The Indian Income Tax Act includes provisions to regulate cross-border transactions and prevent tax evasion. One such rule is Section 9(1)(viii), which outlines the tax implications of sums of money gifted or paid by Indian residents to non-residents (NR) or not ordinarily residents (NOR). In this blog, we’ll delve into five key aspects of this rule, its implications, and compliance requirements, along with additional insights to help you stay on the right side of the law.
1. What Does Section 9(1)(viii) Say?
Section 9(1)(viii), introduced by the Finance (No. 2) Act, 2019, and extended by the Finance Act, 2023, deems that:
- Any sum of money paid by a resident of India to a:
- Non-resident (excluding companies);
- Foreign company; or
- Not Ordinarily Resident (NOR) individual,
shall be deemed to accrue or arise in India, irrespective of where the recipient resides or where the transaction occurs.
- It specifically applies to sums of money classified as income under Section 2(24)(xviia), including:
- Gifts above ₹50,000 from a non-relative.
- Other specified sums categorized as income.
2. Effective Dates and Applicability
This provision has distinct timelines for different recipient categories:
- For Non-Residents (NRs): Applicable for sums paid on or after July 5, 2019.
- For Not Ordinarily Residents (NORs): Effective from April 1, 2024, as per the Finance Act, 2023.
This makes it crucial for Indian residents to verify the residency status of the recipient before making payments.
3. Taxability of Gifts and Payments
How Are These Payments Taxed?
- Deemed Income in India:
- Payments made by Indian residents are treated as income accruing in India, even if the recipient is located abroad.
- Nature of Income:
- Such payments are taxable under Section 2(24)(xviia), particularly if they exceed ₹50,000 and do not qualify for exemptions.
- Recipient’s Tax Liability:
- Non-residents and NORs must include this deemed income in their Indian tax returns.
Tax on Gifts Exceeding ₹50,000
Under Section 56(2)(x) of the Income Tax Act:
- Gifts from non-relatives exceeding ₹50,000 are taxable in the recipient’s hands.
- Exemptions: Gifts are tax-free if received under specific circumstances, such as:
- During marriage.
- As part of inheritance.
- From specified relatives like parents, siblings, or spouse.
4. Compliance Requirements for Indian Residents
Steps for Residents Making Payments or Gifts
- Verify Residency Status:
- Determine if the recipient is a non-resident or NOR as per Section 6(6) of the Income Tax Act.
- Withholding Tax (TDS):
- Indian residents may need to deduct Tax Deducted at Source (TDS) before making payments.
- The applicable TDS rate depends on the type and nature of the payment.
- Maintain Documentation:
- Keep records of the transaction, including:
- Proof of payment.
- Recipient’s residency status.
- Purpose of the transfer.
- Keep records of the transaction, including:
- Report in Tax Returns:
- Disclose such payments in the Annual Information Statement (AIS) or while filing Income Tax Returns (ITR).
5. Practical Scenarios and Examples
Scenario 1: Gift to a Non-Resident Friend
- Situation: An Indian resident gifts ₹3 lakhs to a non-resident friend abroad.
- Analysis:
- Since the amount exceeds ₹50,000 and the recipient is a non-relative, it is taxable in the recipient’s hands under Section 56(2)(x).
- The payment will be deemed to accrue in India under Section 9(1)(viii).
Scenario 2: Gift to an NOR Relative
- Situation: From April 1, 2024, an Indian resident gifts ₹1.5 lakhs to a sibling classified as NOR.
- Analysis:
- Since siblings qualify as relatives, the gift is exempt under Section 56(2)(x).
- However, the provision will still apply to ensure accurate reporting in India.
Scenario 3: Payment to a Foreign Company
- Situation: An Indian resident pays a consulting fee to a foreign company.
- Analysis:
- This payment is also deemed to accrue in India under Section 9(1)(viii) and may attract withholding tax.
Why Was Section 9(1)(viii) Introduced?
The primary objective of this provision is to:
- Prevent Tax Evasion:
- By deeming such payments as income in India, it ensures that cross-border transactions don’t escape Indian tax jurisdiction.
- Promote Transparency:
- Encourages proper disclosure of payments made to non-residents and NORs.
- Broaden the Tax Net:
- Brings more transactions into the Indian tax framework, especially gifts and payments made abroad.
Additional Tips for Compliance
- Seek Professional Advice:
- Cross-border transactions can be complex. Consult a tax professional to understand withholding tax requirements and DTAA benefits.
- Understand DTAA Provisions:
- If the recipient resides in a country with which India has a Double Taxation Avoidance Agreement (DTAA), they may claim relief to avoid double taxation.
- Avoid Misclassification:
- Ensure payments are classified correctly (e.g., gift vs. income) to avoid penalties.
FAQs
- Are all gifts taxable in India?
No, gifts received from specified relatives or under certain circumstances (e.g., marriage, inheritance) are exempt under Section 56(2)(x). - What is the ₹50,000 threshold for gifts?
If the total value of gifts received from non-relatives exceeds ₹50,000 in a financial year, the entire amount becomes taxable. - What is a DTAA, and how can it help?
A Double Taxation Avoidance Agreement (DTAA) prevents the same income from being taxed in both India and the recipient’s country of residence. - What are the penalties for non-compliance?
Non-compliance with Section 9(1)(viii) can lead to penalties, including interest on unpaid taxes and potential prosecution for serious violations.
Conclusion
Understanding Section 9(1)(viii) and its implications is essential for Indian residents making payments or gifts to non-residents and NORs. Starting April 1, 2024, the inclusion of NORs under this provision broadens the compliance landscape. Proper documentation, tax withholding, and disclosure can help you avoid penalties and stay compliant.
Have specific questions about cross-border gifting or compliance? Our tax experts are here to guide you through every step.
