We have addressed Frequently Asked Questions by Foreign Companies and Non resident Indians (NRIs) on Taxation, Investment and FEMA. We hope this section would enable more informed decision-making by Foreign management and Non resident Indians (NRIs). It should not however be viewed as a substitute for professional advice based on the latest legal position and facts and circumstances of each case.
Appropriate structure for your proposed activities in India are determined by various factors like -
As per section 206AA of The Indian Income Tax Act,if a foreign company does not have a PAN, the Indian company effecting remittance needs to deduct withholding taxes @ 20%. To avoid the same, it is advisable for the foreign company to obtain a PAN subject to specific conditions.
The process involved takes approx 4 weeks for the Indian company to be formed.
An Indian company is obligated to obtain registrations like PAN / Tax account Number (TAN) / import export code (IEC) / Value added Tax (VAT) / Service Tax (ST). There are more industry specific registrations that a company may be required to obtain.
Yes. The company formation process involves submission of loads of document starting with parent company charter Documents, directors address proof and passport. Few of the post formation registrations also require the documents to be attested by Indian Embassy in parent jurisdiction. Most of these are one time requirement and not recurring.
Generally, this is applicable to capital gains tax, dividend tax and tax on business income etc. The taxability in parent jurisdiction is governed by taxation laws as prevailing there. However, this is also dependent upon the provisions of the Double Tax Avoidance Agreement (DTAA) of the parent company jurisdiction with India, if any. principally, India has good treaties with most countries and there is no loss of revenue to foreign companies since the treaties are designed on the OECD model and favor single point of taxation. It is advisable that management obtains expert advise narrating facts of the case.
India has transfer pricing (TP) regulations modeled on International standards. The guiding pole being 'arms length transactions'. The regulations stipulate that all 'related party transactions' should be based on 'arms length' ; thereby making it mandatory that due income should be offered for taxation in India. Foreign companies therefore need to consult subject area experts and carry out a detailed TP study and frame up a TP method and fix all commercial transactions based on this advise. It is important to note a company is obligated to file a separate TP Report with Revenue authorities in India and these companies would also be assessed by a designated TP Cell of The Indian revenue authorities.
As per the recently amended Indian Companies Act, it is now mandatory for all foreign companies to have a local resident Director.
Yes. Indian companies Act requires that there should be at least 2 shareholders and foreign companies therefore hold 99.99% of shares of Indian subsidiary and minority balance holding is nominated and held under The Indian companies Act in the name of an individual.
RBI guidelines have defined activities for a foreign company under following broad categories-
Indian Companies Act has elaborate procedure for winding up of companies. Basically, The corporate law gives options for a Fast Track winding up subject to fulfillment of prescribed conditions and voluntary winding up under sec 391 / 394 of The companies Act. The process entails approaching Indian High Court and seeking assistance of official liquidator to wind up a company. In nutshell, if the Indian company has fulfilled all its contractual obligations and there are no open investigations, suits pending, it can be wound up within a period of 6 months.
Mr. A is an existing Non resident Indian (NRI). He has queries on the following issues:
The definition of a NRI is significant from the perspective of FEMA, Investment and Taxation in India (See Benefits associated with NRI status).
The definition of a NRI under the Income Tax Act is different from that under FEMA.
Under Section 115C (e) of the Income Tax Act, a NRI is defined as 'An individual being a citizen of India or a person of India origin (PIO) who is not a resident'. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India.
The term NRI is defined under FEMA rules and regulations as 'A person resident outside India who is either a citizen of India or is a person of Indian origin (PIO).' However the term PIO is defined differently in different regulations & therefore the term NRI will have different meaning under different regulations i.e. the terms NRI & PIO are contextual. Under the Foreign Exchange Management (Deposit) Regulations, 2000, which deal with banking accounts in India by NRIs, the term PIO is defined as below:
A Person of Indian Origin (PIO) is a citizen of any country other than Bangladesh or Pakistan, if
This is the most common definition adopted under most regulations. Significantly, Foreign Exchange Management (Acquisition and Transfer of immoveable property in India) Regulations, 2000 exclude clause c) above and further restrict clause b) to paternal relationships i.e. father and grandfather only. In Foreign Exchange Management (Transfer or issue of security by a person resident in India) Regulations, 2000 that govern investments in companies, stock market and other instruments as also Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000 the term excludes a citizen of Sri Lanka.
