NRI Investment Tax Rules

Investment & Taxation of NRI –
SPECIAL PRIVILEGES
Gurgaon Branch of NIRC of ICAI
21
st
May, 2016 by CA Sanjay Agrawal

WHAT SHOULD BE OUR TAKE AWAYS?
• Meaning of NRI, PIO, OCI, PRI, PROI under
FEMA?
• Investment privileges available to NRI in India?
• FAQs relating to Investment under regulations
provided by RBI?
• Meaning of NRI, NR, NOR, ROR under Income
tax Act?
• Special privileges under Income Tax Act for
NRI?
• Taxability of NRI under different heads of
income?
• Reliefs available under DTAA?
2

3
Legal Framework of FEMA Governing
NRI Investment

Legal Framework of FEMA
• FERA 1973 was replaced with FEMA 1999…
• FEMA contains 7 Chapters into 49 Sections..
• 5 set of rules made by Ministry s-46
(Delegated Legislation)
• 23 set of regulations made by RBI s-47
(Subordinate Legislation)
• Master circular issued by RBI Every Year…
• FDI Policy is issued by DIPP.
• Notification & circular issue by RBI.
• Enforcement Directorate ED
4

Legal Framework of FEMA….
NRI Investment is governed by various regulation
issued by RBI, the relevant regulation for our
discussions today are:
• FEM (Transfer or Issue of Security by a Person
Resident Outside India) Regulations;
• FEM (Investment in Firm or Proprietary Concern
in India) Regulations;
• FEM (Deposit) Regulations;
• FEM (Acquisition and Transfer of Immovable
Property In India) Regulations;
• FEM (Remittance of Assets) Regulations;
• FEM (Borrowing and Lending In Rupees)
Regulations.
5

WHAT SHOULD BE OUR TAKE AWAYS?
• Meaning of NRI, PIO, OCI, PRI, PROI under
FEMA?
– Who is NRI?
– Who is PIO?
– Who is OCI?
– Who is PRI?
– Who is PROI?

Definitions under FEMA
Non Resident Indian (NRI)
REGULATIONS DEFINITION
FEM (Deposit) Regulations NRI means a person resident
outside India who is a citizen of
India
or
is a person of Indian origin (PIO)
[PIO has been replaced by OCI for
Transfer or Issue of Security
Regulation as amended]
FEM (Investment in Firm or Proprietary Concern
in India) Regulations
FEM (Transfer or Issue of Security by a Person
Resident Outside India) Regulations
FEM (Borrowing and Lending In Rupees)
Regulations
FEM (Remittance of Assets) Regulations
NRI means a person resident
outside India who is a citizen of
India
PIO

• Person includes- S-2 (v)
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether
incorporated or not,
(vi) every artificial juridical person, not falling within any of the
preceding sub-clauses, and
(vii) any agency, office or branch owned or controlled by such
person

• Person Resident In India (PRI) S-2 (u)
A person residing in India for more than 182 days during the preceding
financial year.
ExclusionsA person who has gone out of India
or who stays outside India, in either
case
 taking up employment outside
India, or
 carrying on outside India a
business or vocation outside India,
or
 any other purpose, in such
circumstances as would indicate his
intention to stay outside India for an
uncertain period
A person who has come to or stays
in India, in either case, otherwise
than
 taking up employment in India,
or
 carrying on in India a business or
vocation in India, or
circumstances as would indicate his
intention to stay in India for an
uncertain period

Person Resident in India (PRI) Continued.......
b) Any person or body corporate registered or incorporated in
India
c) An office, branch or agency in India owned or controlled by a
person resident outside India
d) An office, branch or agency outside India owned or
controlled by a person resident in India
• Person Resident Outside India (PROI) – It means a person who
is not resident in India. S-2(w)

