Special Provisions For NRIs- Chapter XIIA

Introduction

With the objective to attract investment in India by Non- Resident Indians (NRIs), the Government of India introduced Chapter XII-A of the Income Tax Act in the Finance Act, 1983 which contains special provisions relating to the taxation of non-resident Indians. The chapter levies tax at concessional rates on the gross total income of non-residents which includes either income from investments or income by way of long-term capital gains (LTCGs) or both.

Sections Covered

• Section 115C- Definitions

This section of the chapter defines the terms used in the chapter unless otherwise requires as follows:

• Non-resident Indian (NRI) means an individual being a citizen of India or person of Indian origin who is not a resident. A person is said to be person of Indian origin if he or either of his parents or any of his grandparents was born in undivided India.
• Foreign Exchange Asset means any specified asset which the assessee has acquired or purchased or subscribed to in convertible foreign exchange.
• Convertible Foreign Exchange means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 and any rules made thereunder.
• Investment Income means any income derived from a foreign exchange asset i.e. dividend and interest income from a foreign exchange asset.
• Long Term Capital Gains (LTCGs) means income chargeable under the head “Capital Gains” relating to a foreign exchange capital asset which is not a short-term capital asset;
• Specified Asset means any of the following assets
  • shares in an Indian company;
  • debentures issued by an Indian company not being a private company;
  • deposits with an Indian company not being a private company;
  • any security of the Central Government;
  • Other assets as notified by the Central Government however, no such asset has yet been notified.

• Section 115D- Special provision for computation of total income of non-residents.

The following provisions are applicable while computing the total income of non-residents Indians:

• Investment Income: In the case of investment income, neither deduction in respect of any expenditure nor chapter VI-A deductions shall be allowed while computing investment income.
• Long Term Capital Gain: While computing income under Long Term Capital Gains, indexation benefit and chapter VI-A deductions shall not be allowed.
• Other Income: If the total income of the NRI consists of any income other than investment income or income by way of LTCG, normal provisions of the Income Tax Act shall be applied.

• Section 115E- Tax on investment income and long-term capital gains.

The section provides the concessional rates of taxes on investment income and long-term capital gains as follows:

• In case of investment income, tax shall be charged at the rate of 20% of such income plus applicable surcharge and cess.
• In case of Long Term Capital Gains, tax shall be charged at the rate of 20% of such income plus applicable surcharge and cess.
• In the case of Other Income, normal tax provisions shall prevail along with applicable surcharge and cess.

Summary: Section 115D and Section 115E

Note– No indexation benefit while computing LTCG and tax rates mentioned above shall be increased by applicable surcharge and cess.

• Section 115F- Capital gains on transfer of foreign exchange assets not to be charged in certain cases.

The section states that the income by way of long-term capital gains from the transfer of foreign exchange assets of a NRI shall be exempt provided that the following conditions are fulfilled:

1. The asset transferred must be a long-term capital asset;
2. Net consideration must be invested in certain specified assets;
3. Investment to be made within 6 months of such transfer;
4. If only a portion of the net consideration is reinvested, then the proportionate exemption is allowed;
5. New asset must be retained for at least three years.

Computation of Exemption = LTCG*Cost of new asset/Net Consideration

Note: If the new asset is transferred or converted into money before the lock-in period of three years ends, then LTCG exempted earlier shall be taxable as LTCG in the year of such transfer.

• Section 115G- Return of income not to be filed in certain cases.

Section 115G provides that a NRI shall not be required to file return of income under section 139(1) if-

• His total income includes only investment income or LTCG or both and
• TDS has been deducted on such income.

• Section 115H- Benefit under Chapter to be available in certain cases even after the assessee becomes resident.

According to Section 115H, when a NRI becomes a resident in India, he can file a declaration along with his return of income for the assessment year in which he becomes the resident that he wants to be governed by the provisions of this chapter. The benefit is applicable for investment income derived from foreign exchange assets only till the time it is transferred or converted into money.

• Section 115I- Chapter not to apply if the assessee so chooses.

A non-resident Indian may opt not to be governed by the provisions of this Chapter for any assessment year by furnishing a written declaration to the Assessing Officer along with his return of income for that assessment year under section 139(1). If he does so, his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act.

Illustrations

Illustration 1: Mr. Sharma, a non-resident Indian acquired 50000 equity shares on 1.4.2015 at INR 10 per share by utilizing foreign currency. These shares are sold on 30.3.2022 for INR 25 per share. INR 1 per share is paid on the sale of these shares. Analyze the tax implications of Case 1: He purchased 120000 preference shares at INR 10 per share on 31.3.2022.

Case 2: He purchased 100000 preference shares at INR 10 per share on 15.05.2022.

Solution:

Note1: The benefit of indexation is not available under chapter XII-A of the Income tax act.

Note2: Case 1: Mr. Sharma is entitled to full exemption from capital gains u/s 115F as he has invested the entire net consideration of Rs 12,00,000 for investment in new shares.

Case 2: : Computation of exemption u/s 115F

= Capital Gains*Cost of the new asset purchased/Net Consideration

= 700000/12,00,000*10,00,000 = INR 5,83,333.

Illustration 2: Ms. Aditi, a non-resident Indian has investment income from specified assets of INR 5,00,000, income by way of LTCG from transfer shares of Indian Company of INR 2,50,000 (Sales proceeds- INR 8,00,000; sold on 1.2.2022), and Other Income of INR 15,00,000 by utilizing foreign currency. She has invested INR 150000 in the Public Provident Fund and incurred an expenditure of INR 50000 for earning investment income. Analyze tax implications in hands of Ms. Aditi if she opts for Chapter XII-A provisions for AY 2022-23.

Further, compute tax liability of Ms. Aditi if she invests INR 4,00,000 in debentures of a Public Limited Indian Company on 31.3.2022.

Solution:

Below is the computation of total income and tax liability of Ms. Aditi in following cases:

Case1: Net Consideration from LTCG is not further invested in specified assets.

Case2: Net Consideration from LTCG is invested in specified assets.

Note1: No deduction for any expenditure incurred in respect of investment income is allowed according to Chapter XII-A of the Income Tax Act.

Note2: The benefit of indexation is not available under chapter XII-A of the Income Tax Act.

Note3: Chapter VI-A deductions are not allowed in respect of LTCG and investment income. However the same is allowed in respect of Other income.

Note 4: Exemption u/s 115F is available in Case 2 since Ms. Aditi has invested LTCG considerations within 6 months from date of transfer.

Computation of exemption u/s 115F

= (Capital Gains * Cost of new asset purchased/Net Consideration)

=2,50,000*4,00,000/8,00,000=INR 1,25,000