NRIs do not need to visit India to get a Permanent Account Number

From income-tax perspective, there is a specific exemption for foreign citizens on the requirement to obtain Aadhaar for income-tax return filing and PAN application

Question : I have recently become a citizen of Canada. Till now I was holding NRE and NRO accounts in India, as well as several other investments. My wife, who is a Canadian citizen, is now a part of my financial life as well and I want to transfer two rental properties in India in her name. Please let me know how the taxes for that will be filed? Will she have to get an Aadhaar and PAN? Can I get a PAN in Canada? If so, what is the process?

Answer :
Taxability on transfer of house property to spouse:
Under the Indian income-tax laws, income tax is payable on any sum of money, movable property or immovable property received by an individual without consideration, except if the same is received from a ‘relative’. Under this provision, the term ‘relative’ includes spouse.

Accordingly, a transfer of house property in India to your wife will not be subject to tax in India. A gift deed registering the transfer of property in India is recommended.

Taxability of rental income from house property received by spouse:
Under the India income-tax laws, in case an individual transfers any house property in India to his or her spouse without adequate consideration, the transferor will be considered as the deemed owner of the house property so transferred. Hence, any rental income received from the said house property in India will still be taxable in your hands. You will be required to pay applicable taxes and file the income-tax return in India disclosing rental income from the said house property.

However, any further income derived by your wife from investing the said rental income like interest from bank etcetera, may be taxable in her hands. Your wife will be required to file an income-tax return in India in case her total income (i.e., gross income excluding the exempt income) exceeds the threshold limit for the relevant financial year (Rs2.5 lakh for the financial year 2017-18).

Please note that as you and your wife are residents of Canada, there may be tax implications in Canada for the said transfer and income from the house property in India. In case of any double taxation, applicable benefits under the Double Taxation Avoidance Agreement between India and Canada may be explored.

Eligibility to obtain Aadhaar:
Under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, every ‘Resident’ is entitled to obtain Aadhaar number by providing his demographic and biometric information. The term ‘Resident’ has been defined under the said Aadhaar Act as an individual who has resided in India for a period 182 days or more in the 12 months immediately preceding the date of application for enrolment for Aadhaar.

Accordingly, there may be no requirement for your wife to obtain Aadhaar unless she stays in India for 182 days or more in the immediately preceding 12 months period.

From income-tax perspective, there is a specific exemption for foreign citizens on the requirement to obtain Aadhaar for income-tax return filing and PAN application.

Eligibility to obtain PAN:
Under the India income-tax laws, in case an individual has total income (i.e., gross income excluding the exempt income) exceeding the threshold limit for the relevant financial year (Rs2.5 lakh for the financial year 2017-18), then the said individual is required to obtain a PAN.

Accordingly, your wife may be required to obtain PAN in India in case her total income (i.e., gross income excluding the exempt income) exceeds the threshold limit.

Process to obtain PAN:
To apply for a PAN, your wife may make an online application and send the signed physical PAN application along with the necessary supporting documents such as identity and residence proof to the PAN centre in India. The PAN card can be delivered to your address in Canada.

Source : Live mint/16.10.2017

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How To Get Relief From Double Taxation?

In case , one earns income which suffers tax outside India, the Income Tax Act has clear provision of relief from such double taxation. Therelevant provision are contained in section 90 and section 91 of the I T Act.

Section 90 is applicable for the cases when the tax has been paid in a country with which India has signed comprehensive double taxation avoidance agreements. There are Double Taxation Avoidance Agreements with as many as 81 countries .
Section 90(2) of the I T Act provides that the provision of the Income Tax Act shall apply in those cases where DTAA s signed , to the extent is more beneficial to the person.CBDT’s circular No 333 dt 2.4.1998 [137ITR 1 &2] clarified that whenever there is any conflict noticed on an issue between the provisions contained in both statutes , DTAA shall prevail over the statutory provision of the I T Act. In this regard , Supreme Court held that DTAA constitute special provisions which would prevail over general provision of the I T Act and effect must be given to the special provision of the DTAA even if they are in conflict with general provision of the I T Act.Two important case laws are as under

• Union of India vs Azadi Bachao Andolan 263ITR 706 SC
• CIT vs P.V.L. Kulandagan Chettiar [2004] 267ITR654 SC

What if there is DTAA agreements?
In that case, section 91 of the I T Act provides relief from double taxation. Provision of Section 91 of the I T Act says

“(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deductionfrom the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal”
The general rule of computation of relief is as under:

1.Ascertain doubly taxed income .

