Of NRIs, spouses and taxation

A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answers your questions on NRI investment.

A new Rediff India Abroad feature:

I am a Non-Resident Indian residing in United States since the last 15 years.

I do not have any income in India. All my income from the US is parked in Non-Resident External accounts in India.

I want to gift my wife a sum of Rs 5 million from my NRE account which she will deposit in a bank as a fixed deposit. She will earn an interest of approximately Rs 500,000 per annum.

She is a homemaker and does not have any other income. I understand that she will have to pay income tax on the interest earned. My wife is a permanent Indian resident.

A friend has advised that this will attract clubbing of income in my hand and the whole interest earned by my wife will be taxed as my income. Moreover, the rebate of Rs 180,000 will not be given to my wife. Is this true?

--- Harbhajan Singh

Your friend has advised you correctly. As per Section 64 of the Indian Income Tax Act, any income arising from assets gifted to spouse is to be taxed in the donor spouse's hands. This law is put in place to prevent tax planning by transferring income to the non-earning spouse.

Most NRIs are under the impression that as long as they move money from NRE accounts, any transaction would be free of Indian tax. However this is not true. NRE accounts are in Indian banks and hence subject to Indian jurisdiction.

The tax law in India specifically exempts interest from NRE accounts from tax. But this doesn't mean that other tax provisions are not applicable to the same.

The only way this clubbing provision can be circumvented is by transferring funds to the spouse abroad (this is not so much in your case but when both husband and wife are abroad). Then the wife can send money to her NRE account here in India.

In such cases, though the credit to the NRE account has been received from funds sourced from the husband, since such transfer had taken place abroad, Indian law will not be applicable.

I am working in the merchant navy since December 1996. From the financial year 1998-1999 to year 2007-2008, I have completed necessary requirements of NRI (183 or more days out of country). But for financial year 2008-2009, I am unable to complete required 183 days out of country.

Now please advice me whether I am eligible for RNOR and if yes for how many years.

-- Gurdip Singh

There is a transitional status of RNOR between being an NRI and becoming a full-fledged Resident after returning to India permanently.

Resident but not Ordinarily Resident is a person who satisfies one of the following conditions:

a) He has been a Non-Resident in India in nine out of the ten previous years preceding that year, or

b) Has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less.

An RNOR is not required pay tax in India on his forex income.

Most NRIs will be caught by the requirement of stay in India for 729 days or less during the last seven financial years.

Consequently, anyone who returns after seven or more financial years of being an NRI will become RNOR for two years. Those returning after six years will become RNOR for one year only. This is subject to his stay in India during the previous seven years for 729 days or less.

Those returning after being NRIs for five continuous years or less will become Residents immediately.

However, in those cases where he has not come to India in any of the previous five years and has returned to India after April 2 will be an RNOR for three years.

Finance Act 2003 has changed the definition of RNOR. Before this amendment, a person with NRI status for two consecutive years could enjoy the RNOR status for nine years after returning to India.

I would like to clarify whether an NRI holding the following visas (PIO/OCI card) open a regular account in India or not, and what does the 180 days rule have to do with it?

-- Jagat Sandhu

Obtaining a Person of Indian Origin/Overseas Citizen of India card is not a status under the Indian law. These cards just facilitate and ease the requirements under law for PIOs like registering with the FRO after a stay of 180 days, et cetera. In any case, getting a PIO/OCI card brings the person on par with NRIs.

Both NRIs and PIOs cannot open regular resident bank accounts in India. Only NRE, NRO and FCNR accounts may be opened by NRIs and the same is true even for PIO/OCI card holders.

I am a US citizen who is a resident of India. All my assets and income are earned in India and I pay tax here. I earn income from my professional work and have past savings which are invested in mutual funds, et cetera. I have no earnings in the US at all, except whatever small interest I earn on the bank balance I maintain there.

All my income and assets are in India, and I have been filing and paying all my taxes here. While I was in the US, I filed and paid taxes there on my US income earned when I lived there.

I want to know, given that there is a double tax avoidance treaty between the US and India, do I have any tax liability in the US? My understanding is that I don't.

--- Madhu Sarin

This is a forum for discussing Indian tax laws and regulations. We cannot advise you on the applicability of US taxes on your income. However, do note that generally for a citizen of any country, global income is taxable. Going by that, your Indian income would be taxable in the US.

The treaty takes incomes item by item and either gives a particular country the exclusive right of taxation or if it is taxable in both countries, you can take credit for tax paid in the source country while filing your tax return in the country of residence.

That said, it would be advisable to consult a tax attorney for the nuances and working out the details.