Interest income received by a non-resident from Government or from any other person in India is taxable in India .

A. Exempt Investment Income

Following types of investment incomes are exempted:

Interest on NRE/FCNR account paid or credited to individual non-residents Indians who are permitted by Reserve Bank to maintain such accounts. Sec. 10(4)(ii) (including persons who may be "resident" in India as per Income-tax law, but are resident outside India under section 2(q) of FEMA.)

Interest on notified saving certificates (like NSC VI & VII) subscribed in foreign exchange before 1-6-2002, by a NR who is an Indian citizen or a person of Indian origin. sec. 10(4B)

3. Interest, premium on redemption or any other payment on NRNR deposit and other securities, bonds, savings certificates, notified under section 10(15)(i). NRNR deposit interest is exempt in the hands of non-resident while he remains non-resident as per Income-tax Act.

4. Interest on "NRI Bonds 1988" and "NRI Bonds (Second series)" issued by SBI purchased in foreign exchange, exemption continues even after person becomes resident. (S. 10(15)(iid). However, no exemption will be available in the year of premature encashment.

5. Interest paid up to 31st March, 2005 by a scheduled bank on RBI approved foreign currency deposits, FCNR & RFC A/c, to a NR or NOR [S. 10(15)(iv)(fa)]. [Exemption withdrawn for interest payable on or after 1st April, 2005 by the Finance (No. 2) Act, 2004]

6. Interest payable by Government or local authorities on moneys borrowed from sources outside India prior to 1-6-2001. [Sec. 10(15)(iv)(a)].

7. Interest on moneys borrowed by industrial undertaking prior to 1-6-2001 in a foreign country in respect of purchase of raw materials, components or plant and machinery and approved by Central Government prior to 1-6-2001 [Sec. 10(15)(iv)(c)].

8. Lease income from leasing of aircraft or aircraft engine received from an Indian company under an agreement is exempt from tax. However incomes under an agreement entered into between 1st April, 1997 and 31st March, 1999, and agreements entered into after 31st March, 2006, are not entitled to exemption.

9.Any income by way of dividends referred to in S. 115-O received by a non-resident is exempt u/s 10(34). Any income received in respect of units of a Mutual Fund specified u/s 10(23D), or the specified company or an Administrator of the specified undertaking as defined in Sec. 10(35) is exempt u/s 10(35).

10.  Any income arising from the transfer of a long-term capital asset, being an eligible equity share in a company purchased on or after 1st day of March, 2003 and before 1st March, 2004 and held for a period of twelve months or more is exempt u/s 10(36). Eligible equity share means: –

   i. Any equity share in a company which is a constituent of BSE 500 Index of the Stock Exchange, Mumbai as on the 1st day of March, 2003 and the transaction of purchase and sale of such equity share are entered into on a recognized stock exchange in India;

  ii. Any equity share in a company allotted through a public issue on or after the 1st day of March, 2003 and listed in a recognized stock exchange in India before 1st March, 2004.

11.  Any income by way of long term capital gain on transfer of equity shares on recognized stock exchange or on re-purchase of equity oriented fund on which Security Transaction Tax (STT) is paid.

12.  Any interest received by a non-resident or a person who is NOR, in India on a deposit made after 1st April, 2005 in an Offshore Banking Unit as is referred to in section 2(u) of the Special Economic Zones Act, 2005. Taxation of Capital Gains from sale of listed securities is treated differently. See the relevant Income Tax Section for details.

B. Special Tax Rate and Surcharge applicable on Investment Income of Non-resident

Tax Rates

Sections 115A to 115AD prescribes tax rates for various types of investment income of different non-resident entities. However, if the non-resident is covered by a particular DTAA, then the rates prescribed under that DTAA would be applicable without any surcharge (which includes education cess).

Surcharge

If a non-resident recipient of income is either an individual, HUF, AOP or BOI and his income (from all sources) is exceeding or likely to exceed Rs. 10,00,000/- in a Financial Year then a surcharge of 10 per cent of the tax and education cess of 2% of tax plus surcharge is applicable. In case the income does not exceed or is not likely to exceed Rs. 10,00,000, then the tax shall be increased by education cess of 2% of the tax.

In the case of a non-resident Company whose income (from all sources) is exceeding or likely to exceed Rs. 1,00,00,000 in a Financial Year then a surcharge of 2.5% and education cess of 3% (Including 1% of Secondary & Higher Education Cess) of tax plus surcharge is applicable. In case the income does not exceed or is not likely to exceed Rs. 1,00,00,000, then the tax shall be increased by education cess of 3% (Including 1% of Secondary & Higher Education Cess) of the tax.

   i. Income of non-residents in respect of interest received from Government or any Indian concern for money borrowed in foreign currency is taxed @ 20% subject to applicable surcharge and education cess. [Sec. 115A]

  ii. Tax on overseas financial organization (approved by SEBI) in respect of income by way of long-term capital gain arising on sale/repurchase of units of Mutual Funds/UTI purchased in foreign currency is 10% subject to applicable surcharge and education cess. [Sec. 115AB]

iii. Tax on non-resident in respect of interest on bonds of Indian companies issued as per Government notification, on bonds of PSU sold by Government and purchased in foreign currency, and on LTCG on sale of such bonds/GDRs/ADRs is 10% subject to applicable surcharge and education cess. [Sec. 115AC].

iv. Tax on approved Foreign Institutional Investor (FII) is as follows:

   i. Income by way of interest on securities – 20%

  ii. Short-term capital gains on sale of other securities – 30% on sale of listed shares, units - 10%

iii. Long-term capital gains on sale of other securities – 10% on sale of listed shares, units – Nil [Sec. 115AD]