Investment income info for NRIs

Special Provisions relating to certain income of non-resident Indian citizen and foreign nationals of Indian origin

The salient features of the special provisions are as under :

1. The income derived by non-resident Indian from any foreign exchange asset is called "Investment income". For this purpose, "foreign exchange assets" means any specified asset acquired or purchased with, or subscribed to in, convertible foreign exchange". The assets so specified under section 115-C (f) are :
   1. shares in an Indian company;
   2. debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956;
   3. deposits with an Indian company which is not a private company as defined in the companies Act, 1956;
   4. securities of the Central Government; and
   5. such other assets as may be notified by the Central Government.
2. In computing the " investment income" of a non-resident Indian, no deduction will be allowed:
   1. in respect of any expenditure or allowance under any provision of the Income-tax Act, and
   2. in respect of deductions permissible under Income Tax Act.

      In computing income chargeable under the head "Capital gains" in respect of shares in, or debentures of, an Indian company, the provisions relating to "adjusted cost" will not apply.

      However, where the non-resident Indian elects to furnish return of income to the Assessing Officer for any assessment year, the deductions permissible under the provisions of Income-tax Act will be allowed for that year.

   3. Where the total income of a non-resident Indian consists only of "investment income" , such income shall be charged to tax at a flat rate of 20% by way of income-tax . The recent amendment provides that the long term capital gains arising from the transfer of foreign exchange assets shall be taxed at a concessional rate of 10%.

      The Act provides a separate method of computation of capital gains (whether short-term or long-term) arising from transfer of shares or debentures of an Indian company held by a non-resident Indian. The cost of acquisition, expenditure incurred in connection with such transfer and the full value of consideration received or accruing as a result of such transfer should be converted into the same foreign currency as was initially utilised for the purchase of the said shares or debentures. The capital gains should be computed in that foreign currency and then such gains should be reconverted into Indian currency. This manner of computation of capital gains will be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares or debentures of, an Indian company.

   4. The income from foreign exchange assets (called investment income) and long-term capital gains arising on transfer of any such asset will constitute a separate block of income and charged to income-tax at a flat rate of 10% by way of income-tax. If the non-resident Indian has any other income in India, such other income will constitute as an altogether separate block of income and charged to tax as if such other income were the total income. The aggregate of income-tax so calculated in respect of the said two blocks of income will be the tax payable for the relevant assessment year

   5. The long-term capital gains arising from the transfer of any foreign exchange asset will be exempt from tax to the extent the net proceeds realised on transfer are re-invested or re-deposited within six months after the date of such transfer in any specified assets However, where the new asset is transferred or converted (otherwise than by transfer) into money within a period of three years of its acquisition, the capital gains arising from the transfer of the original asset which has been exempted from tax shall be deemed to be the long-term capital gains of the previous year in which the new asset is transferred or converted into money

   6. A non-resident Indian has the option to claim that in respect to any particular assessment year the special provisions relating to taxation of "investment income " and "long-term capital gains" under which the tax on such income is to be charged at a flat rate should not apply to him. Such option can be exercised by furnishing his return of income for that assessment year u/s. 139 declaring therein that the flat rate should not apply to him. In cases where such option is exercised in respect of any assessment year, the whole of the total income of that assessment year will be charged to tax under the general provisions of the Income-tax Act

   7. A non-resident Indian who becomes a resident in any subsequent year has the option to claim that the special provisions of Chapter XII-A shall continue to apply to him in relation to income derived from foreign exchange asset ( other than shares in Indian companies ) for that assessment year and for every subsequent assessment year until the transfer or conversion of such assets into money. Such option can be exercised by furnishing a declaration in writing to that effect along with his return of income for that assessment year

   8. A non-resident Indian having only investment income or income by way of long-term capital gains arising from the transfer of any foreign exchange asset or both need not file the return of his income if the tax deductible from such income has been correctly deducted at source. However, it is permissible for him to opt to submit the return of income and claim the refund due to him.

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