Income tax laws treat residents and non-residents differently with respect to certain taxation provisions. In this article, we will discuss the tax benefits that are available to a resident individual taxpayer and not available to a non-resident taxpayer. Please note that non-resident for taxation purpose is different under FEMA (Foreign Exchange Management Act) for transactions and investment purposes in India. An individual is treated as a non-resident for income tax purposes based on the length of his stay in the financial year ending 31st March of each year and which is generally known after the end of the year. Let us discuss the major benefits which are not available to the non-resident.
basic exemption limit
A person is required to pay tax in India if his taxable income in India exceeds the basic exemption limit. General exemption limit Rs. 2.50 lakh per annum. However, for resident individual, who has completed 60 years of age as on 31st March of the relevant year, the basic exemption limit has been increased to Rs. 3 lakhs. Similarly, for individual taxpayers who are residents for income tax purposes and have completed 80 years of age (commonly referred to as super senior citizens) the applicable basic exemption limit is Rs. 5 lakh and then the respective slab rate is applicable on income in excess of the basic exemption limit. This special treatment of enhanced basic exemption limit is available only to senior citizens and very senior citizens resident in India. So the basic exemption limit for all non-residents under the Indian Income Tax laws is thus Rs. 2.50 lakhs irrespective of their age. Please note that special treatment is available based on your physical stay in India during the previous year and independent of your citizenship. So even an Indian citizen who is above 80 years but is not a resident under the Income Tax laws, he has only Rs. 2.50 lakh as basic exemption.
Exemption under section 87A
Indian tax law allows you an exemption of Rs. 12,500/- from your net tax liability if your income does not exceed Rs. 5 lakh provided you are resident under the Income Tax laws of India. So this exemption under section 87A is Rs. 12,500/- is not available to a person who is a non-resident even if his net taxable income does not exceed 5 lakhs.
taxation of dividend
Dividend in the hands of a non-resident is taxed at the same rate of 20% without any exemption while a resident has to pay tax on dividend at the slab rate. So a resident can claim deduction under various sections like 80C, 80D, 80G to reduce the incidence of tax on his dividend income. Since dividends are taxed at a slab rate, the effective rate is much lower for resident tax payers as compared to non-residents, who have to pay flat 20% on dividends from Indian companies. A resident is allowed to claim deduction against his dividend income in respect of interest paid for acquisition of shares up to 20% of the dividend received.
Higher deduction for interest received by senior citizens from banks, post offices and co-operative banks
All senior citizens who are residents for tax purpose are eligible to claim deduction under section 80TTTB in respect of any interest received from banks, post offices and co-operative banks. 50,000/- in a year. Interest can be from savings bank, fixed deposit or recurring deposit. However, in the case of non-resident senior the deduction is reduced to Rs. 10,000/- u/s 80TTA and that too in respect of interest only on savings bank account derived from these entitlements
Marginal relief from payment of capital gains
Any gain arising out of sale of listed equity shares or investment in equity oriented units of Indian Mutual Funds or units of business trusts is taxed at a flat rate of 15%. In the case of a resident tax payer, if his income other than such short-term capital gains or long-term capital gains falls below the basic exemption limit, he shall be required to adjust his short-term capital gains to the extent of such reduction and deduct tax. Payment is allowed on balance. Similarly, the same benefit is available to a resident tax payer in respect of all types of long-term capital gains. Both these benefits of making up the shortfall in the basic exemption are not available to a non-resident.
TDS provision
When a resident sells an immovable property, the buyer is required to deduct tax at the rate of 1% of the sale consideration, if the sale consideration of the property exceeds fifty lakh rupees. However, if the seller is a non-resident, the buyer will have to deduct at a higher rate of 20% if the property was held by the non-resident for more than two years and was at 30% of the taxable income included in the sale consideration. If the seller provides details of the cost and date of purchase of the property to help the buyer calculate taxable capital gains. If the non-resident does not provide such details, the buyer is bound to deduct tax on the entire amount. In case of non-resident seller, there is no limit for deduction of tax and the buyer has to deduct tax from the first Rs.
A resident individual can apply to a company paying dividend to him without deduction of tax at source if his estimated tax liability on his income including the amount of dividend is nil. No such option is available for a non-resident taxpayer to receive dividend without deduction of tax at source. Similarly, a resident senior citizen is entitled to submit a declaration to pay income without deduction of tax at source to the payer of various incomes if his estimated tax liability for the year is nil. There is no such option available to a non-resident senior citizen in receipt of any income in India.
Balwant Jain is a tax and investment specialist and can be reached on Twitter at jainbalwant@gmail.com and @jainbalwant.
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