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Tax Exemption for NRIs/ Overseas Indians

Chapters VII to X of the Income Tax Act list the exemptions granted to non-resident Indians on their income in India.

Calculating the NRI income
To simplify the calculation of the net income of a non-resident from his gross receipts in India, the law provides for taxation of the income of the non-resident on 'Gross income basis', which means that the tax liability is determined on the basis of gross receipts without going into the question of expenses incurred in earning those receipts. Such 'Gross receipt basis' taxation operates in two ways:

By laying down the rate of tax to be applied on gross receipts
The rates are determined at a figure lower than the general rate of tax applicable to total income as it takes account of the possible expenses in earning the income. Such provisions are:-

i. Tax on dividend (other than dividend from domestic companies), interest, royalty, fee for technical services and income from Units
ii. Tax on income and capital gain in respect thereto from units purchased in foreign currency by off shore funds
iii. Income and capital gain in respect thereto from Bonds and shares purchased in foreign currency or acquired in resulting or amalgamated company as a result of de-merger or amalgamation
iv. Tax on income other than dividend of Foreign Institutional Investors from Securities & Capital gains arising from their transfer
v. Income of sportsman or Sports association

By laying down a percentage to be applied on gross receipts to determine the net income
The tax is then calculated at the normal rate of tax on such presumptive income. Such provisions are:-
i. Profits of shipping business
ii. Profits of business of providing services etc. to be used in the business of prospecting, exploration or production of mineral oils
iii. Profits from operation of aircraft
iv. Profit from business of civil construction etc. in certain turnkey power projects

The scheme of Advance Ruling has been introduced in Chapter XIX-B in the Income Tax Act, which enables non-residents entering into a transaction with residents or non-residents to obtain, in advance, a binding ruling from the Authority for Advance Rulings on issues which could arise in determining their tax liabilities.

Such Advance ruling helps non-residents in planning their income tax affairs well in advance, apart from avoiding tedious and expensive litigation.

Tax Exemptions from Property Investments
Income from House Property
Income from House Property is the annual value of House Property, of which the assessee is the owner. House property consists of buildings or land. The land may be in the form of a compound housing the building. Any rent received from standalone vacant plot is not assessable as "Income from House Property".

One self-occupied House Property or part of such property owned by an individual and used for personal use, but not let out, in the previous year, will not be taxable.

From the assessment year 2002-03, Income from House property is classified as: Let out Property (L.O.P.), and Self Occupied Property (S.O.P.)

The following two deductions are available from the income under the head "Income from house property" under the Income tax Act, 1961.

Standard Deduction: 30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.

Interest on Borrowed capital: Interest on borrowed capital is permitted as deduction if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.
When more than one property is occupied for own residential purposes: Where the person has occupied more than one house for his own residential purposes, only one house (according to his choice) is treated, as self-occupied and all other houses will be "deemed to be let out".

Tax Exemptions from Other Assets and Investments
Dividend Income All dividends, received from domestic companies are exempt from tax under the I.T. Act, 1961. Income received in respect of units of specified Mutual Funds and the Unit Trust of India is exempt from tax.

Interest Income
Any income arising on a deposit with a Bank or any financial institution will be treated as Interest income and will be chargeable under the head "Income from other Sources". Interest income may be treated as investment income and chargeable at a special rate under certain specified situations.

Capital gains
A 'gain' or the excess of 'sale price over' cost that arises on transfer of a capital asset is taxed under the head 'Capital Gains'.

  • A capital asset held for 36 months or more (12 months or more for certain shares or units) is treated as a long-term capital asset, and gain resulting from its transfer is called long-term capital gain subject to tax at the rate of 20% (10% in certain cases) plus surcharge, if applicable, and education cess.
  • Long-term capital gains arising on sale of equity shares in company or units of equity oriented fund are not chargeable to tax Short-term Capital gains arising on sale of equity shares in company or units of equity-oriented funds are chargeable to tax @ 10%.
  • Capital gain amount received on the transfer of bonds or Global Depository Receipts made outside India by a non-resident to another non resident will not be liable to Capital gain tax in India.
  • Short-term Capital gains arising on sale of equity shares in company or units of equity-oriented funds are chargeable to tax @ 10%.

Any sum of money received, in excess of Rs.25, 000/- from a person would be taxed in the hands of the recipient. However, gifts received on the occasion of the marriage or from a relative or under a will or by way of inheritance or in contemplation of death of the payer, would not be subject to tax.

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