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Harsh Taxing Provisions & Tinkering with Residential Status

under the Code are bound to irk the Global Indian Community!

Amrish Amin, a Non Resident Indian (NRI) settled in U.K. earns interest income of Rs.3 lakhs on his Non Resident Ordinary (NRO) Account Bank Deposit in India in the current FY 2010-11. Enjoying his personal exemption limit of Rs.1,60,000 and the eligible deduction of Rs.1,00,000 under Section 80C, Amin is comfortable paying income-tax of Rs.4,000 in the first slab of 10% on his effective taxable income of Rs.40,000.

A huge shock awaits Amin and some millions of NRIs, in regard to taxation of their interest and income from non-Equity Oriented Funds earned in India, proposed to be treated under the draft Direct Tax Code as ‘income from special sources.’

In 2012-13, on the same interest income of Rs.3 lakhs, Amin will be required to pay a hefty tax of Rs.60,000 at the flat rate of 20%, without being eligible to claim any basic exemption or other deduction, as provided under Part III of the First Schedule to the Code.


Proposed Section 15 of the Code provides that the ‘income from a special source’ of the persons as specified in Part III of the First Schedule shall be computed in accordance with the provisions of the Ninth Schedule. The Ninth Schedule prescribes that the amount of accrual or receipt of such income from special sources shall be computed as the taxable income, and no loss, allowance or deduction shall be allowed, as the same shall be presumed to have been granted.

A Non-resident (which would cover every NRI) has been included in the list of ‘specified persons.’ Moreover, the ‘special source income’ listed in case of a Non-resident includes income earned by a Non-resident comprising of any interest and profit distributed by a Fund on which tax on distributed income has not been paid under Section 110. Since Section 110 levies tax only on income distributed by any Equity Oriented Fund, any income distributed to NRIs by Mutual Funds, under their other schemes such as Liquid, Debt, Money Market or Balanced Funds, will by implication also attract 20% flat rate of tax as referred above.

The rate of tax provided on such incomes from special source earned by Non-residents is a flat rate of 20% and the same would be attracted without allowing any deduction or allowance, including the basic exemption limit of Rs.2,00,000 prescribed under the Code in the case of an individual. Interestingly, while an average tax rate of 20% would be attracted on ordinary taxable income of Rs.17,00,000 (income-tax thereon being Rs.3,40,000) as per the tax rates under the Code, in view of the mischief of the above provisions, an NRI would be called upon to pay tax at 20% from the first rupee of interest income or income from a non-Equity Oriented Fund earned  by him.


As per the current provisions of Section 6 of the Income-tax Act, an individual is treated as a Resident during the financial year, if he fulfils any one of the following two conditions:

  1. He is in India for 182 days or more; or

  2. He is in India for 60 days or more in that year and is also in India for 365 days or more during the 4 years immediately preceding that year.

As a special relief condition (b) referred above is not invoked in the cases of NRIs being Indian Citizens or Persons of Indian Origin, living outside India and visiting India during that year.

However, Section 4 of the Code dealing with the provisions relating to residential status has proposed to eliminate the above relief, which allowed an NRI to stay in India each year for less than 182 days and still maintain his Non-resident tax status.  The Case Study discussed hereunder will help in understanding the implications of the proposed change:

Case Study: Hari Patel settled in USA has been visiting India since 2001 for around 150 days every year. Since his stay in India during each financial year does not exceed 182 days, he is able to maintain his status in India as a Non-resident and thus not be concerned about any Indian tax liability in respect of his US income. However, with the introduction of the new provisions of the Code as discussed above, if he stays in India during FY 2012-13 for 60 days or more (though less than 182 days), he would be treated as a Resident in India for tax purposes, as he would have been in India for 365 days or more during the 4 preceding financial years 2008-09 to 2011-12. As a result, Patel would be under obligation to declare his US income for Indian tax purposes in FY 2012-13.

In view of the above, NRIs visiting India during a financial year, who could conveniently plan their Indian stay for even upto 180 days, will now have to restrict the same to less than 60 days during that year, if they have also been in India for 365 days or more during the 4 preceding financial years.

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