2.Ascertain tax by applying Indian rate of tax as well as rate of foreign country separately.

3.Which ever is less , relief is given to that extent.
You can read more about computation of relief u/s 90 or 91 here.

Certain other points need attention here :
1.Doubly taxed income has not been defined, but as expressed in a court decision by Madras High Court in CIT vs O.VR, SV.VR Arunachalam Chettiar [, it means only that portion of income on which tax has been paid by the Resident in India which was subjected to taxation abroad also.

2. As per explanation given under Section of the I T Act ,the expression “Indian rate of tax” means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter , by the total income;

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Can capital gains on property + investments in the U.K. be set off through Bonus Stripping?

Please do not do this. This activity is under Indian Incometax lense.

After taxing investors for dividend stripping, the Income Tax (I-T) Department is gearing up to tax bonus stripping. Official sources say scrutiny of returns filed by companies, brokers and individuals active in the stock markets and in possession of shares revealed wide use of this mechanism to evade tax. According to data compiled by Business Standard Research Bureau, 314 companies have announced bonus shares since 2005-06. While assessments are on for 2008-09, in most cases the department is checking returns filed for the last four years under the scrutiny assessment, sources add.

To explain how bonus stripping works, a source said: “Say, someone is in possession of 1,000 shares of company XYZ, priced at Rs 1,000 each. Following a bonus issue announced by XYZ in the ratio of 1:1, the shareholder gets 1,000 stocks more for free. By the end of the issue, the investor owns 2,000 shares, each priced at Rs 500. He now sells the initial 1,000 shares at Rs 500 each, incurring a short-term capital loss. He uses the loss to reduce gains made in other market transactions. Later, he sells the remaining 1,000 shares, at a profit since they were acquired free and reaps the benefit of tax exemption on long-term capital gains.”

The I-T Department recommends an amendment to Section 94(8) of the Income Tax Act to bring such proceeds within the tax ambit.

While Section 94 of Indian Income Tax Act 1961 refers to tax avoidance by certain transactions in securities, Section 94(8) covers taxation of bonus shares held under the mutual fund units. Thus, bonus equity shares held by individual investors or companies are completely out of the tax net. The department now proposes to extend the coverage to securities, too, say sources.
Under Section 94(8), for tax purposes, the loss arising from the sale of shares held prior to the bonus issue is treated as the cost of acquisition for the bonus shares. If the amendment is made, the profit earned by the ordinary investor or the company will be subdued, since it has to be reduced from the loss incurred by selling the earlier lot which acts as the acquisition cost. At present, the profit has no upper limit, since there is no acquisition cost for bonus shares and, over and above this, there is exemption on long-term capital gains.

Taxation of dividend stripping was introduced in the Budget of 2002-03. Dividend stripping is purchasing of shares before a dividend is paid and later selling them when they go ex-dividend or, dividend payment does not apply to the shares after a certain date fixed by the company.

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Income Tax provisions Related to Expatriates Working in India and Indian Residents Posted Abroad

1. Introduction -With the globalisation of the world trade and liberalisation of the Indian economy, the number of persons moving in or out of India in theexercise of their business, profession or employment is on the increase. A brief discussion of the taxation of these expatriates is being attempted below:

2. RESIDENTIAL STATUS
As in most of the countries, the liability under the Indian Income tax law is also co-related to the residential status of the concerned tax payer. Section 6 of the Indian Income-Tax Act creates 3 categories as far as residential status is concerned.

