Definition of Non-Resident

Based on residential status (Section 6 of Income Tax Act)

As per Section 6 of the Income Tax Act, 1961, the residential status of an individual is determined on the basis of their physical presence in India during a financial year.

An individual is classified as a Non-Resident (NR) if:

• They were in India for less than 182 days during the relevant financial year, and
• They were not in India for at least 365 days during the preceding 4 years.

Non-residents are taxed in India only on income that is received in India or that accrues or arises in India or is deemed to accrue or arise in India.

Income Taxable for Non-Residents (Section 4, 5, 9)

Income received or deemed to be received in India

Under Section 5(2)(a), any income that is received in India by or on behalf of a non-resident is taxable in India, regardless of where it was earned.

This includes:

• Salaries credited to an Indian bank account
• Interest or dividend paid in India

Income accruing or arising or deemed to accrue or arise in India

According to Section 5(2)(b) read with Section 9, income is deemed to accrue or arise in India in the following scenarios:

• Business connection in India
• Property or asset situated in India
• Transfer of capital asset situated in India
• Services rendered in India
• Interest, royalty, or technical fees paid by Indian residents

Hence, even if the income is earned outside but is linked to activities in India, it can be taxed in India.

Meaning of "Income accruing or arising in India"

Business connection

The term business connection under Explanation 2 to Section 9(1)(i) includes activities carried out by a non-resident through:

• Agents or employees in India
• Provision of services (including technical and managerial)
• Transfer of rights or information related to property

This means that if a non-resident is conducting part of their business in India, the income attributable to that part is taxable in India.

Source of income

The source rule forms the basis of Indian taxation of non-residents. If the source of income lies in India, the income is considered to have accrued or arisen in India, irrespective of where the payment is made or received.

Example: A non-resident providing consultancy services to an Indian company from abroad — the payment made by the Indian company is taxable in India as the source of income lies within India.

Taxation of Shipping Income

Shipping income of a non-resident from the operation of ships in international waters is governed by Section 44B of the Income Tax Act, 1961.

Special presumptive scheme (Section 44B)

Section 44B provides for a presumptive taxation scheme whereby:

• 7.5% of the gross receipts from shipping operations in India is deemed as taxable income.
• This is applicable whether or not the non-resident has a presence or permanent establishment in India.

Formula: Taxable Income = 7.5% of Gross Receipts from Indian operations

No other deduction (like expenses or depreciation) is allowed under this section.

This provision simplifies taxation and ensures certainty for foreign shipping companies operating in Indian waters.

Taxation of Air Transport Income

Income earned by non-residents from the operation of aircrafts in India is governed by Section 44BBA of the Income Tax Act, 1961.

Presumptive taxation under Section 44BBA

Similar to Section 44B for shipping, this section provides that:

• 5% of the gross receipts from carriage of persons, livestock, mail or goods is deemed as taxable income in India.

Formula: Taxable Income = 5% of Gross Receipts from operations in India

No further deduction of expenses is allowed under this provision.

This provision is designed to ease compliance and tax administration for foreign airline companies flying into and out of India.

Taxation of Non-Resident Indians (NRIs)

Specific provisions for NRIs

The Income Tax Act provides special tax treatment for Non-Resident Indians under Chapter XIIA (Sections 115C to 115I).

Section 115E – Tax Rates on Specified Investments

NRIs are subject to concessional tax rates on income from certain investments:

• Investment income (e.g., interest, dividends) from specified assets in India is taxed at 20%.
• Long-term capital gains from sale of such assets are taxed at 10%.

Specified assets include:

• Shares of Indian companies
• Debentures issued by public Indian companies
• Deposits with Indian public companies or banks
• Government securities

Other key features:

• No deduction under Chapter VI-A (like 80C) is allowed against such investment income.
• NRIs can opt out of Chapter XIIA and be taxed under regular provisions by filing a declaration under Section 115I.

Withholding Tax (TDS) on Payments to Non-Residents (Section 195)

Section 195 of the Income Tax Act, 1961 mandates that any person responsible for paying a sum (other than salary) to a non-resident, which is chargeable to tax in India, must deduct income tax at source (TDS) at applicable rates.

Key Features of Section 195

Scope

Applies to payments such as:

• Interest
• Royalties
• Fees for technical services
• Capital gains
• Any other sum chargeable under the Act

Rate of TDS

The rate depends on the nature of payment and the relevant DTAA (if applicable). In general, the higher of the rate under the Income Tax Act or the DTAA will be applied unless DTAA is invoked using a valid Tax Residency Certificate (TRC).

Application to Assessing Officer

Under Section 195(2), the payer may apply to the Assessing Officer to determine the appropriate proportion of income chargeable to tax, especially when the payment includes both taxable and non-taxable components.

Form 15CA and 15CB

Compliance with Form 15CA (self-declaration) and Form 15CB (CA certificate) is required for most foreign remittances to ensure proper tax deduction.