Income Tax 2025

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Special provision for computation of total income of non-residents. ​

213(1) ​

No deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non-resident Indian.

213(2) ​

In the case of an assessee, being a non-resident Indian, where––

  • (a) the gross total income consists only of investment income or income by way of long-term capital gains or both then no deduction shall be allowed under Chapter VIII;
  • (b) the gross total income includes any income referred to in clause (a),–– (i) the gross total income shall be reduced by such income; and (ii) the deductions under Chapter VIII shall be allowed as if the gross total income as so reduced was the gross total income of the assessee.
Explanation

Section Summary: ​

This section deals with the computation of total income for non-resident Indians (NRIs) and imposes restrictions on the deductions they can claim. Specifically, it disallows certain deductions for NRIs when their income consists solely or partly of investment income or long-term capital gains. The purpose is to simplify the tax treatment of NRIs and ensure that specific types of income are taxed without the benefit of deductions that are otherwise available to residents.

Key Changes: ​

  1. No Deductions for Investment Income: Under Section 213(1), NRIs cannot claim any deductions for expenses or allowances when computing their investment income. This is a stricter rule compared to the previous law, where some deductions might have been applicable.
  2. Restrictions on Chapter VIII Deductions: Section 213(2) clarifies that if an NRI's income consists solely of investment income or long-term capital gains, they cannot claim any deductions under Chapter VIII (which includes deductions like those under Sections 80C to 80U). If their income includes other types of income alongside investment income or capital gains, the deductions under Chapter VIII are allowed only on the remaining income after excluding investment income or capital gains.

Practical Implications: ​

  1. Impact on NRIs: NRIs earning investment income (e.g., interest, dividends) or long-term capital gains (e.g., from the sale of property or securities) will face higher taxable income since they cannot claim deductions for expenses or allowances related to such income.
  2. Mixed Income Scenarios: If an NRI has both investment income/long-term capital gains and other income (e.g., salary or business income), they can still claim Chapter VIII deductions, but only on the portion of income that is not investment income or capital gains.
  3. Simplified Compliance: The law simplifies tax computation for NRIs by removing the need to calculate and claim deductions for certain types of income.

Critical Concepts: ​

  1. Investment Income: Refers to income from investments such as interest, dividends, or rental income.
  2. Long-Term Capital Gains (LTCG): Gains from the sale of assets held for more than a specified period (e.g., 24 months for immovable property, 12 months for listed securities).
  3. Chapter VIII Deductions: These include deductions under Sections 80C to 80U, such as deductions for life insurance premiums, tuition fees, medical insurance, etc.
  4. Gross Total Income: The total income of an individual before allowing any deductions under Chapter VIII.

Compliance Steps: ​

  1. Identify Income Sources: NRIs must separate their income into investment income, long-term capital gains, and other income.
  2. Exclude Investment Income/LTCG: If the income consists solely of investment income or LTCG, no deductions under Chapter VIII can be claimed.
  3. Compute Deductions for Mixed Income: If the income includes other types of income, reduce the gross total income by the amount of investment income or LTCG, and then compute Chapter VIII deductions on the remaining income.
  4. File Accurate Returns: Ensure that the tax return reflects the correct computation of income and deductions as per this section.

Examples: ​

  1. Example 1 (Only Investment Income):

    • An NRI earns ₹10 lakh as interest income from fixed deposits in India.
    • Under Section 213(1), no deductions for expenses or allowances can be claimed.
    • The taxable income is ₹10 lakh, and no Chapter VIII deductions are allowed.

  2. Example 2 (Mixed Income):

    • An NRI earns ₹5 lakh as interest income (investment income) and ₹7 lakh as salary income.
    • Under Section 213(2), the gross total income is ₹12 lakh. The ₹5 lakh investment income is excluded, and Chapter VIII deductions are allowed only on the remaining ₹7 lakh salary income.

This section ensures that NRIs are taxed appropriately on their investment income and capital gains, while still allowing deductions for other types of income.