For the purposes of levy of tax, the Income-tax Act in India has classified the status of an individual assessee into three viz.,
Resident and ordinarily resident (ROR)
Resident but not ordinarily resident (R but NOR)
The residential status of an Individual is determined based on the number of days of stay in India. Financial year (FY) is April to March.
*Not applicable to a resident going outside India for employment, a resident who leaves India as a member of crew of an Indian ship, an Indian citizen or person
of Indian origin who is abroad and comes to India for a visit i.e. if such a person stays in India for less than 182 days, he would be a non-resident.
In the case of a ROR, his global income is taxed in India. Normally a returning Indian would be assessed as RNOR on his return to India (See FAQs Returning Indians for more).
In the case of a Non-resident, only the income earned or received in India is taxed in India. Accordingly, income earned outside India by 'A' would not be taxable in India.
India has contracted Double Tax Avoidance Agreements (DTAAs) with various countries. Taxability of A's Indian income would be decided as per the provisions of these DTAAs. Most of these DTAAs contain provisions for lower rates of tax in case of incomes like dividend, royalties, fees for technical services etc. Provisions of some DTAAs provide interesting opportunities for efficient tax planning. For instance, the DTAA with Mauritius. Structuring of likely income in India therefore requires a 'case to case' study depending on facts of each case.
FEMA stands for Foreign Exchange Management Act. Residential status and nature of transaction i.e. capital account transaction (e.g. purchase/ sale of shares, property) or current account transaction (e.g. remittance of income on shares, property) are the cornerstones of FEMA. The golden rule of FEMA is, " All capital account transactions other than those permitted are prohibited while all current account transactions other than those prohibited are permitted ". Under FEMA, certain types of transactions do not require RBI permission while others either require prior approval of RBI/ Government or it is mandatory to inform RBI of the same. Although total capital account convertibility does not exist under FEMA, there is full convertibility to the extent of USD 1 million per calendar year for NRIs- See Repatriation for details.
Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential
status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax act, residential status is determined based only on the number
of days of stay in India. Under FEMA, residential status is primarily determined based on the intention of the person.
'A' would be a non-resident under FEMA as soon as he goes out of India for employment/ business outside India irrespective of the duration of his stay in India. Accordingly, 'A' would be outside the ambit of FEMA as far his transactions outside India are concerned (e.g. he can freely invest or carry on business abroad out of his earnings abroad).
The definition of a NRI is significant from the perspective of FEMA, Investment and Taxation in India (See Benefits associated with NRI status).
The definition of a NRI under the Income Tax Act is different from that under FEMA.
Under Section 115C (e) of the Income Tax Act, a NRI is defined as 'An individual being a citizen of India or a person of India origin (PIO) who is not a resident'. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India. Apart from various types of investments in India, which 'A' can make, there are several other advantages of the NRI status, which are outlined below:
The table below analyses the key features of bank accounts that NRIs can operate in India.
|Particulars||Foreign Currency Non- Resident Account (FCNR)||Non-Resident External Rupee Account (NRE)||Non-Resident Ordinary Account (NRO)|
|Who can open||NRI||NRI||Any person resident outside India i.e. even a non-NRI.|
|Type of account||Term deposit only||Savings, Current, Recurring/ Term deposit||Savings, Current, Recurring/ Term deposit|
|Period for deposits||For terms not less than 1 year and more than 3 years i.e. 1-3 years only||No restriction||No restriction|
|Joint account||In the name of two or more non-resident individuals||In the name of two or more non-resident individuals||May be held jointly with residents|
|Operation of account||Besides account holder, Power of Attorney holder||Besides account holder,Power of Attorney holder||NRI and Resident Indian Account holder jointly or severally. Also Power of Attorney holder.|
|Designated currency||USD, Pound Sterling, Japanese Yen, Euro||Rupees||Rupees|
|Rate of interest||Fixed or floating within the ceiling rate of LIBOR/ SWAP rates for the respective currency/corresponding term minus 25 basis points at present.||Savings: Ceiling rate of six month USD LIBOR Term Deposit: Ceiling rate of USD LIBOR of corresponding maturity Current: No interest is paid||Savings: As applicable to domestic savings account Term Deposit: Banks are free to determine interest rates. Current: No interest is paid.|
|Taxation of interest||Tax-free. Even on permanent return to India, tax-free till the time a person is "Not Ordinarily Resident" within the meaning of the Income Tax Act.||Tax-free. If a NRI permanently returns to India, interest accrued w.e.f the date of permanent return to India is taxable.||Taxable and Tax deducted at source at the applicable rate|
|Repatriation||Both principal and interest freely repatriable||Both principal and interest freely repatriable||Interest and other current income freely repatriable. Principal repatriable up to USD 1 million per calendar year.|
|Change in residential status||Can be continued till due date on which option for conversion to Rupees/ RFC (See FAQs onReturning NRIs) account to be exercised||Can be continued till maturity, but to be designated as resident account or converted to RFC (See FAQs onReturning NRIs) account||Account to be designated as a Resident account|
Loans and Overdrafts (against security of funds in the account)
A) IN INDIA
|i) to the account holder||Permitted||Permitted||Permitted|
|ii) to third parties||Permitted||Permitted||Permitted|
|In Foreign currency|
|i) to the account holder||Permitted||Not Permitted||Not Permitted|
|ii) to third parties||Not Permitted||Not Permitted||Not Permitted|
|B) OUTSIDE INDIA|
|i) to the account holder||Permitted||Permitted||Not Permitted|
|ii) to third parties||Permitted||Permitted||Not Permitted|
In general, 'A' can freely invest in residential/ commercial property (subject to certain restrictions like investment in agricultural land,
plantation and farm house). Besides the sale proceeds can be freely repatriated outside India to the extent of the amount originally brought
in from abroad. Also sale proceeds of only two residential properties can be repatriated.
