Taxation of NRI/PIO Under Income Tax Legislature in India

Like FEMA, there are not much specific tax provisions for NRIs/PIOs (except Chapter XII-A) under Income Tax Legislation in India.

For NRIs/PIOs, there is only one chapter (Chapter XII-A) provided in the Income Tax Act, which deals with some NRI/PIO specific tax provisions. Salient features of the chapter are as under:

  • NRI is defined as a non-resident individual who is citizen of India. NRI includes PIO. PIO is a non-resident individual who himself or his parents are born in undivided India.
  • This chapter provides for special lower rate taxation wrt investment income as well long term capital gains in relation to specified assets.
  • Benefit of this chapter is available if NRIs have acquired the specified assets out of convertible foreign exchange.
  • Specified assets are Security issued by Central Government, or Shares/Debentures/Deposits of Indian company.
  • Special lower rate of tax shall be applicable as 10% on long term capital gains and 20% on other income (i.e. interest or dividend income).
  • No need of filing ITR, if income consists of abovementioned income only.
  • This chapter is optional. If this chapter is chosen than other provisions of the Income Tax Act shall not be applicable.

In general, the legislation provides for taxation of income on the basis of Residential Status. The same gets applied for NRIs and PIOs as well. Hence, being a Non-Resident (NR) or Not Ordinary Resident (NOR) (or sometimes Ordinary Resident ‘OR’), NRIs and PIOs can be defined as NR or NOR (or OR) and accordingly tax also gets levied. Consequently, in case of NRIs/PIOs as well the taxability of income needs to be understood from combined study of:

  • Residential Status
  • Source of Income