1. Resident & ordinarily Resident – world income taxable.

2. Resident but not ordinarily Resident – Income earned/received in India or income deemed to accrue in India or income arising abroad out of business controlled in India is taxable.

3. Non-Resident – only income earned/received in India and income deemed to accrue or arise in India is taxable.

Interest income received by a non-resident from Government or from any other person in India is taxable in India.

1. Exempt Investment Income

Following types of investment incomes are exempted:

1. Interest on NRE/FCNR account paid or credited to individual non-residents Indians who are permitted by Reserve Bank to maintain such accounts. Sec. 10(4)(ii) (including persons who may be "resident" in India as per Income-tax law, but are resident outside India under section 2(q) of FEMA.)

2. Interest on notified saving certificates (like NSC VI & VII) subscribed in foreign exchange before 1-6-2002, by a NR who is an Indian citizen or a person of Indian origin. sec. 10(4B)

3. Interest, premium on redemption or any other payment on NRNR deposit and other securities, bonds, savings certificates, notified under section 10(15)(i). NRNR deposit interest is exempt in the hands of non-resident while he remains non-resident as per Income-tax Act.

4. Interest on "NRI Bonds 1988" and "NRI Bonds (Second series)" issued by SBI purchased in foreign exchange, exemption continues even after person becomes resident. [S. 10(15)(iid)]. However, no exemption will be available in the year of premature encashment.

5. Interest paid up to 31st March, 2005 by a scheduled bank on RBI approved foreign currency deposits, FCNR & RFC A/c, to a NR or NOR [S. 10(15)(iv)(fa)]. [Exemption withdrawn for interest payable on or after 1st April, 2005 by the Finance (No. 2) Act, 2004]

6. 6. Interest payable by Government or local authorities on moneys borrowed from sources outside India prior to 1-6-2001. [Sec. 10(15)(iv)(a)].

7. Interest on moneys borrowed by industrial undertaking prior to 1-6-2001 in a foreign country in respect of purchase of raw materials, components or plant and machinery and approved by Central Government prior to 1-6-2001 [Sec. 10(15)(iv)(c)].

8. Lease income from leasing of aircraft or aircraft engine received from an Indian company under an agreement is exempt from tax. However incomes under an agreement entered into between 1st April, 1997 and 31st March, 1999, and agreements entered into after 31st March, 2006, are not entitled to exemption.

9. Any income by way of dividends referred to in S. 115-O received by a non-resident is exempt u/s 10(34). Any income received in respect of units of a Mutual Fund specified u/s 10(23D), or the specified company or an Administrator of the specified undertaking as defined in Sec. 10(35) is exempt u/s 10(35).

10. Any income arising from the transfer of a long-term capital asset, being an eligible equity share in a company purchased on or after 1st day of March, 2003 and before 1st March, 2004 and held for a period of twelve months or more is exempt u/s 10(36). Eligible equity share means: –

1. Any equity share in a company which is a constituent of BSE 500 Index of the Stock Exchange, Mumbai as on the 1st day of March, 2003 and the transaction of purchase and sale of such equity share are entered into on a recognised stock exchange in India;

2. Any equity share in a company allotted through a public issue on or after the 1st day of March, 2003 and listed in a recognised stock exchange in India before 1st March, 2004.

11. Any income by way of long term capital gain on transfer of equity shares on a recognised stock exchange or on re-purchase of units of equity oriented fund on which Security Transaction Tax (STT) is paid.

12. Any interest received by a non-resident or a person who is NOR, in India on a deposit made after 1st April, 2005 in an Offshore Banking Unit as is referred to in section 2(u) of the Special Economic Zones Act, 2005. Taxation of Capital Gains from sale of listed securities is treated differently. See the relevant Income Tax Section for details.

13. Any income accruing or arising to a Sikkimese individual (as defined) from any source in the State of Sikkim, or by way of dividend or interest on securities is exempt u/s 10(26AAA) with effect from assessment year 1990-91.

