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 Clarification on Indirect Transfer provisions in case of redemption of share or interest outside India under the Income-tax Act, 1961

New direct tax code to alter status
August, 26th 2010

As per the provisions of the Income Tax Act, 1961, an individuals income is taxable based on his residential status in India. Residential status is determined based on the physical stay of the individual in the current financial year (1 April to 31 March) and the preceding 10 financial years.

Residential Status

An individual is said to be a Resident if he is in India for 182 days or more during a financial year or for 60 days or more during a financial year and 365 days or more in the four preceding financial years. If none of these two conditions is satisfied, then an individual is said to be a Non-Resident.

A Resident may further be classified as a Resident and Ordinarily Resident (ROR) or Not Ordinarily Resident (NOR). An individual is said to be a NOR if he satisfies any of the following two conditions. First, if he has been a non-resident in India in nine out of the 10 preceding financial years. Second, if during the preceding seven financial years he has been in India for 729 days or less.

Taxability of income

Broadly speaking, an ROR is taxable in India on his global income i.e. including the income earned or received outside India. While an NR or NOR is primarily taxable on his income earned/received in India, subject to certain exceptions.

Therefore, if an individual comes to work in India for a few years, the above provisions are important to determine the taxability of Indian and global income. His employment income would primarily be taxable in India in respect of the services rendered in India.

This is irrespective of whether salary is received in India or outside India. However, in respect of his other incomes like rent, interest, dividends, capital gains etc from the investments/assets situated outside India, the taxability would depend upon his residential status.

Generally, in case his residential status is NR/NOR in a particular financial year, then non-salary income earned and received outside India would not be taxable in India. In this context, the condition of 729 days or less stay in India in the preceding seven financial years be-comes important.

This could be better understood with the help of an example. Say, a person visits India for the first time to take up employment for four years and stays in India for 200 days in each year.

In each of the four financial years i.e. year 1 to year 4, as his stay exceeds 182 days, he is considered to be a Resident in India. However, as his cumulative stay at the end of the each of these years is less than 729 days i.e. year 1- 200 days, year 2 - 400 days, year 3 - 600 days, he would qualify to be a NOR. Hence, his overseas income earned and received outside India would not be taxable.

 
 
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