Income Tax

FEMA/RBI Regulations

 

An Indian abroad is popularly known as Non-Resident Indian (NRI). The NRI status is legally defined under the Foreign Exchange Management Act, 1999 and the Income Tax Act, 1961 for applicability of respective laws.

A. Wealth tax is a tax which is charged on the “Net Wealth”.

A. Net Wealth is the aggregate value, computed under the provisions of the Wealth Tax Act, 1957, of all assets (including deemed assets), belonging to the assessee on the valuation date, MINUS the aggregate value of all debts owed by the assessee on the valuation date which have been taken in relation to the assets attracting wealth tax.

A. All assets other than cash shall be valued as per the provision laid down in Schedule III of the Wealth Tax Act.

A. Wealth tax shall be charged for every assessment year in respect of the Net Wealth as on the corresponding valuation date. For example, for assessment year 2013-14, the valuation date is March 31, 2013. Due date for filing of Wealth Tax Return will correspond to the date of Income Tax Return of the concerned assesse.

A. Every Individual, Hindu Undivided Family and Company is liable to pay wealth tax.

A. Following are not liable to pay net wealth on net wealth:

  • Company registered u/s 25 of the Companies Act, 1956
  • Co-operative Society
  • Social Club
  • Political Party
  • Mutual Fund specified in section 10(23D) of the Income Tax Act, 1961.
  • Reserve Bank of India

A. Wealth tax shall be charged at the rate of 1%.

A. Wealth Tax is charged if Net Wealth as on valuation date exceeds Rs 30 lakh. Hence, Net Wealth upto Rs 30 Lac is exempt from wealth tax.

A. Following assets are chargeable to wealth tax:

  • Buildings or land appurtenant thereto (hereinafter referred to as “house”)
  • Motor Cars
  • Yachts, boats and aircrafts
  • Jewellery, bullion, etc.
  • Urban land
  • Cash in hand

A. Wealth tax is not levied on productive assets; hence investments in shares, mutual funds, bank balance etc are not chargeable to wealth tax.

A. Exemption is available for one house (or part of house) or a plot of land upto 500 Sq Meter.

A. Assets located outside India and debts incurred in relation to such assets are not to be included in the net wealth of:

  • An Individual who is Non-resident (NR) or Resident but Not Ordinarily resident (RNOR) or not a citizen of India (Foreign Citizen).
  •  HUF which is Non-resident or resident but not ordinarily resident
  • Company which is Non-resident

A. As per Wealth Tax Act, if an NRI returns back to India, then he will be eligible for exemption from Wealth Tax in relation to assets purchased out of money brought into India by that NRI. Exemption will be available for 7 years.

A. Yes. Trust is assessable as an Individual and is therefore liable to pay wealth tax.

Ans: It is a tax imposed by the Government of India on any person who earns income in India. This tax is levied on the strength of an Act called Income tax Act which was passed by the Parliament of India.

Ans: Income earned in India is not limited to income earned within the geographical limits or boundaries of the country. Certain incomes are also deemed to have been earned in India although they may have been earned outside the country.

Ans: Any Individual or group of Individual or artificial bodies who/which have earned income during the previous years are required to pay Income tax on it. The IT Act recognizes the earners of income under seven [7] categories. Each category is called a Status. These are Individuals, Hindu Undivided Family [HUF], Association of Persons [AOP], Body of individuals [BOI], Firms, Companies, Local authority, Artificial juridical person.

Ans: No, The Income tax Act applies to all persons who earn income in India. Whether they are resident or non-resident.

Ans: If an individual stays in India for 182 days or more in a year, he is treated as resident in that year regardless of his citizenship. If the stay is less than 182 days he is a non-resident.

Ans: In case of resident individuals and companies, their global income is taxable in India. However non-residents have to pay tax only on the income earned in India or from a source/activity in India.

