India’s economy has been witnessing an increasing trend of Non-Resident Indians (NRIs) venturing into business activities within the country. Section 44DA of the Income Tax Act, 1961 outlines clear regulations for computing taxable income and determining the tax on NRI business income in India. This article will delve into the key aspects of Section 44DA and shed light on its implications for NRIs.
What is Section 44DA of the Income Tax Act,1961?
The Indian government has incorporated Section 44DA into the Income Tax Act, 1961 to establish regulations for the computation of income received by NRIs through royalties and technical services.
NRI Taxable Business Income in India
The income of eligible taxpayers falling under Section 44DA is computed by Income Tax officials under the category of ‘Profits or gains from business or profession’. To determine the taxable income, one must subtract the business-related expenses incurred from the permanent establishment and the reimbursement of actual expenses from the total income. The following formula provides a clearer illustration:
Taxable income = Total Income – (Expenses incurred for the business + Reimbursement of actual expenses by a permanent establishment)
Tax on NRI Business Income in India
- Income falling under this section will be subject to income tax at the regular tax slab rates applicable to the taxpayer.
- In the case where a non-resident or foreign company receives royalties or fees for technical services as per an agreement with the government or an Indian entity, and does not conduct business through a permanent establishment or fixed place of profession in India, Section 115A applies. In such instances, the tax rate will be 10%.
When is Section 44DA Applicable?
Section 44DA of the Income Tax Act is applicable in the following circumstances:
- When a non-resident Indian has entered into an agreement with either the Government of India or an Indian company, resulting in the receipt of royalties or fees for technical services (FTS).
- In case, a non-resident Indian has a permanent establishment in India and conducts business or professional activities from that establishment.
- When the permanent establishment is associated with the rights, contracts, and property from which the individual earns royalties and fees for technical services (FTS).
Eligibility Criteria under Section 44DA
The following are eligible under Section 44DA:
- Non-resident Indians
- Non-corporate entities
- Foreign companies.
If an NRI earns income in the form of royalties or fees for technical services (FTS), they have the opportunity to claim deductions in accordance with the specified terms and conditions of the section.
Meaning of Royalty under Section 44DA
As per section 9(1)(vi) of the Income Tax Act, 1961, the term “royalty” encompasses lump sum consideration provided for the following:
- The transfer of any or all rights pertaining to patents, inventions, models, designs, secret formulas, processes, trademarks, and similar assets. This also includes the granting of licenses.
- Imparting any information concerning the use or working of certain technical, industrial, commercial, or scientific knowledge, experience, or skill.
- Use of any industrial, commercial, or scientific equipment (excluding those mentioned in section 44BB).
- Transfer of any or all rights in relation to copyrights, literary, artistic, or scientific works, films, or video tapes. (Note: Tapes here do not include consideration for the sale, distribution, or exhibition of cinematographic films).
- Rendering of any services in specified cases.
As per section 9(1)(vi) of the Income Tax Act, 1961, the following instances shall not be considered as royalty:
- Any consideration that would be taxable as the recipient’s income under the category of ‘capital gain’.
- Any consideration received for the sale, distribution, or exhibition of cinematographic films.
Meaning of Fees for Technical Service under Section 44DA
- Section 9(1)(vii) defines “Fees for Technical Services” as any consideration, including a lump sum amount, received for the provision of:
- Technical, or consultancy services (This includes the engagement of technical or other personnel for service provision)
However, it is important to note that “Fees for Technical Services” does not include the consideration received for activities such as:
- Assembly, mining, or similar undertakings carried out by the recipient.
- Additionally, any consideration that would be categorized as salary income of the recipient is also excluded from the definition of “Fees for Technical Services.”
Meaning of Permanent Establishment under Section 44DA
In accordance with Section 92F (iiia) of the Income Tax Act, 1961, the term “Permanent establishment” encompasses a fixed location or place of business where the enterprise conducts its business activities either wholly or partially.
Points to Remember about Section 44DA
Here are some key considerations to keep in mind regarding Section 44DA:
- You must note that the income earned under Section 44DA is subject to taxation at the applicable income tax slab rates determined by the IT department.
- It is necessary to maintain a comprehensive book of accounts and retain other relevant documents as prescribed by Section 44DA.
- It is advisable to obtain a thorough tax audit conducted by a Chartered Accountant and submit the audit report while filing the Income Tax Return (ITR).
In conclusion, it is crucial for all NRI taxpayers to familiarize themselves with Section 44DA of the Income Tax Act. This section establishes the necessary legal framework for determining the tax on NRI business income in India.
There are various ways for NRIs to save income tax in India, but due to a complicated tax system and recurrent amendments, understanding tax laws can be confusing, especially for NRIs. NRIs may miss claiming deductions and other benefits. At SBNRI, we understand this struggle. You can download SBNRI App to connect with our NRI Tax Experts to know more about new TRC, TDS/ TCS rules for NRIs. You will also get end-to-end assistance related to NRI tax filing. SBNRI will also help you get a lower TDS Certificate to reduce tax payable. You can also click on the button below to ask any questions. Visit our blog and YouTube Channel for more details.
Section 115A provides the tax rates applicable on interest, dividends, royalty and fees for technical services in the case of NRIs and foreign companies.
The definition of a permanent establishment can be found in Section 92F of the Income Tax Act. It refers to a stationary location where a non-resident taxpayer conducts their business either fully or partially.