2. Special Tax Rate and Surcharge applicable on Investment Income of Non-resident

Tax Rates

Sections 115A to 115AD prescribes tax rates for various types of investment income of different non-resident entities. However, if the non-resident is covered by a particular DTAA, then the rates prescribed under that DTAA would be applicable without any surcharge (which includes education cess and secondary and higher education cess).

Surcharge

If a non-resident recipient of income is either an individual, HUF, AOP or BOI and his income (from all sources) is exceeding or likely to exceed Rs. 10,00,000 in a Financial Year then a surcharge of 10 per cent of the tax and education cess of 3% (including 1% of Secondary & Higher Education Cess) of tax plus surcharge is applicable. In case the income does not exceed or is not likely to exceed Rs. 10,00,000, then the tax shall be increased by education cess of 3% (Including 1% of Secondary & Higher Education Cess) of the tax.

In the case of a non-resident Company whose income (from all sources) is exceeding or likely to exceed Rs. 1,00,00,000 in a Financial Year then a surcharge of 2.5% and education cess of 3% (Including 1% of Secondary & Higher Education Cess) of tax plus surcharge is applicable. In case the income does not exceed or is not likely to exceed Rs. 1,00,00,000, then the tax shall be increased by education cess of 3% (Including 1% of Secondary & Higher Education Cess) of the tax.

1. Income of non-residents in respect of interest received from Government or any Indian concern for money borrowed in foreign currency is taxed @ 20% subject to applicable surcharge and education cess. [Sec. 115A]

2. Tax on overseas financial organisation (approved by SEBI) in respect of income by way of long-term capital gain arising on sale/repurchase of units of Mutual Funds/UTI purchased in foreign currency is 10% subject to applicable surcharge and education cess. [Sec. 115AB]

3. Tax on non-resident in respect of interest on bonds of Indian companies issued as per Government notification, on bonds of PSU sold by Government and purchased in foreign currency, and on LTCG on sale of such bonds/GDRs/ADRs is 10% subject to applicable surcharge and education cess. [Sec. 115AC].

4. Tax on approved Foreign Institutional Investor (FII) is as follows:

1. Income by way of interest on securities – 20%

2. Short-term capital gains on sale of other securities – 30%,
   on sale of listed Shares, units – 15%

3. Long-term capital gains on sale of other securities – 10% on sale of listed shares, units – Nil [Sec. 115AD]

3. Special Tax Rates for income of a non-resident sportsmen or Sports Associations

Income of non-resident sportsmen or sport associations by way of

1. participation in India in any game or sport or ii) advertisement or

2. contribution of article in newspapers, magazines etc. is chargeable at 10% subject to applicable surcharge and education cess (without allowing any deductions) [Sec. 115BBA]

1. Income from business of operation of ships is taxable at 7.5% of the gross receipts from such business. [Section 44B]

2. Income from business of providing services or facilities in connection with plant and machinery on hire used or to be used in prospecting for or extraction or production of mineral petroleum & natural gas is taxable at 10% of gross receipts from such business, unless the assessee claims lower profits and gains by fulfilling the required conditions. If the non-resident claims that he has earned lower profits than that prescribed, he can keep proper accounts, get the same audited and file the audit report with the income tax return. The Income Tax Officer will then conduct a scrutiny assessment. [Sec. 44BB]

3. Income from business of operation of aircraft is chargeable at 5% of gross receipts from such business. [Sec. 44BBA]

4. Income of foreign companies from business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in respect of turnkey power project approved by the Central Government and financed under any international aid programme is chargeable at 10% of gross receipts from such business, unless the assessee claims lower profits and gains by fulfilling the required conditions. If the foreign company claims that it has earned lower profits than that prescribed, it can keep proper accounts, get the same audited and file the audit report with the income tax return. The Income Tax Officer will then conduct a scrutiny assessment. [Sec. 44BBB]

5. In any other case, for computing the business income of non-resident, expenditure in nature of head office expenditure is allowable up to 5% of the adjusted income as specified.
   [Sec. 44C]

6. For any other business, the present rate of tax for foreign companies is 40% plus a surcharge of 2.5% (In case income of the company from all the sources exceeds Rs. 1,00,00,000) and education cess of 3% (Including 1% of Secondary & Higher Education Cess) thereon. (i.e., 41.20%) In case the income does not exceed or is not likely to exceed Rs. 1,00,00,000, then the tax shall be increased by education cess of 3% (Including 1% of Secondary & Higher Education Cess) of the tax (i.e. 42.23%).