Person of Indian Origin (PIOs)
FEM (Deposit)
Regulations
PIO means a citizen of any country other than Bangladesh or
Pakistan if
(a) he at any time held Indian passport or
(b) he or either of his parents or any of his grandparents was
a citizen of India or
(c) the person is a spouse of an Indian citizen or a person
referred to in sub-clause (a) or (b)
FEM (Remittance of
Assets) Regulations
FEM (Borrowing and
Lending In Rupees)
Regulations
FEM (Investment in
Firm or Proprietary
Concern in India)
Regulations
PIO means a citizen of any country other than Bangladesh or
Pakistan or Sri Lanka, if
(a) he at any time held Indian passport or
(b) he or either of his parents or any of his grandparents was
a citizen of India or
(c) the person is a spouse of an Indian citizen or a person
referred to in sub-clause (a) or (b)

• Person of Indian Origin (PIOs) Continued………
FEM (Acquisition
and Transfer of
Immovable
Property In India)
Regulations
PIO means an individual (not being a citizen of
Pakistan or Bangladesh or Sri Lanka or
Afghanistan or China or Iran or Nepal or
Bhutan), who
(a) at any time, held Indian passport or
(b) who or either of whose parents or
grandparents was a citizen of India

Definition under Citizenship Act
• Overseas Citizens of India (OCI)
A person of Indian Origin who is foreign national and gets
registered as Overseas Citizen of India Cardholder under Section
7A of the Citizenship Act,1955 as amended w.e.f. January 6, 2015
• Who is eligible for OCI Card?
Following categories of foreign nationals are eligible for
registration as Overseas Citizen of India (OCI) Cardholder:-
1) Who was a citizen of India at the time of, or at any time after
the commencement of the Constitution i.e. 26.01.1950; or
2) who was eligible to become a citizen of India on 26.01.1950;
or
3) who belonged to a territory that became part of India after
15.08.1947; or
4) who is a child or a grandchild or a great grandchild of such a
citizen; or
5) who is a minor child of such persons mentioned above; or

• Who is eligible for OCI Card? Continued….
6) who is a minor child and whose both parents are citizens of
India or one of the parents is a citizen of India; or
7) Spouse of foreign origin of a citizen of India or spouse of
foreign origin of an Overseas Citizen of India Cardholder
registered under section 7A of the Citizenship Act, 1955
and whose marriage has been registered and subsisted for
a continuous period of not less than two years
immediately preceding the presentation of the application.
Note: On January 9, 2015, GOI (MHA) issued notification to
rescind the PIO scheme and provided that all exixting PIO
cardholders registered till January 9, 2015 should be
deemed to be the OCI cardholder.

• Benefits available to OCI
 Multiple Entry, multiple purpose life long visit to visit India
 Exemption from reporting to police authorities for any length to stay in
India
 Parity with NRIs in financial, economic, and educational fields except in
the acquisition of agricultural or plantation properties.
 Parity with Resident Indians in Domestic Affairs
 Parity with Indian National in entry fees for national Parks and Wild Life
Sanctuaries.
 Parity with NRIs in respect of –
 Entry fees for visiting the national monuments, historical sites &
museums in India
 Pursuing the professions of doctors, dentists, nurses and
pharmacists, advocates & chartered accountants.
 Appearance for All India Pre-Medical test
 Inter Country Adoption

Definitions under Income Tax Act
• Person includes-
(i) an individual,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the
preceding sub-clauses

• Person Resident In India
An Individual is said to be resident in India in any Previous year if he
satisfied any condition –
Explanation1
In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year as a
crew member of an Indian ship, or for the purposes of employment
outside India, the provisions of condition 2 shall apply in relation to
that year as if for the 60 days occurring therein,182 days has been
substituted.
In India for a period/periods of 182
days or more in that previous year
OR
Having within 4 years immediately
preceding that year been in India for 365
or more days and is in India for a 60 or
more days in that year.
CONDITION 1 CONDITION 2

• Person Resident in India Continued…….
(b) being a citizen of India or person of Indian Origin comes to
India for visit purpose in any previous year the provisions of
condition 2 shall apply in relation to that year as if for the
words “60 days", occurring therein, the words “182 days" had
been substituted.