Besides, housing loan can be availed in India against the security of the immoveable property. Now loan for any bonafide purpose may be obtained against the security of immoveable property.
See Investment opportunities for more on investment in real estate. Profit on sale of property acquired out of forex resources as above or even the sale proceeds of property acquired out of Rupee resources can be repatriated in certain cases. To know more about the same, read Investing in real estate in India.
'A' can make investments or operate his business in India in the following ways:
Branch/ Liaison office with prior permission of RBI (profits of the branch can be freely repatriated). Indian company- 100% wholly owned subsidiary/ Joint Venture on repatriation and non-repatriation basis without permission of RBI in most of the sectors. For investments on repatriation basis, the prohibited sectors include retail trading, domestic wholesale trading and print media besides a few others.
Partnership firm/ Proprietorship concern on non-repatriation basis (income freely repatriable) in any activity except agriculture, plantation and real estate (other than real estate development) without permission of RBI. It is significant to note here that now even sale proceeds of investments held on non-repatriation basis can be repatriated up to USD 1 million per calendar year. See Investment opportunities for more on investment through Indian companies.
'A' can freely invest in the shares (equity and preference) and convertible debentures of listed Indian companies on repatriation (i.e. from NRE account/ remittance from abroad) and non-repatriation basis (i.e. from NRO account/ NRE account/ remittance from abroad) subject to the following conditions:
See Investment opportunities for more on investment in stock market.
NRIs can freely invest on repatriation and non-repatriation basis in mutual funds in India. See Investment Opportunities for analysis of mutual funds as an investment option. See also FAQs on Mutual Funds, Performance Updates, Schemes.
In our view, permission from or declaration to RBI is not required to acquire or continue to hold jewellery and other movable assets in India. Permission should be taken while taking jewellery abroad so that there is no duty while returning back. For repatriation of sale proceeds, see Repatriation.
'A' can hold insurance policies in India and pay premium thereon without any permission. Settlement of claims in foreign currency by insurance companies is permitted in certain cases where the premium has been paid in foreign currency or remittance from abroad. See also Repatriation.
'A' can acquire and continue to hold both domestic and international credit cards issued by banks in India. He can pay for the same from his NRE/ NRO account or by way of remittance from abroad.
NRIs can lend to residents as follows:
Significantly, even loans/ deposits on non-repatriation basis can now be repatriated under the USD 1 million per calendar year route.
Banks in India can lend to NRIs for any bonafide purpose (other than investment in capital market and for prohibited business activities viz. agriculture, plantation. chit fund/ nidhi, trading in TDR) against any acceptable security based on their commercial judgement. Banks can even lend outside India to NRIs trough their overseas branches/ correspondents against securities provided in India. Other residents cannot lend to NRIs in general.
Loan given to another person against the collateral security of shares/ immoveable property of 'A' is permitted.
'A' can also provide a guarantee in relation to loan to a resident in general provided no direct or indirect outgo from India is involved by way of guarantee commission or otherwise.
A resident other than a bank can provide guarantee in favour of a NRI only with prior RBI permission.
To act/ continue as a director of an Indian company, no permission from RBI is required. The Indian company can make payment in Rupees to its non-wholetime director towards travel expenses to n fro and within India, sitting fees, commission or remuneration as agreed which can be repatriated abroad by 'A' after payment of taxes.
