part I, we deal with rights and obligations of Non-residents under Income Tax Act. In part II (at https://rdlawchambers.com/research-articles/), we discuss about the rights and Restrictions of the non-residents in terms of The Holding of Assets in India, Holding of Bank Accounts, Remittance of Funds etc.
Taxability of Income in India for residents of India and for persons Not residents in India
Taxation of an individual under the Income Tax Act, 1961, is determined based on individuals’ residence India, as also based on the income deemed to be received in India, and income deemed to accrue or arise in India. Provisions relating to rules of residency in India and which income will be deemed to be accrued, received or arisen in India are contained in Section 4, 5, 6, 7, and 9 of the Income Tax Act, 1961.
A person who is a resident of India is taxable on his global income in India, i.e., (i) on the income which is received or is deemed to be received in India, (ii) which accrues or arises or is deemed to accrue or arise in India and also on (iii) the income that accrues or arises to him outside India.
A person who is non-resident in terms of the Income Tax Act is taxed on the first two categories of income. But such a person’s income accruing or arising to him out of India is not taxable under the Income Tax Act.
In terms of Section 6 of the Income Tax Act, an individual is said to have been a resident of India in the previous year if has been in India in that year for a period or periods of 182 days or more or he has, within 4 years preceding the previous year, been in India for a period of 365 days or more along with him being in India for a period of 60 days or more in the previous year. There are various other exceptions and specific circumstances for the determination of Residential Status under Section 6, which may apply to an individual. However, for the purpose of this article, we are keeping things simple by not dealing with such exceptions.
Obligations of a person Non-resident in India under Income Tax Act
Informing the Tax Department
The individual migrating out of India must inform the income tax department and must take out necessary procedure/application for transferring his PAN number from the jurisdiction of the assessing officer in the domestic taxation ward to an assessing officer in the international taxation ward.
Filing Income Tax Return
On migration out of India, an individual will qualify as Non-resident in terms of rules explained above. However, even being a non-resident in India, an individual is required to file an income tax return if his taxable income exceeds the exemption limit of INR 2,50,000. For a calculation of this limit, income accruing or arising to him outside India during the previous year, it is not taken into consideration.
What will be the tax deducted at source for the income of the non-resident through different sources?
A person having migrated out of India is likely to continue having sources of Income in India e.g. rental income, dividend income and many other types as stated below. The TDS rates applying to such person may be higher as compared to TDS rates applying to a resident of India.
In terms of section 195 of the Income Tax Act, any person responsible for paying a non-resident, any interest or any other sum chargeable under the provisions of the Income Tax Act shall, at the time of credit of such income to the account of the non-resident or at the time of payment thereof in cash, whichever is earlier, deduct income-tax thereon at the rates applicable.
For finding the applicable rate of deduction, specific sections under Income Tax Act, 1961 relating to rental income, capital gains and other types of income will be required to be looked into.
While not dealing with applicable rates section-wise, we seek to give a summary of the different types of income and the rates of TDS for payments to be made to an NRI or a non-resident, as under: –
| Income category | TDS Rate |
| Long Term Capital Gains(LTCG) from sale of immovable Property | 20% |
| Short Term Capital Gains(STCG) from sale of an Immovable Property | 30% |
| Rental income through renting of an immovable property | 30% |
| LTCG from sale of listed equity oriented Mutual fund units | 10% |
| STCG from sale of listed equity oriented Mutual fund units | 15% |
| Income from royalty | 10% |
| Fees for Technical Services | 10% |
| LTCG through sale of Unlisted shares | 10% |
| STCG through sale of unlisted shares | 30% |
| LTCG from sale of units other than equity oriented Mutual fund | 20% |
| STCG from sale of units other than equity oriented mutual fund | 30% |
| Dividend Income | 20% |
| Any other Income | 30% |
When a Non-resident is eligible for the benefits of a double taxation avoidance agreement between India and the country of his residence, the rates of taxation will be the rates prescribed in the DTAA and not the rates as prescribed under Income Tax Act as detailed above.
Application by payor for deducting tax not on the whole but only a part of sum being paid
The payer of the non-resident, if he considers that the whole of the sum would not be income chargeable to tax for the non-resident, he can make an application under section 195(2) of the Income Tax Act, to the assessing officer for determination of the appropriate portion of the sum so chargeable and upon said determination the tax will be deducted only on the proportion of the sum which is so chargeable.
Application by the Non-resident payee for reduced rate of TDS
Non-resident payee as well can make an application to the assessing officer for deduction of the tax at the lower rates based on the fact that his total taxable income does not justify the deduction of income tax at prescribed rates and any lower rates of taxation should be applicable. Such application could be made by the non-resident payee under section 197 of the Income Tax Act.
Applicable Exchange Rate for TDS
The exchange rate for the purpose of deduction of the tax to be deducted at source will be taken to be the rate of exchange of the Reserve Bank of India on the day on which the TDS is required to be deducted.
In part II of this series, we shall discuss about the rights And Restrictions in terms of The Holding of Assets in India, Holding of Bank Accounts, Remittance of Funds etc. You can find this part II as also our research and analysis on other important topics such as taxability of different types of income in India, contesting a tax litigation, tax notice and strategies and on various topics pertaining to commercial litigation, contracts, oil and gas, intellectual property rights and arbitration in India at https://rdlawchambers.com/research-articles/
*The content of this article is intended to provide general information. No reader or user should act or refrain from acting based on the information written above without first seeking legal advice from a qualified law practitioner.