• Non-Resident means a person who is not a "resident" ,and for
the purposes of sections 92, 93 and 168, includes a person
who is not ordinarily resident in India.
• Non-Resident Indian – As per Section 115C(e) “NRI means an
individual, being a citizen of India or a person of Indian origin
who is not a "resident".
Explanation.—A person shall be deemed to be of Indian origin
if he, or either of his parents or any of his grand-parents, was
born in undivided India;

Comparison under FEMA & IT Act
Particulars FEMA Act Income Tax Act
Person It includes-
(i) an individual,
(iii) a company,
(iv) a firm,
(v) an association of persons or a
body of individuals, whether
(vi) every artificial juridical
person, not falling within any of
the preceding sub-clauses, and
(vii) any agency, office or branch
owned or controlled by such
person
It includes-
(i) an individual,
(iii) a company,
(iv) a firm,
(v) an association of persons or a
body of individuals, whether
(vi) every artificial juridical
person, not falling within any of
the preceding sub-clauses, and
(vii) a local authority

Comparison under FEMA & IT Act
Particulars FEMA Act Income tax Act
Person
Resident
in India
[PRI]
Person residing in India for more
than 182 days in the preceding
financial year
Exclusions
A person who has gone out of
India or who stays outside India,
in either case
 taking up employment outside
India, or
 carrying on outside India a
business or vocation outside India,
or
circumstances as would indicate
his intention to stay outside India
for an uncertain period.
An individual is said to be resident
in India in any previous year, if
he—
(a) is in India in that year for a
period or periods amounting in all
to 182 or more days ; or
(b) having within the 4 years
preceding that year been in India
for a period or periods amounting
in all to 365 days or more, is in
India for a period or periods
amounting in all to 60 or more in
that year.

Investment Privileges available to NRI
in India
 Deposits in special bank accounts NRO, NRE, FCNR;
 Equity shares both listed and unlisted;
 Bonds and Government Securities;
 Mutual funds;
 Immovable property;
 REITs
 Gold Exchange Traded Funds (GETF)
 Gold Monetization and Sovereign Gold Bond
 Debentures
 National Pension Scheme (Circular 24 dt.
29.10.2015)
 Chit Funds on non repatriation basic; (Circular 107
dt. 11.06.2015)

in India
Modes of Investment in shares & Securities:
 Portfolio Investment Scheme (PIS);
 Foreign Direct Investment (FDI);
 Foreign Venture Capital Investment(SEBI Approved
FVCIs)
 Investment on Non Repatriation basis;
 Other Investments;

in India-General Permission
• On Non Repatriation basis (Schedule 4 of TISPRO
Regulation)
 An NRI, including a company, a trust, and a partnership firm
incorporated outside India and owned and control by NRI, may
acquire and hold equity shares, convertible preference shares,
convertible debenture, warrants or units without any limit.
 An NRI or PIO may contribute to the capital of partnership
firm, a proprietary firm or LLP without any limit.
 Provided the investment is not for prohibited sectors like Nidhi
company, any entity engaged in agriculture/plantation or real
estate business or construction of Farm houses or dealing in
TDRs.
 The sale/maturity shall be credited only to NRO accounts and
which is not to be repatriated abroad.
 Exchange Traded Derivatives approved by SEBI out of Rupee
fund available in India.

in India-Generally Prohibited
• No Capital Investment allowed for:
1. Chit Fund;
2. Nidhi Company;
3. Agriculture or plantation activities;
4. Real estate business or construction of farm
house;
5. Trading of TDRs

TAXATION
 Exemptions of Income - Section 10
 Salary
 House Property
 PGBP
 Capital Gain
 Dividend
 Interest
 Concessional Rate of tax
 Special Provisions relating to certain
incomes of Non-Residents [Chapter XIIA]
 Relief under DTAA
27

Exemptions of Income - Section 10
Section Types of Income Exemption available to
10(4)(i) Interest on Bonds or securities before 01-06-
2002 by CG including premium on redemption
of such bonds
Non- Residents
10(4)(ii) Interest on NRE Account PROI as per FEMA
10(4B) Interest on notified savings certificates issued
before 01-06-2002 by the CG & subscribed to in
convertible foreign exchange
Non-Resident individual,
being citizen of India or
a person of Indian origin
10(6)(ii) Remuneration received by Foreign Diplomats/
Consulate and their staff (subject to conditions)
Individual not being a
citizen of India
10(6)(v) Remuneration received by non-Indian citizen as
employee of a foreign enterprise for services
rendered by him during his stays in India if
a) Foreign enterprise is not engaged in any
trade or business in India