No permission from RBI is needed to act/ continue as a trustee of a trust in India in general.
NRIs can acquire assets by way of inheritance and continue to hold them without RBI permission. Further sale proceeds of assets can be repatriated abroad up to USD 1 million per calendar year without RBI permission. Repatriation in excess of the abovementioned limit requires prior RBI approval. Tax will be payable by the legal heirs on the income accruing from such asset after the date of death as also on gains from the sale of assets.
There is no restriction on gifts by NRIs to resident Indians in foreign exchange or Indian Rupees or in the form of assets. All sorts of gifts from relatives (as defines under Income Tax Act) are tax free. All that is required is an offer by the donor and acceptance thereof by the in black and white. To safeguard against any hassles, the donee should request the donor for a gift and then the donor should remit the amount to the donee. Alternatively, the donor can offer the gift. In either case, it is necessary for the done to accept the gift in writing (maybe through a thank you note).
There are no restrictions on repatriation of current income i.e. rent, dividend, interest etc. net of Indian taxes. Only an undertaking by the remitter and CA certificate as to the payment/ deduction of tax is required.
Repatriation of sale proceeds of investments acquired out of forex resources/ NRE funds has been discussed in Investment opportunities.
Now full capital account convertibility is available to NRIs to the extent of USD 1 million per calendar year for any bonafide purpose out of:
It is recommended that 'A' should execute a power of Attorney (general or special) in favour of a trusted friend/ relative/ professional to undertake certain transactions on his behalf. The power of attorney holder can operate bank account for local disbursement (for expenses) but can not make remittance outside India nor can make a gift or extend a loan to any person Resident in India / Resident outside India. In case of NRO account, joint account with a resident is permitted. Accordingly, in such a case, a power of Attorney need not be executed for operation of bank account if there is a joint account holder.
No. WILL is not compulsory in India. However, in absence of WILL, estate will be bequeathed to legal heirs as per the applicable law. Further, this might increase paperwork for legal heirs to effect transfer of assets from your name to their name. It is therefore advisable to effect a WILL for Indian assets.
A WILL is a binding document that identifies who should inherit your assets after your death. Recipients generally include a spouse, children, grandchildren or a charitable organization.
For all class of assets, you have an option of ‘nominating’ entities. In case of your death, nominee can produce death certificate before the authorities and nominee will be placed as ‘owner’ in your place without any other legal formalities. Once your WILL is opened, executors can approach authorities and in case the ‘successors’ to your assets are different than the ‘nominees’, their names will be placed as ‘owners’ and nominee’s names would be removed.
You have to complete the paperwork as prescribed by each authority and this nomination is duly recorded in their records. It is a recommended practice to complete the nomination paperwork.
In case you need any assistance, you may connect with us on email@example.com
Yes. Nomination process is not a substitute for WILL.
It is advisable to have a separate WILL for Indian assets.
Not really. Only if you wish to register the WILL, you need to be present in India and not otherwise.
It is not mandatory to register a WILL in India. A simple white paper printed WILL is also sufficient and legal as far as India is concerned. It is advisable to register a WILL in cases where you suspect that legal heirs might dispute validity of WILL etc.
No. Your legal heirs need not be present in India while you are framing and executing the WILL.
The executors as defined in the WILL are the entities who will take position as ‘caretakers’ of your estate till such time that they are effectively transferred to your legal heirs.
Typically, these are close and trusted family members / friends / professionals.
Generally these are people who have the powers to protect the assets. They also have powers and obligation to effect the distribution of assets. Further, their powers can also be mentioned/restricted in the WILL as per your desire.
Yes. Capital Gains tax and income tax (as applicable) is leviable on sale of your assets in India.
Yes. If you own assets in India and you have taxable income in India, it advisable that you file your tax returns in India.
No. As per the law as it stands today (2020), there is no estate duty in India.
No. There are no restrictions. You can distribute the assets as per your desire.
Yes. They can sell the assets and repatriate funds out of India. However, if they are NRIs, RBI rules shall apply and as per current guidelines (2020), each of your heir can repatriate up to 1 Million USD per financial year.
It depends on nature of assets and also the kind of powers given to executors in the WILL. If all execution powers are given to executors, the legal heirs may not need to visit India.
Yes. That can be done. Even this can be mentioned in the WILL itself.
No. This is not mandatory. However, it would be a good practice to obtain a certificate from practicing doctor certifying that you are in fit state of mind and health to make your WILL.
If you have any other query, do not hesitate to Ask Us
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