1995 (8) TMI 305 - AAR - Income Tax

Indian Tax Residency: RNOR Status, Foreign Income Exemptions, and Taxation Rules

IN RE: ADVANCE RULING A. NO. P-5 OF 1995,

The applicant will be considered 'resident but not ordinarily resident' for nine assessment years upon returning to India, due to not meeting the ... Whether the applicant will not be liable to pay income-tax in India on the income from the three categories of assets set out in the question? Whether the interest on the fixed deposit will be liable to income-tax in India if it is received, or the right to receive it is exercised, in India? Whether if the factual foundations mentioned in the question are fulfilled, the transaction will not attract any income-tax in India? Whether no income-tax will be payable in India on the interest from the fixed deposits with the State Bank of India and the Indian Bank for any assessment year if, in respect of the relevant assessment year, the conditions set out in section 10(4)(ii) of the Income-tax Act, 1961, are fulfilled? Whether the income from the units of the Unit Trust of India [item (d) in paragraph 7 of annexure “I”] will be exempt if the units had been acquired out of funds in a non-resident (external) account with any bank in India or out of funds remitted to India in foreign exchange in accordance with the provisions of the Foreign Exchange Regulation Act, 1973, and the rules and orders made thereunder? Whether the interest on the fixed deposit with Lloyds Finance in India [item (e) in paragraph 7 of annexure “I”] will not be exempt from tax in India but the applicant can avail of a concessional rate of 20 per cent. on the gross amount of the interest under sections 115D and 115E read with section 115H on complying with the procedural requirements of section 115H? Issues Involved:1. Residential status of the applicant.2. Taxability of interest and dividends received in a foreign country.3. Taxability of interest on fixed deposits in foreign banks.4. Taxability of foreign income from bank deposits and investments in foreign units.5. Taxability of income from Indian banks and companies for a resident but not ordinarily resident (RNOR).Issue-wise Detailed Analysis:1. Residential Status of the Applicant:The residential status of the applicant has to be determined under section 6 of the Income-tax Act, 1961. The applicant, having left India in 1970 and staying abroad, will be considered 'resident but not ordinarily resident' (RNOR) for nine assessment years following his return to India if he returns before October 3, 1995. This is due to not fulfilling the criteria of being a resident in nine out of ten previous years or staying in India for 730 days in the preceding seven years. Thus, the applicant will be RNOR from the assessment years 1996-97 to 2004-05.2. Taxability of Interest and Dividends Received in a Foreign Country:The applicant's first query concerns the taxability of interest and dividends from investments made in the UK and received in foreign bank accounts. Specifically:- India Development Bonds: Issued by the State Bank of India, interest from these bonds is exempt from income-tax in India as per the Remittances of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991.- Investments in India Fund and Lazard Birla India Investment Trust: These investments are in shares of foreign companies, and the dividends received are considered income accruing in the UK. Thus, they are not taxable in India for an RNOR.3. Taxability of Interest on Fixed Deposits in Foreign Banks:The applicant's second query pertains to interest on a fixed deposit with the American Express Bank in London. The interest is considered income accruing in the UK. However, if the deposit is repaid in India, it will be taxable as income received in India. There is no exemption under sections 10(4) or 115C for such interest if received in India.4. Taxability of Foreign Income from Bank Deposits and Investments in Foreign Units:The third query involves the taxability of foreign income from bank deposits and investments in foreign units. If the investments are made in foreign units with no business relationship with India, the income derived will not be taxable in India for an RNOR. Additionally, capital gains from the sale of such units while still a non-resident will not attract tax in India.5. Taxability of Income from Indian Banks and Companies for RNOR:The fourth query relates to the taxability of income from investments in Indian banks and companies:- Non-resident External Rupee Accounts: Interest on these accounts is exempt under section 10(4)(ii) if maintained as per FERA provisions and with RBI permission. If not exempt, the interest will be taxable at a concessional rate of 20% under sections 115C, 115D, and 115E, provided the procedural requirements of section 115H are met.- Units of Unit Trust of India: Income from these units is exempt if acquired out of funds in a non-resident (external) account or remitted in foreign exchange per FERA provisions. No exemption under section 115AC is available for RNOR.- Fixed Deposit with Lloyds Finance: Interest is not exempt but can be taxed at a concessional rate of 20% under sections 115D and 115E, provided the procedural requirements of section 115H are fulfilled.Ruling:1. The applicant will not be liable to pay income-tax in India on the income from the specified foreign investments.2. Interest on the fixed deposit will be taxable in India if received or the right to receive it is exercised in India.3. If the factual conditions are met, the proposed transactions will not attract income-tax in India.4.- Interest from fixed deposits with State Bank of India and Indian Bank will be exempt if section 10(4)(ii) conditions are met, else taxable at 20% concessional rate.- Income from UTI units will be exempt if acquired per FERA provisions, with no exemption under section 115AC.- Interest on the fixed deposit with Lloyds Finance will be taxable at a 20% concessional rate, subject to section 115H compliance.