Section Particulars Exemption available to
b) His stay in India does not exceed in
aggregate a period of 90 days in such
previous year
c) Such remuneration is not liable to be
deducted from the income of employer
chargeable under this act
10(6)(viii) Salary received by Non-resident for services
rendered in connection with his employment on
foreign ship if his stay in India does not exceed
90 days in the previous year
Non-resident salaried
employee, who is not
an Indian citizen
10(6)(xi) Remuneration received by an individual, who is
not a citizen of India, as an employee of the
Govt of a foreign state during his stay in India in
connection with his training in any Govt
office/Statutory Undertaking etc
Salaried Employee who
is not an Indian citizen

Section Type of Income Exemption available to
10(15)(iid) Interest on Bonds issued(NRI Bonds by SBI) Individual being a
a) NRI or nominee or
survivor of NRI
b) Individuals to whom
bonds gifted by NRI
10(15)(iv)
(fa)
Interest on foreign currency deposit kept with
Scheduled bank FCNR(B) Account
Non- Resident
10(15)(viii) Interest on deposit made on or after
01.04.2015 in an offshore banking unit.
Non- resident
10(34)/(35) Dividend received from Indian companies
and any income from specified mutual funds
Non- resident
10(34A) Buy back of shares of unlisted Indian
company provided additional tax paid u/s
115QA
Non- resident
30

Salary
• Section 9(1)(ii) - Salary earned in India
 Salary payable for services rendered in India; and
 The rest period or leave period which is preceded and
succeeded by services rendered in India and forms part of
the contract of employment
• The place of accrual of Income is the place where services
are rendered
• Salary will be taxable in India on the basis of services
rendered in India irrespective of Residential status of
employees (except to the extent of short stay exemption)

House Property
• Section 24 – Income shall be computed after making the
following deductions, namely-
a) 30% of the annual value
b) Where the property has been acquired, constructed,
repaired, renewed or reconstructed with borrowed capital
with borrowed capital, the amount of any interest payable
on such capital subject to some conditions.

Business Income
• Non- resident has permanent establishment in India or
performs professional services through a fixed place of
profession situated in India & right, property or contract
in respect of which royalties or fees for technical
services are paid is effectively connected with such
permanent establishment or fixed place of profession
• Section 44DA shall apply. Income shall be computed
after deducting all expenses relating to that income.
• Tax will be levied at the normal rate.

Capital Gain
• Following transactions not regarded as “Transfer” for the
purpose of section 45.
– Any transfer of bonds or GDR referred to in section 115AC,
made outside India by a NRI to another NRI or NR
– Any transfer of a capital assets under a gift or will or an
irrevocable trust*
* Section 56(2)(vii) – Receipt of sum of money specified property
and immovable property, without consideration, more than
INR 50,000 is however taxable in the hands of recipient (certain
exemptions to transfer from any relative, on the occasion of
marriage, under will or by way inheritance, trust etc

Capital Gain
• Section 48 – Mode of Capital gain
 First Proviso to Section 48
An assessee who is non-resident, capital gain arising from the
transfer of shares or debentures in an Indian company shall be
computed by converting
i. the cost of acquisition
ii. Expenditure incurred wholly and exclusively in
connection with such transfer and
iii. the full value of the consideration received or accrued
as a result of transfer
In the same foreign currency as was initially utilised in the
purchase of shares or debentures. The capital gain so
computed in the foreign currency shall be reconverted
into Indian currency.