Ans: The word Income has a very broad and inclusive meaning. In case of a salaried person, all that is received from an employer in cash, kind or as a facility is considered as income. For a businessman, his net profits will constitute income. Income may also flow from investments in the form of Interest, Dividend, and Commission etc. Infect the Income Tax Act does not differentiate between legal and illegal income for purpose of taxation. Under the Act, all incomes earned by persons are classified into 5 different heads, such as:

  • Income from Salary
  • Income from House property
  • Income from Business or Profession
  • Income from capital gains
  • Income from other sources

Ans: No. Receipts can be classified into two kinds. A) Revenue receipt B) Capital receipt.The general rule under the Income tax Act is that, all revenue receipt are taxable unless a receipt is specifically exempted and all capital receipts are exempt from taxation unless there is a provision to tax it. Gifts and loans etc are in the nature of capital receipts not attracting tax.

Ans: No. The dividend declared by Indian companies is not taxable in the hands of the shareholders because tax on distributed profits have already been borne by the company.

Ans: For every source of income you have to maintain proof of earning and the records specified under the IT Act. In case, no such records have been laid down, you should maintain reasonable level of records with which you can support the claim of income.

Ans: Generally the tax on income crystallizes only on completion of the previous year. However for ease of collection and regularity of flow of funds to the Government for its various activities, the Income tax Act has laid down payment of taxes in advance during the year of earning itself. Taxes may also be collected on your behalf during the previous year itself through TDS and TCS. If at the time of filing of return you find that you have some balance tax to be paid after taking into account your advance tax, TDS & TCS, the short fall is to be deposited as Self Assessment Tax.

Ans: You must first register your PAN by logging into the online service called view tax credit in the NSDL website [http://www.tin-nsdl.com]. Thereafter your PAN registration must be authorized by visiting the nearest TIN [Tax Information Network] facilitation center of NSDL or getting their representative to call upon you. These are paid services.

Ans: For payments deposited by you into the bank you will have to contact your bankers if the credit has not been given even after three days. In case of TDS or TCS you will have to contact the concerned deductor /collector after the due date for filing the quarterly TDS/TCS return by them is over.

Ans: The tax can be reduced by making investment in approved schemes and also by making donations to approved charitable institutions.

Ans: It is a prescribed form through which the particulars of income earned by a person in a financial year and taxes paid on such income is communicated to the Income tax department after the end of the Financial year. Different forms are prescribed for filing of returns for different Status and Nature of income.

Ans: You can authorize any person by way of a Power of Attorney to file your return. A copy of the Power of Attorney should be enclosed with the return.

Ans: The due dates are as follows:


Companies & their Directors

30th September

Other business entities, other than companies, iftheir accounts are auditable & their working partners 30th September
In all other case 31st July

Ans: A PAN number has been made compulsory for every transaction with the Income Tax department. It is also mandatory for numerous other financial transactions such as opening of bank accounts, availing institutional financial credits, purchase of high-end consumer item, foreign travel, transaction of immovable properties, dealing in securities etc. A PAN card is a valuable means of identification accepted by all government andnon-government institutions in the country.

Ans: With your PAN you can continue to transact with the Income Tax department. However, in respect of other agencies you may encounter constraints without a PAN card since it doubles as a photo identity card.

Ans: You may retain any one of the numbers and surrender the other through a letter addressed to your jurisdictional Assessing Officer.

Ans: Yes. It is illegal to have two PANs and the penalty for such offence is Rs.10,000/-

Ans: It is advisable to retain only one PAN, preferably the one used for Income Tax purpose and surrender the other number immediately. The institutions where the latter number has been quoted should be informed of the correct PAN.

Ans: No. Return is to be filed only if you have taxable income.

  • 1.) When and how one is treated as NRI under the Income-tax Act,1961?
  • 2.) In respect of Capital Gains under the Income-tax Act,1961 one is not liable to Income-tax if he reinvests in specified assets or if he has capital loss in other assets. Is there any procedure to ensure no deduction of tax from Capital Gains in such a situation.?