1. Royalties and Fees for Technical Services received by non-residents from an Indian concern or the Government are taxed as under:

*(i) Agreements entered into after 31st March, 1976 and before 1st June, 1977 – [Section 115A(1)(b)]

1. Foreign Companies:

1. If agreement approved by Central Government, or is under Industrial Policy, Tax = 30% on Gross income

2. For other agreements, Tax = 40% on Gross income

2. Persons other than foreign companies – Tax is at applicable rates on Gross income.

*(ii) Agreements entered into after 31st May, 1997 and before 1st April, 2003 – [Section 115A(1)(b)]

1. Foreign Companies:

1. If agreement is approved by Central Government, or is under Industrial Policy, Tax = 20% on Gross income.

2. For other agreements, Tax = 40% on Gross income.

2. Persons other than foreign companies – Tax is at applicable rates on Gross income.

*(iii) Agreements entered into after 31st March, 2003 – [Sections 44DA & 115A(1)(b)]

For all non-residents; i.e., Foreign companies and other persons:

1. If the non-resident does not have a Permanent Establishment in India –

1. If the agreement is approved by the Central Government or is under Industrial Policy, Tax = 20% on Gross income.

2. If the agreement is not approved as mentioned in clause (a), Tax is at applicable rate on Net income.

2. If the non-resident has a PE, Tax is at applicable rates on Net income.

*(iv) Agreements entered into on or after 1st June, 2005 – [Section 115A(1)(b)]

1. Foreign companies

1. If the agreement is approved by Central Government, or is under Industrial Policy, Tax = 10% on Gross income.

2. For other agreement, Tax – 40% on Gross income.

2. Persons other than foreign companies. Tax is at applicable rates on Gross income.

2. Any income by way of royalty or fees for technical services arising to any foreign company (as may be notified by the Central Government from time to time) under an agreement entered into with the Central Government for provision of services in connection with security of India is exempt. (Section 10(6C))

TDS borne by the payer in case of all payments to non-residents would be taxable in hands of the non-residents except in following cases:

1. royalty or technical service fees payment in respect of agreements with foreign company after 1-4-1976 and before 1-6-2002.

2. payment other than salary, royalty or technical services in respect of agreement made before 1-6-2002 between Central Government and international organisation or foreign government.

3. tax on perquisites borne by the employer u/s 192(1A).

4. payment of lease rent for aircraft or aircraft engine under an agreement entered into after 31st March, 1997 but before 1st April, 1999, or entered into after 31st March, 2006.

1. For the purpose of computation of business income, ’Actual Cost’ of any asset brought into India by a non-resident would be computed as Actual cost of acquisition to the non-resident as reduced by notional depreciation as provided in the Income-tax Act, 1961, from the date of acquisition as if the asset had been used in India. (Sec. 43 Expl. 11)

2. Where an imported capital asset is acquired on deferred payment terms or out of the foreign loan the actual cost would be after taking into account the fluctuation in exchange rate. For this purpose, actual payment will be considered. (Sec. 43A).

All provisions discussed above are subject to Double Tax Avoidance Agreements (also known as "Tax Treaties") entered into with various countries or with any specified association in a specified territory outside India. The provision of the relevant tax treaty or domestic law provision whichever is beneficial to the tax-payer would be applicable. [Sec. 90/ 90A]

First proviso to Sec. 48 provides that where investments in shares or debentures are made by a non-resident in a foreign currency then in order to compute the capital gains/loss that may arise on sale of such securities, sale proceeds must be converted in the same currency in which the original investments were made. Resultant capital gains/loss may again be reconverted into rupees to arrive at taxable capital gains/loss. The benefit of indexation will not be available in such cases.