Generally, the NRI's are liable for tax deduction at source at maximum rate of tax. Also, the tax is deducted at source even when the payment / income received by NRI's is not liable to tax on account of exemptions available for reinvestment of long term capital gains or set-off of capital losses against capital gains. Also Double Taxation Avoidance Treaty entitles them relief in Income Tax.

In view of this, in majority cases the tax paid by them is more than actual liability of tax. The excess tax deducted is hardly claimed as refund by filing Return of Income.                                                                                      

In order to ensure least deduction of tax and to minimize the tax liability, the NRI's are advised as under:

1.       Tax Exemption Certificates.

o        Lower Rate of tax

o        Set-off gains against losses.

o        Reinvestment of Capital Gains

2.       DTAA (Double Taxation Avoidance Agreements) Benefits.

3.       Concessional Tax Provisions.

4.       Filing of Return of Income for carry forward of loss.

5.       Indexation

The NRIs are offered special provisions under the Income-tax Act, 1961 whereby he is -

         i.            Offered procedural simplification

       ii.            Fixed rate of taxation.

      iii.            Tax on real income i.e. income is computed in Foreign Exchange (so that rupee depreciation do not increase taxes)

     iv.            Deduction of tax at source the amount at which he is liable for taxation.

NRIs have been offered a separate concessional tax regime in respect of certain types of income under Chapter XIIA comprising section 115C to 115I. The said chapter has been introduced in the Income tax Act with a view to encouraging and inviting Non-residents Indian to invest their foreign earnings in India.

As per section 115E, concessional tax of 20 percent is available in respect of investment income and 10% in respect of long term capital gains from the specified assets which are acquired out of convertible foreign exchange.
Specified assets are defined under section 115C(f) as:

         i.           Shares in an Indian company.

       ii.   Debentures and deposits in an Indian company (which is not a private company).

      iii.   Any security of the Central Government.

     iv.    Any other notified asset. (no asset has been notified as yet).

There are some strings attached. If an NRI opts for the concessional tax treatment, he is taxed at a flat rate [section 115D], and he is denied-

    * Any deduction in respect of any expenditure or allowance under any provisions of this Act (like interest on over draft, Bank charges for collection).
    * Deduction under Chapter VIA (like section 80L).
    * Benefit of cost indexation for capital gains.

However, expenses incurred wholly and exclusively in connection with transfer of capital asset is allowable while working out capital gains.

Reinvestment of long term Capital Gains

As per section 115F(a), long term capital gains from sale of specified assets would be exempt if, within six months, the net consideration is reinvested in any specified asset or savings certificate notified under section 10(4B). If only a proportion is reinvested, proportionate exemption is available. The holding period for the new asset is three years and if it is transferred within three years, the capital gain which was exempted will be liable to be taxed in the year of such transfer of the new asset [section 115F(2)].

Option
Under the scheme the NRI need not file his return of income, if

    * His total income consists of investment income or long term capital gains or both, and
    * Tax has been deducted at source under Chapter XVII-B.[Sec. 115G]

NRIs also have a choice to opt out of these provisions. They are not forced on NRIs. If the NRI wants to opt out, he will have to give a declaration in the return of the income. In respect of each assessment year, the choice is entirely with the NRI. [ Sec.115I]

Continuance of benefit after return
The benefit of concessional tax treatment under chapter XIIA continues even after NRI becomes a resident. However he has to file a declaration in writing to the assessing officer alongwith the return of income u/s. 139. The option having been once exercised is irrevocable, and the provisions of the Chapter will continue to apply till the transfer or conversion into money of the said assets. It is pertinent to note that the benefits are not available for long-term capital gain after the non-resident Indian becomes a resident.