 

A. FEMA mandates main functions of RBI as:

  • Control over dealings in foreign exchange by giving general or special permission for dealing in foreign exchange.
  • Prior approval of RBI is required for certain current account transactions as provided in Foreign Exchange Management (Current Account Transactions) Rules, 2000. Restrictions on current account transactions be imposed by Central Government in consultation with RBI by making Rules;
  • Prescribing conditions for capital account transactions;
  • Make regulations for
  • Transfer or issue of foreign security to resident, and Indian security to non-resident,
  • Borrowing and lending in foreign exchange or to a foreign person,
  • Export/import of currency or currency notes,
  • Transfer of immovable property outside India, and
  • Giving guarantee or surety where foreign exchange transaction is involved;
  • Make regulations for realisation of foreign exchange due from export of goods and services;
  • Make regulations for realisation, possession and repatriation of foreign currency or foreign coins, foreign currency accounts, foreign exchange acquired from employment, business, trade, services etc.;
  • Granting authorisation to ‘Authorised Person’ to deal in foreign exchange, and give directions; and
  • To make any other Regulations.

A. As per section 2(v) of FEMA, Person resident in India means a person residing in India for more than 182 days during the course of the preceding financial year but does not include

(A) a person who has gone out of India or who stays outside India, in either case

  • for or on taking up employment outside India, or
  • for carrying on outside India a business or vocation outside India, or
  • for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

 (B) a person who has come to or stays in India, in either case, otherwise than

  • for or on taking up employment in India, or
  • for carrying on in India a business or vocation in India, or
  • for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

To be treated as a person resident in India under FEMA, a person has not only to satisfy the
condition of the period of stay (being more than 182 days during the preceding financial year)
but has to also comply with the condition of the purpose/intention of stay.

As per section 2(w) of FEMA, Person resident outside India means a person who is not resident
in India.

A. As per Section 2(j) of FEMA, Current account transaction means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,

  • Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,
  • Payments due as interest on loans and as net income from investments,
  • Remittances for living expenses of parents, spouse and children residing abroad, and
  • Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Further, as per Section 2(e) of FEMA, Capital Account Transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India i.e.

  • Transfer or issue of any foreign security by a person resident in India;
  • Transfer or issue of any security by a person resident outside India;
  • Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
  • Any borrowing or lending in foreign exchange in whatever form or by whatever name called;
  • Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
  • Deposits between persons resident in India and persons resident outside India;
  • Export, import or holding of currency or currency notes;
  • Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
  • Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
  • Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred
  • by a person resident in India and owed to a person resident outside India; or
  • by a person resident outside India

‘Non-resident Indian (NRI)’ means a person resident outside India who is a citizen of India or is a person of Indian origin.
Person of Indian Origin’ means a citizen of any country other than Bangladesh or Pakistan, if

  • he at any time held Indian passport; or
  • he or either of his parents or any of his grand-parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or
  • the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b).

However, the definition of NRI/PIO changes under the different regulation of FEMA. The same can be clarified with the help of below table:

Regulation

Related To

NRI

PIO

(i) FEM (Deposit) Regulations

Bank Accounts

Non-resident Indian (NRI)’ means a person resident outside India who is a citizen of India. Eg Indians working/living abroad, and holding Indian citizenship, will qualify as NRI.

‘PIO’ means a citizen of any country other than Bangladesh or Pakistan, if he satisfies below conditions*

(ii) FEM (Borrowing and Lending In Rupees) Regulations

Loans

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

Setting up Proprietorship or Being Partner in Partnership Firm

PIO’ means a citizen of any country other than Bangladesh or Pakistan or Sri Lanka, if he satisfies below conditions*

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

Foreign Investment in India

 

(v) FEM (Remittance of Assets) Regulations:

 

Non-resident Indian (NRI)’ means a person resident outside India who is a citizen of India.

