How will foreign-sourced dividend income be taxed in India?

I am the promoter of a Belgian company, and I’ve been a Belgian citizen for many years now. I’m planning to retire in India next year. Before coming to India, the company's operations will cease. I have been advised that for the first year, I will be treated as RNOR (resident but not ordinary resident) in India for tax purposes. During this period, if my Belgian company declares dividends to my foreign bank account, will it be taxed in India?

-Name withheld on request

Individuals qualifying as RNOR under the Income Tax Act, 1961 are not taxed on their global income but only on the incomes that - accrue/arise in India 

- deem to accrue /arise in India or 

- when such income is received/deemed to be received by them in India

Essentially, foreign-sourced incomes–incomes that accrue or arise outside India—are left out from the scope of taxation. However, an exception to this rule exists, which provides that such foreign-sourced incomes may be taxed if they are derived from a business controlled in India or from a profession set up in India.

Assuming that you will qualify as RNOR for FY2025-26, it is important to determine the place of accrual for the dividend income. And if the dividend income accrues/arises outside India, it must be assessed whether it can be considered as derived from a business controlled in India, especially since it would have settled in India for good by then.

Dividends as such would accrue at the place where they are declared and made payable. In your case, since the Belgium company would declare dividends in Belgium, the source of accrual would be Belgium. Furthermore, since they would be paid to your Belgian bank account, their place of receipt would also be outside India.

Next, it is essential to evaluate whether the dividend income can be said to be ‘derived from’ a business controlled in India. Supreme Court has time and again held that the expression ‘derived from’ would only cover cases of direct nexus and where sources do not extend beyond the first degree. 

Applied to the present case, it would mean that there should be a direct nexus between dividend income and the business. Dividend income is derived from the investment made in the shares of the company and cannot be said to be derived from the business itself. Business activities generate profits and losses chargeable under the head ‘Profits and gains of business or profession,’ while dividend income falls under ‘Income from other sources’. 

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Moreover, since operations of the business will cease before you retire to India, there would be no income derived from business at all. Thus, in your case, dividend income cannot be considered to be derived from a business controlled in India. Therefore, the dividend income would not be taxable in your hands as RNOR.

Under foreign exchange regulations of India, you are not obliged to repatriate the dividend income back to India. You may retain it in your foreign bank account.

Harshal Bhuta is a partner at chartered accountancy firm PR Bhuta & Co.