Dividend
• Section 9(iv) - Dividend Income paid to non-resident by
Indian company is deemed to accrue in India only on the
payment and not on declaration.
• This is in contradistinction to section 8 which refers to a
dividend declared, distributed or paid by a company
• Dividend income in the hands of shareholder is exempt if
the dividend declared by the company is subject to
dividend distribution tax in India

Interest
• Payable by-
(a) the Government; or
(b) a person who is a resident, except where the interest is
payable in respect of any debt incurred, or moneys borrowed
and used for the purposes of a business or profession carried
on by such person outside India or for the purposes of making
or earning any income from any source outside India; or
(c) a person who is a non-resident, where the interest is
payable in respect of any debts incurred, or moneys borrowed
and used, for the purposes of a business or profession carried
on by such person in India or for the purposes of making or
earning any income from any source in India

Concessional Rate
• Section 111A – STCG where transaction is subject to STT to be
taxed @ 15%
• Section 112 – LTCG to be taxed @ 20% [10% in the case of
unlisted shares without indexation]
• Proviso to section 112(1) – Long-term capital gains from
transfer of listed securities or unit or zero coupon bonds to be
taxed @10% of capital gains without indexation benefit
• Section 115A – Interest received from Govt or an Indian
concerned on monies borrowed or debt incurred by such Govt
or Indian concern in foreign currency @ 20% [in the case of
ECB & issue of long term infrastructure bonds @ 5% (Section
194LC)]
• Section 115AC – Interest, Dividend and long term capital-gains
(Without Indexation) earned from bonds and GDR respectively
issued by Indian company to be taxed @10% (no need to file
the income tax return is income is subject to tax)
38

Special Provisions relating to certain
incomes of Non Resident [Ch - XIIA]
• Section 115C - Definitions
• Section 115D – Special Provisions for computation of total
income of non-residents
• Section 115E - Tax on investment income & Long term Capital
gains
• Section 115F – Capital gain on transfer of foreign exchange
assets not to be charged in certain cases
• Section 115G – Return of Income not to be filed in certain
cases
• Section 115H – Benefit under chapter to be available in certain
cases even after assessee becomes resident
• Section 115I – Chapter not to be apply if the assessee so
chooses

• Section 115C
 “Specified Asset" means any of the following assets, namely
:—
i. shares in an Indian company;
ii. debentures issued by an Indian company which is not a
private company
iii. deposits with an Indian company which is not a private
company
iv. any security of the Central Government
v. such other assets as the Central Government may
specify in this behalf by notification
 “Foreign Exchange Asset” means any specified asset which the
assessee has acquired or purchased with or subscribed to in,
convertible foreign exchange
40

• Section 115D
 No deduction of any expenditure or allowance in computing
the investment income
 GTI consists of only Investment income & LTCG then deduction
under Chapter VI-A is not allowed
 Other Income – deduction under chapter VI-A is allowed
• Section 115E
 LTCG on sale of specified assets – 10%
 Any income from Investment or income from LTCG of an asset
other than specified assets – 20%
 Other income – Normal slab rate

• Section 115F - Capital gain tax exemption on sale of long term
foreign exchange assets if the capital gains is reinvested in any
specified assets or any saving certificates specified in Section
10(4B), subject to certain conditions.
• Section 115G - No return is required to be filed if income
consisted of only from LTCG or from investment income or
both; and tax has been deducted at source from such income.
• Section 115H – Benefit under Chapter XII-A can still be
available to NRI who has become resident in India on income
from the specified assets till the date of transfer or conversion
into money of such specified assets, provided such declaration
is to be filed along with the return of income.

• Section 115I - NRI has an option to be governed by the normal
provisions of the Income tax act provided such declaration is to
be filed along with the return of Income
43

Relief under DTAA
• Taxability of Non-Resident is to be examined under the
Income-tax Act,1961 vis-à-vis the Double Taxation
Avoidance Agreement (“DTAA”)
• The Non-Resident can choose between the two,
whichever is more beneficial [Section 90(2)]
• Tax Residency Certificate is must in order to avail Treaty
benefits [Section 90(4)]
44

Relief under DTAA Based on
Singapore-India DTAA
• DIVIDEND [ARTICLE 10]
DTAA Income Tax Act Effect of DTAA
1) Dividends paid by a company
which is a resident of a
Contracting State to a resident of
the other Contracting State may
be taxed in that other State.
2) If recipient is the beneficial
owner of dividend, the tax so
charged shall not exceed –
a) 10% if beneficial owner is a
company holding at least 25%
shares of the company
b) 15% - other cases
As per Section
10(34)/(35), any
income by way of
dividends referred
to in section 115O
Dividend is
already exempt
in India so no
need to refer
DTAA.