2.1 Resident An Individual is said to be resident in India in any previous year if he is in India for at least 182 days in that year or during that year he is in India for a period of at least 60 days & has been in India for at least 365 days during the 4 years preceding that year. However, the period of 60 days referred to above is increased to 182 days in case of Indian citizens who leave India as members of the crew of an Indian Ship or for Indian citizens or persons of Indian origin who, being outside India, come to visit India in any previous year.

2.2 Non- Resident A person who is not a resident in terms of the above provisions is a non-resident.

2.3 Resident but Not A person who is otherwise resident as Ordinarily Resident defined in para 10.2.1 would be RNOR (RNOR) if he satisfies any of the following two conditions:

(i) He has not been resident in India in 9 out of 10 preceding previous years.
Or
(ii) He has not been in India for an aggregate period of 730 days or more in the preceding 7 previous years.
W.e.f. 01.04.2004, the status ‘RNOR’ has been redefined as follows:-
An individual shall be said to be RNOR if he has been a non-resident in India in 9 out of 10 previous years preceding or period amounting to 729 days or less during the 7 previous years preceding that year.

3 SCOPE OF TAXATION:
Based on the residential status of payer, his tax liability will be as follows:-
Residential status Taxability of Income
(i) Resident All income of the previous year wherever accruing or arising or received by him including incomes deemed to have accrued or arisen.
(ii)Non-Resident All income accruing, arising to or deemed to have accrued or arisen or received in India.
(iii) Resident but not ordinary Resident All Income accruing or arising or deemed to have accrued or arisen or received in India. Moreover, all income earned outside India will also be included if the same is derived from a business or profession controlled or set up in India.

4. EXPATRIATES WORKING IN INDIA
In case of foreign expatriate working in India, the remuneration received by him, assessable under the head ‘Salaries’, is deemed to be earned in India if it is payable to him for service rendered in India as provided in Section 9(1 )(ii) of the Income Tax Act. The explanation to the aforesaid law clarifies that income in the nature of salariespayable for services rendered in India shall be regarded as income earned in India. Further, from assessment year 2000-2001 onwards income payable for the leave period which is preceded and succeeded by services rendered in India and forms part of the service contract shall also be regarded as income earned in India. Thus, irrespective of the residential status of the expatriate employee, the amount received by him as salary for services rendered in India shall be liable to tax in India being income accruing or arising in India, regardless of the place where the salary is actually received. However, there are certain exceptions to the rule which are briefly discussed below:-

4.1 Remuneration of an employee of a foreign enterprise is exempt from tax if his stay in India is less than 90 days in aggregate during the financial year [Sec. 1 0(6)(vi)]. This is subject to further relaxation under the provisions of Double Taxation Avoidance Agreement entered into by India with the respective country.
4.2 Remuneration received by a foreign expatriate as an official of an embassy or high commission or consulate or trade representative of a foreign state is exempt on reciprocal basis [Sec. 1 0(6)(ii)].
4.3 Remuneration from employment on a foreign ship provided the stay of the employee does not exceed 90 days in the financial year [Sec. 10(6)(viii)].
4.4 Training stipends received from foreign government (Sec. 10(6)(xi)).
4.5 Remuneration under co-operative technical assistance programme or technical assistance grants agreements (Sec. 10(8) & (10(8B)).

5. SPECIAL PROVISIONS RELATING TO NON-RESIDENTS
Chapter XIIA of the Income Tax Act deals with special provisions relating to certain incomes of non-residents. Sec. 11 5D deals with special provisions regarding computation of investment income of NRIs. Section 11 5E relates to investments income and long term capital gains of NRIs, such income being taxed at concessional flat rates. As per section 11 5F, capital gain is not chargeable on transfer of foreign exchange assets under certain circumstances. The NRIs need not file their return of income if their total income consist only of investment income or long term capital gains or both and proper tax has been deducted from this income(Sec. 11 5G). Benefits under this chapter are available even after the assessee becomes a resident (Sec. 11 5H). The provisions of this chapter would not apply if the assessee so chooses (Sec. 115I).

6. DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA)
The Central Government acting under the authority of Law(Sec. 90) has entered into DTAAs with more than 60 countries. Such treaties serve the purpose of providing protection to the tax payers from double taxation. As per section 90(2), in relation to an assessee to whom any DTAA applies, the provisions of the Act shall apply only to the extent they are more beneficial to the assessee. The provisions of these DTAAs thus prevail over the statutory provisions.

7. INDIAN RESIDENTS POSTED ABROAD
Indian residents who have taken up employment in countries with which India has got DTAA are entitled to the benefit of the DTAA entered into by India with the country of employment. Accordingly, their tax liability is decided.
Indian expatriates working abroad have been granted several special tax concessions under the Act. Professors,teachers and research workers working abroad in any university or any educational institutions are entitled to deduction of 75% of their foreign remuneration provided the same is brought into India in convertible foreign exchange within a period of 6 months from the end of the previous year or such extended time as may be allowed(Sec. 80-R). Similarly, in case of an Indian Citizen having received remuneration for services rendered outside India, 75% of his foreign remuneration is deductible from his taxable income provided such remuneration is brought to India in convertible foreign exchange within the time specified above (Sec. 80 RRA).
From assessment year 2001-2002 onwards, there has been a change in the amount of deduction available under sections 80R/ 80RRA. For details, reference may be made to the sections concerned of the Income Tax Act. No deduction u/s 80R/80RRA shall be allowed in respect of A.Y. 2005-06 onwards.
It may also be mentioned here that as per section 9(1)(iii) income chargeable under the head ‘Salary’ payable by the Government to a citizen of India for services rendered outside India is deemed to accrue or arise in India. However, allowances or perquisites paid or allowed outside India by the Govt. to a citizen of India for rendering services abroad is exempt from taxation u/s 10(7).

8. INCOME TAX CLEARANCE CERTIFICATE
An expatriate before leaving the territory of India is required to obtain a tax clearance certificate from a competent authority stating that he does not have any outstanding tax liability. Such a certificate is necessary in case the continuous presence in India exceeds 120 days. An application is to be made in a prescribed form to the Income Tax Authority having jurisdiction for assessment of the expatriate to grant a tax clearance certificate. This is to be exchanged for final tax clearance certificate from the foreign section of the Income Tax Department. Tax Clearance certificate is valid for a period of 1 month from the date of issue and is necessary to get a confirmed booking from an airline or travel agency and may be required to be produced before the customs authorities at the airport.

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NRI – Tax liability of Resident Foreign Currency (RFC) Account

After you return to India and when you become a resident as per FEMA, you can choose to park your overseas earnings or your NRE balances to an RFC account. You CANNOT open this account when your status is a non-resident as per FEMA.

Interest earned from RFC account is exactly similar to FCNR account: it is tax free under Section 10(15)(iv)(fa) of the Income Tax Act (as discussed above) till your residential status is Resident and Not Ordinarily Resident (RNOR). After your status becomes ROR, it is taxable as any other resident FD & TDS is also applicable.

Money in RFC account is denominated in your currency of choice (e.g. USD, GBP, EUR, SGD etc.) and is freely repatriable any time out of India.

At the time of transferring money to create an RFC deposit, currency conversion charges may apply.

Some other points on Non Resident Accounts

Re-designate all your accounts, deposits, investments from “non-resident” to “resident” within a reasonable time. What is “reasonable time” has not been defined under the Act – so understand this, if you are caught violating FEMA, reasonable time is what you are comfortable in convincing the enforcement authorities

you become a resident from the day you return to pick up employment or in any case, with an intention to stay for an uncertain period.

Very Important point: Though interest on non-resident accounts is tax free in India, if you qualify as a tax resident in a foreign county (for e.g. USA), it will be taxed in that country. So please check the local tax laws and comply accordingly. If in doubt, engage a CPA. For USA based NRIs, this is especially important that India now as an IGA on FATCA with USA. US NRI should also bear in mind to disclose these assets in mandatory reporting to FINCEN and IRS otherwise be ready for massive penalties

If you are an NRI and file a return, please show the exempt interest income from the accounts in the “exempt income” section in the return.

