RNOR not required pay tax in India on forex income

A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answer your questions on NRI investment.

A Rediff India Abroad feature:

I have been a Non-Resident Indian for the last 10 financial years, from  FY 1997-98 till 2006-07. I am planning to return to India in the current FY 2007-08 and feel I may not be able to satisfy the requirement of 182 days in the current FY. Please advise if my transfers made to India in the current FY 2007-08 so far will be taxable in India.

-- Umesh Datar

There is a transitional status of Resident but not Ordinarily Resident (RNOR) between being an NRI and becoming a full-fledged Resident after returning to India permanently.

RNOR is a person who satisfies one of the following conditions:

a. he has been a non-resident in India in nine out of the ten previous years preceding that year, or

b. has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

An RNOR is not required pay tax in India on his foreign exchange income.

Most of the NRIs will be caught by the requirement of stay in India for 729 days or less during the last 7 financial years.

Consequently, anyone who returns after 7 or more financial years of being an NRI will become RNOR for 2 years. Those returning after 6 years will become RNOR for 1 year only. This is subject to his stay in India during the previous 7 years for 729 days or less.

Since you will be RNOR for the FY 07-08 (if your stay in India during the FY is 182 days or more) your foreign exchange earnings during the FY 07-08 will be tax-free in India. The same earnings transferred to India from your account in your host country to your account in India will not be taxable in India.

I have been working in Canada for the past two years. I am on deputation to Canada. My Indian employer is paying me my Indian salary which is getting credited in my account every month. I have taken a house loan in India from ICICI Bank for which I claim income tax benefit on the interest as well as amount paid as principal. As an NRI am I allowed to avail the tax benefit on the house loan? I am keeping the house locked currently but if I rent that house out would I still be able to claim the tax benefit by showing earning from rent in my income and pay appropriate taxes on that?

-- Laxman Rai

Yes, tax benefits on home loans are common for residents and NRIs.

If this is the only house that you own, if you keep it locked, you would be entitled to an interest deduction of Rs 150,000 per financial year. On the other hand, if you rent it out, the entire interest you pay (even if it over Rs. 150,000) is deductible.

I am a retired bank manager. I get 1 percent extra interest for deposits made in my name but the condition is that my name should be the first name and TDS (tax deduction at source) will be done in my name.

Now, can I keep my son's money in a joint account with me as per the above so that the extra benefit of interest can be availed? Is this allowed as per income tax laws? I don't want to violate the tax laws but would like to avail the benefit if it is legal. After all, the money belongs to our family only.

-- Sorab

It would be irregular for you to invest your son's money in your name. We suggest instead that you ask your son to transfer the funds in your account. There would be no tax incidence on either you or your son resulting from the transfer as gift between relatives are tax-free.

Once you receive the funds in your account you get title to the same. Now you can invest the money with your name as the first name and your son as the joint second holder.

Please explain the difference in TDS computation if the source of fund for purchase of shares is from Non-Resident Ordinary or Non-Resident External accounts.

-- Nevrekar

The source of funds is immaterial for the computation of TDS or tax on sale of shares.

The long-term capital gains from shares sold on recognized stock exchange in India is exempt from tax. TDS on short-term capital gains is applied @10.3%, irrespective of whether the shares are purchased from NRO or NRE account.

However, as far as interest from the bank account is concerned, interest from NRE account is tax-free in India.

The interest on NRO is fully taxable at the rates applicable to Residents. But there is no income threshold under which TDS is not chargeable. However, TDS is applicable @30.9 percent on the entire NRO interest (without any threshold) and nothing can be done in practice, to avoid it. The TDS is applicable on accrual basis on cumulative deposits. The only practical recourse open is to claim refund by filing tax returns.

The authors may be contacted at wonderlandconsultants@yahoo.com