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DTC – an NRI perspective

Posted by cvbasheer on June 22, 2011


To begin with, the NRI can draw comfort from the fact that there are no changes in the manner of taxability or scope of income. But having said that one of the biggest blows in the DTC for an NRI is the removal of the “NOR” or the “Not Ordinarily Resident” Category. Under the existing Act, basis physical presence, a Resident is further classified as Resident and Resident Ordinary (ROR) and Not Ordinarily Resident (NOR). A person is said to be “not ordinarily resident” in India in any previous year if such person is an individual who has not been a resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more. The latter two differ in the scope of Income that is held taxable. The RORs are subject to tax in India on their worldwide income but the NORs/NRs are taxable in India only on their India sourced income. Now under DTC, every NRI visiting India for greater than 182 days in a financial year would become a “Resident” by default, and he would be subject to taxes on his global income.

The concept of NOR has been replaced by providing exemption to the individual on the income which is sourced out of India. This exemption will be available from the financial year in which the NRI becomes a resident and the immediately succeeding financial year, if such individual was a non resident for nine years immediately preceding the financial year in which he becomes a resident. So typically, in case of a returning Indian who has been out of India for a long period of time, he may become liable for tax on his worldwide income (if he retains sources of income overseas) from 3rd or 4th year of coming to India.

Another change is in the DTAA claims. India has signed treaties with 74 different countries to avoid dual taxation on the income of a NRI who is paying taxes in the other country. This is called the Double Taxation Avoidance Agreement or DTAA, under which the NRI could enjoy the benefit of lower withholding of tax. While the current tax law, required the NRI to merely declare that he was a tax resident, under the DTC structure, he will need to submit a Tax residency certificate from the country of his residency. This makes claiming the benefit more stringent and cumbersome.

Having said this, the little breather or if we may call it that, the DTC also has provided special rates of withholding tax on investment income by way of interest on dividends on which DDT has not been paid by the company, etc.

TO summarize, the DTC is a tough nut for the NRI and will add some discomfort once it comes into force on April 1st, 2012.

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