‘PIO’ means a citizen of any country other than Bangladesh or Pakistan, if he satisfies below conditions*

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

Buy/Sell
Immovable Property In India

 

‘PIO’ means an individual (not being a citizen of 8 countries**) and who also satisfies the below conditions***

 

A.

NRIs/PIOs can open FCNR, NRE and NRO Account in India. The transaction that can take place in each account can be explained with the help of below table:

Description

FCNR Account

NRE Account

NRO Account

Who can Open

NRI/PIO

NRI/PIO

Any person resident outside India

Restriction on opening Account

Individuals/entities of Bangladesh/Pakistan nationality requires approval of RBI

Individuals/entities of Bangladesh/Pakistan nationality requires approval of RBI

Individuals/entities of Bangladesh/Pakistan nationality requires approval of RBI

Joint account of two or more NRIs

Yes

Yes

May be held jointly with residents

Joint account with another person resident in India

Not Permitted

Not Permitted

Permitted

Currency

US Dollar, UK Pounds, Yen, Euro, Canadian dollars and Australian dollars

Indian Rupees

Indian Rupees

Repatriability of Principal Amount

Freely Repatriable

Freely Repatriable

Current income fully repatriable. Upto USD 1 million per year for bona fide purpose permitted.

Repatriability of Interest

Freely Repatriable

Freely Repatriable

Freely Repatriable

Permissible Credits

Remittances in foreign exchanges, transfer from other NRE/FCNR account, refund when permissible payment was made from same account.

Remittances in foreign exchanges, transfer from other NRE/FCNR account, refund when permissible payment was made from same account, current income like rent, dividend, pension, interest etc. subject to TDS and CS certificate.

Remittance from abroad and legitimate dues in India of account holder.

Permissible Debits

All local/foreign payments for permissible transactions on current/capital account

All local/foreign payments for permissible transactions on current/capital account

  • All local payments including permissible investments
  • Remittance anroad of current income in India, net of taxes
  • Remittance of medical expenses and proceed of sale of property up to USD 1 million

Foreign Currency Risks

No risk as the account is denominated in foreign currency

Amount will be repatriated at the exchange rate prevalent on date of repatriation. Hence, if Rupee depreciates, amount repatriable expressed in terms of foreign exchange will be lower.

Permissible amount will be repatriable at the exchange rate prevalent on date of repatriation. Hence, if Rupee depreciates, amount repatriable expressed in terms of foreign exchange will be lower.

A. Repatriation of sale proceeds of residential property purchased by NRI / PIO is permitted to the extent of the amount paid for acquisition of immovable property in foreign exchange received through banking channels. The facility is restricted to not more than two such properties. The balance amount can be credited to the NRO account and can be remitted under USD one million facility

A. NRIs/PIO have the option to credit the current income to their Non-Resident (External) Rupee account, provided the Authorized Dealer bank is satisfied that the credit represents current income of the non-resident account holder and income tax thereon has been deducted / provided for.

A. Authorised Dealer banks have been permitted to issue International Credit Cards to NRIs/PIO, without prior approval of the Reserve Bank. Such transactions may be settled by inward remittance or out of balances held in the cardholder’s FCNR(B)/NRE / NRO accounts.

