by Moiz Mannan
With the Indian Rupee sliding ever lower over the past few weeks Non-Resident Indians (NRIs) have shown an increasing proclivity to leverage their exchange rate advantage by putting more money into bank deposits in India.
Certain changes in India’s taxation laws in the context of NRIs have become applicable from the current financial year and overseas earners who deposit money in Indian bank accounts need to be careful while planning their investments.
The amendments relate to taxation on the income derived from putting deposits in the Non-Resident Ordinary (NRO) accounts with banks in India. These accounts have become attractive as banks are offering interest rates of close to 9 per cent. Maintained in Indian rupees, these deposits are a good option for long term investment.
India and Qatar have signed a Double Taxation Avoidance Agreement (DTAA) in early 2000. All provisions of the agreement have been given effect in India under Section 90 of the Income Tax Act of 1961.
The DTAA benefit is provided to NRIs as per the provisions of the Act. However, in the Union budget of 2012, an amendment was made to Section 90. With regard to the amendment, all NRIs who wished to avail of DTAA benefits on NRO deposit for the financial year 2012-2013 had to mandatorily provide Tax Residency Certificate (TRC) to the Deductor (Bank).
The TRC is issued by the tax/government authority of the country where the NRI is Tax Resident. As there are specific provisions in the Income Tax Act for TRC, no other document in lieu of TRC is considered for availing the DTAA. This provision continues in the current financial year and those NRIs who wish to avail of the benefits have to provide an updated copy of their TRC to the bank. NRIs need to be careful because in case of non receipt of the TRC, interest earned on their NRO account will be taxed at 30.90%. They must also remember that Tax Deducted at Source (TDS) once deducted cannot be refunded.
The Central Board of Direct Taxes (CBDT), vide Finance Act, 2012 has prescribed following contents to be provided on the TRC on the basis of which benefits of DTAA can be availed: 1. Name of the assessee; 2. Status (individual, company, firm etc.) of the assessee; 3. Nationality (in case of individual); 4. Country or specified territory of incorporation or registration (in case of person other than individual); 5. Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory; 6. Residential status for the purposes of tax; 7. Period for which the certificate is applicable; and 8. Address of the applicant for the period for which the certificate is applicable.
With regard to double taxation relief, the Indian government enters into an agreement with the government of any other country. According to sub-section (2) of Section 90, in this regard, the provisions of this Act would apply to the extent they are more beneficial to that assessee.
However, in the amended Section 90, the following sub-section has now been inserted with effect from April 1, 2013: “notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee, even if such provisions are not beneficial to him.”
Moreover, a new sub-section has been inserted saying: “An assessee… shall not be entitled to claim any relief under such agreement unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.”
This makes in absolutely necessary for the NRI to obtain a TRC and submit it to the deductor bank so that he pays lower taxes by fully availing of the facilities under the double taxation avoidance agreements. Also, when it comes to paying taxes, the new law won’t necessarily accept the option that is beneficial to the NRI.
NRIs are often faced with the situation of maintaining a Rupee account in India. Primarily there are two reasons for opening such account: NRI wants to repatriate overseas earned money back to India and/or NRI wants to keep India based earnings in India. The NRI has the option of opening a Non Resident Rupee (NRE) account and/or a Non Resident Ordinary Rupee (NRO) account. An NRO account can also be opened by a Person of Indian Origin (PIO) and an Overseas citizen of India (OCI).
The difference in the tax treatment for interest earned on an NRE and an NRO account is that the interest earned on any type of NRO account as well as the credit balances in this kind of account are taxed under the account holder’s tax bracket. On the other hand, interest earned on the NRE account is totally exempted from income tax, and the credit balances in the account don’t attract any wealth tax. Any gift given to a close relative doesn’t attract gift tax.
An NRE account is freely repatriable (principal and interest earned) while the NRO account has restricted repatriability.
The Peninsula