• INTEREST [ARTICLE 11]
1) Interest arising in a Contracting State
and paid to a resident of the other
Contracting State may be taxed in that
other State.
2) If Beneficial owner is resident of other
contracting state, the tax so charged does
not exceed:-
a) 10% - Interest on loan granted by bank
carrying on a bonafide banking business
or by a similar financial institution
(including an insurance company)
b) 15% - Other cases
Specified rates
mentioned in
Section 115A.
Otherwise tax
@ 30%
1) If Indian
income tax rate is
lower than the
rate specified in
DTAA then tax will
be deducted at
the rate specified
in Indian income
tax.
2) Indian income
tax rate is higher
than DTAA rate
then apply DTAA
rate

• INTEREST [ARTICLE 11]
3) ) If beneficial owner has PE or
fixed base in other contracting
state in which FTS arise & Interest
is also connected with it, then
apply ARTICLE 7 or ARTICLE 13 as
the case may be

• FEES FOR TECHNICAL SERVICES [ARTICLE12]
DTAA INCOME TAX EFFECT OF DTAA
1) FTS arising in a Contracting State
and paid to a resident of the other
Contracting State may be taxed in
that other State.
2) If recipient is the beneficial owner,
the tax shall not exceed 10%
3) If beneficial owner has PE or fixed
base in other contracting state in
which ARTICLE 13 as the case may
be. FTS arise& FTS is also connected
with it, then apply ARTICLE 7 or
Section 115A – Tax
@ 10%
Tax will be deducted
@ 10%

• CAPITAL GAIN [ARTICLE 13]
Gains derived by a resident of
a Contracting State from the
alienation of immovable
property referred to in Article
6 and situated in the other
Contracting State may be
taxed in that other State.
LTCG @ 20% as per
Section 112
(More than 3 years)
STCG @ 30.99%
(Within 3 years)
Payer or payee will go to AO for
determine the amount
chargeable to tax in India.
According tax @ 20% will be
deducted on the determined
amount.
If payer or payee both do not
go to AO then tax will deducted
on whole consideration.
No specified rate is mentioned
in DTAA so tax will be deducted
at the rate specified in Indian
Income tax.

• Independent Personal Services [ARTICLE14]
individual who is a resident of a
Contracting State from the performance of
professional services or other independent
activities of a similar character shall be
taxable only in that State
Exceptions:-
1) Fixed base in other contracting state &
income attributable to that or
2) Stay in other contracting state – 90 days
or more in a fiscal year
[Please refer DTAA for the definition of
Professional service]
Section 115A
– TDS @ 10%
Non- Taxable in India
(if not covered under
exceptions)
Taxable in India (if covered
under exceptions)
Taxable @ 10%

• Dependent Personal services [ARTICLE15]
1) Salaries, wages and other similar
remuneration derived by a resident of a
Contracting State in respect of an
employment shall be taxable only in that
State unless the employment is exercised
in the other Contracting State. If
employment is exercised, then it may be
taxed in other state.
As per Slab rate 1) If Employment is
not exercised in
India, then it is not
taxable in India.
2) If employment is
exercised in India &
the 3 conditions are
satisfied then not
taxable in India

• Dependent Personal services [ARTICLE15]
2) Notwithstanding the paragraph 1,
remuneration shall be taxable only in
that state if-
a) Stay does not exceed 183 days in
other stay
b) Employer is not resident of other
state
c) Remuneration is not borne by a
PE which the employer has in the
other state
3) In Other cases, apply
slab rate

Open house
53
Questions…
CA Sanjay Agrawal
Parner
Dinesh Mohan & Co.
Chartered Accountants
Tel (Direct): +91 124 4604 126
Cell: +91 9810116321
email: sanjay@charteredaccountantsindia.in

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