A. NRE accounts: NRE accounts should be redesignated as resident accounts or the funds held in these accounts may be transferred to the RFC accounts (if the account holder is eligible for maintaining RFC account) at the option of the account holder immediately upon the return of the account holder to India for taking up employment or for carrying on business or vocation or for any other purpose indicating intention to stay in India for an uncertain period. Where the account holder is only on a short visit to India, the account may continue to be treated as NRE account even during his stay in India.
FCNR(B) deposits: When an account holder becomes a person resident in India, deposits may be
allowed to continue till maturity at the contracted rate of interest, if so desired by him. However, except the provisions relating to rate of interest and reserve requirements as applicable to FCNR(B) deposits, for all other purposes such deposits shall be treated as resident deposits from the date of return of the account holder to India. Authorised dealers should convert the FCNR(B) deposits on maturity into resident rupee deposit accounts or RFC account (if the depositor is eligible to open RFC account), at the option of the account holder and interest on the new deposit (rupee account or RFC account) shall be payable at the relevant rates applicable for such deposits.
NRO accounts: NRO accounts may be re-designated as resident rupee accounts on the return to the
account holder to India for taking up employment, or for carrying on business or vocation or for any other purpose indicating his intention to stay in India for an uncertain period. Where the account holder is only on a temporary visit to India, the account should continue to be treated as non-resident during such visit.

A. Yes, an individual resident Indian can borrow sum not exceeding USD 250,000 or its equivalent from his close relatives staying outside India, subject to the conditions that:

  • the minimum maturity period of the loan is one year;
  • the loan is free of interest; and
  • the amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR(B) account of the NRI.

A. Yes, an individual resident can lend money by way of crossed cheque /electronic transfer within the overall limit of USD 200,000 per financial year under the Liberalised Remittance Scheme, to meet the borrower’s personal or business requirements in India, subject to conditions. The loan should be interest free and have a maturity of minimum one year and cannot be remitted outside India.

A. Yes, where an authorised dealer in India has granted loan to a non-resident Indian such loans may also be repaid by resident close relative (relative as defined in Section 6 of the Companies Act, 1956), of the Non-Resident Indian by crediting the borrowers loan account through the bank account of such relative.

A. FDI means investment by non-resident entity/person resident outside India in the capital of the Indian company under Schedule 1 of FEMA 20.

A. Benefits provided to NRIs/PIOs can be further explained in below table:

Particulars

 

 

A. Investment Facilities for NRIs

NRIs may, without limit, purchase on repatriation basis:
● Government dated securities / Treasury bills
● Units of domestic mutual funds;
● Bonds issued by a public sector undertaking (PSU) in India.
● Non-convertible debentures of a company incorporated in India.
● Perpetual debt instruments and debt capital instruments issued by banks in India.
● Shares in Public Sector Enterprises being dis-invested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.
● Shares and convertible debentures of Indian companies under the FDI scheme
● Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme.

NRI may, without limit, purchase on non-repatriation basis :
● Government dated securities / Treasury bills
● Units of domestic mutual funds
● Units of Money Market Mutual Funds
● National Plan/Savings Certificates
● Non-convertible debentures of a company incorporated in India
● Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme. ● Exchange traded derivative contracts approved by the SEBI, from time to time, out of INR funds held in India on non-­repatriable basis, subject to the limits prescribed by the SEBI.
Note: NRIs are not permitted to invest in small savings or Public Provident Fund (PPF).

B. Investment in Immovable Property

NRIs/PIOs may acquire immovable property in India other than agricultural land/ plantation property or a farm house out of repatriable and / or non-repatriable funds.


C. Facilities to returning NRIs/PIOs

● Returning NRIs/PIOs may continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned when resident outside India.
● The income and sale proceeds of assets held abroad need not be repatriated.


D. Resident Foreign Currency (RFC) Account

● Returning NRIs /PIOs may open, hold and maintain with an authorised dealer in India a Resident Foreign Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts.
● Proceeds of assets held outside India at the time of return can be credited to RFC account.
● The funds in RFC accounts are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India.
● RFC accounts can be maintained in the form of current or savings or term deposit accounts, where the account holder is an individual and in the form of current or term deposits in all other cases.
RFC accounts are permitted to be held jointly with the resident close relative(s) as defined in the Companies Act, 1956 as joint holder (s) in their RFC bank account on ‘former or survivor basis’. However, such resident Indian close relative, now being made eligible to become joint account holder shall not be eligible to operate the account during the life time of the resident account holder.