• If you are not planning to return to India, please note that though NRE fixed deposits offer a good tax free interest, the wealth will be subject to currency risk. Hence, it is advised to consider FCNR deposits as they are denominated in foreign currency only and does not impose any currency risk. Even if you return to India and do not have a long term plan of settling down here, you can shift the money to RFC account.

As per FEMA rules, you can add a non-resident or a resident relative or a mandate holder in the non-resident accounts. This is much better than a simple nomination and should be considered.

In your Indian will, ensure details of all these accounts are mentioned.
Given the overreach of tax authorities, in case of a scrutiny assessment, you may be asked to provide source of funds for credit to these accounts and if the same is not properly explained, Assessing Officer can treat it as a “cash credit” u/s 69 of IT Act & levy tax on it. So, keep the gift deeds, overseas bank statements, overseas salary slips, W-2 forms (in case of a US based NRI) ready – it does not harm to be a bit over-prepared when it comes to tax.

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NRI – Tax liability of Foreign Currency Non Resident (FCNR) Account

FCNR is a foreign currency denominated account where you can park your foreign earnings and it will be free from exchange rate fluctuations.

You can create this FD only during the period that you are a non-resident.

Interest earned from FCNR accounts is tax free under Section 10(15)(iv)(fa) of the Income Tax Act (as discussed above) till your residential status is Resident and Not Ordinarily Resident (RNOR). After your status becomes ROR, it is taxable as any other resident FD and the applicable TDS shall also apply.

FCNR account with a co-operative bank or other banks not falling in Second Schedule of RBI Act will not qualify for tax exemption. You can check the Second Schedule here on RBI website

On your return to India, FEMA allows you to continue the deposits to maturity.
On maturity of FD, you can convert the FD to either a resident FD or a RFC FD.

Money in FCNR account is denominated in your currency of choice (e.g. USD, GBP, EUR, SGD etc.) and is freely repatriable any time out of India.

At the time of transferring money to create an FCNR deposit, currency conversion charges may apply

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NRI – Non Resident External (NRE) Account

If you become an NRI as per FEMA, you can open this account to deposit your overseas earnings.

It is NOT mandatory to open this account however if you are likely to earn outside India for significant time and want the money to be repatriable, you should consider opening this account & deposit your overseas earnings in this account and not in the NRO account.

You should use this account to make mutual fund/stock investments or purchasing insurance policies if you wish the money to be repatriated out of India.

The amount in this account is completely tax free under Section 10(4)(ii) of the Income Tax Act (as discussed above) till the time you are a NRI. The moment you return back to India, you will have to re-designate account to “resident” and it will be taxable as a normal bank account.

After your return to India, your bank will allow you to run your NRE deposits till maturity.

FEMA requires that on return to India, money standing to credit of NRE should be either moved to an RFC account after return or to a resident FD: you will have to make a choice more from an exchange risk perspective than the taxation angle.
Since interest is tax free, there is no question of TDS. Even after your return to India, bank will continue to deduct zero TDS but this does not mean these deposits are tax free – if you’ve opted for converting them to resident FD, you will have to offer income in your tax return.

As far as rate of tax is considered, you can take benefit of special provisions of the IT Act for non-residents & claim a concessional rate of 20.60% u/s 115I of Income Tax Act for this income after your return to India. Rest of your income (except this income can be charged at normal rates)

If your NRE account is with a non-Indian bank (e.g. Citibank, HSBC etc.), you cannot claim benefit of 20% concessional rate.

The benefit of concessional tax rate can be taken ONLY till it is continued. If it is matured/broken, then this special tax benefit gets lost.

In case amount in these deposits are high, you will have to pay advance tax otherwise you’ll have to bear interest u/s 234A,B,C of Income Tax Act.

If you return back to India, you have the option to re-designate this account either as resident account or transfer a portion of funds to a Resident Foreign Currency (RFC) account.

Bear in mind that NRE is a rupee account so your investments will carry currency risk, just in case you wish to repatriate & use it out of India later on.

It is a myth that to open an NRE deposit, you have to open an NRE account also.
At the time of transferring money to create an NRE deposit, currency conversion charges may apply.

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