Scope of income chargeable under Tax Liability Based on Residential Status :

As already discussed in earlier chapters, the scope of income chargeable to tax in the case of a non-resident is laid down in section 5(2).

According to this provision, the total income of any previous year of any person who is non – resident must be taken to include all income from whatever source derived which – (i) is received or deemed to be received in India in such year by or on behalf of the non-resident; or (ii) accrues or arises or is deemed to accrue or arise to the non-resident in India during the previous year.

Explanation 1 to section 5 seeks to clarify that income accruing or arising outside India would not be deemed to be received in India for purposes of determination of the total income of the assessee under section 5 merely by reason of the fact that it has been taken into account in a balance sheet prepared in India. In other words, for determining whether a particular income accrues or arises in India or outside, one should not be guided by the entries in the books of accounts and disclosure thereof in the final accounts; it is, therefore, essential to determine the place of actual accrual of the income for purposes of inclusion or exclusion of the same within the scope of total income assessable to tax. Explanation 2 to section 5 further clarifies that income which has been included in the total income of a taxpayer on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him, should not be again so included on the basis of its actual or deemed receipt in India either by the assessee or on his behalf.

Exemption available to non-residents: Apart from the scope of tax liability being less in the case of non-residents, there are other concessions available to persons who are non-resident. They are entitled to concessional rates of tax in respect of their income chargeable to tax in India.

Interest on fixed deposits with banks abroad would be taxable in India if such income by way of interest is received in India or the right to receive the same is exercised by the individual in India. Interest on non-resident (external) non-repatriable deposits as well as Non-resident (External) Rupee Deposits in the banks in India would be exempt under section 10(4) of the Income-tax Act, 1961, subject, however, to the limits and conditions specified therein. In respect of assets acquired by investment through foreign exchange remittances the concessional rates of income tax would continue to be available to non-resident Indians in respect of their investment income including capital gains under section 115C read with sections 115D, 115E and 115H.