NRI Taxation In India

Table of Content

1.How do I determine my residential status?

2.Types of Non-residents

3.Do NRIs have to pay taxes in India for income earned abroad?

4.What is income earned or accrued in India?

5.Filing income tax for NRIs

6.Taxable income for non-resident Indian

7.Special provision related to long-term capital gains

8.Computation of Tax (Section 115D)

9.Investment income and long-term capital gains taxability (Section 115E)

10.Non-filing of income tax returns is allowed in specific cases (Section 115G)

11.Non-application of provisions for NRI taxation (Section 115I)

12.Tax Exemptions for NRIs

13.Tax Deductions for NRIs

14.Tax Returns for NRIs

15.When is an NRI required to file his Income Tax Return?

16.Due Date for filing Income Tax Return

17.Do NRIs have to pay advance tax?

18.Which ITR Form applies to the NRI assessee?

19.How can NRIs avoid Double Taxation?

20.Other important points for NRIs

21.How are you taxed when you are a?

22.FAQs on Taxation for NRI

NRI taxation in India is a constant matter of concern for the vast number Indians living all over the world who have to send money home to their loved ones or make investments planning for themselves and their families. The tax filing season is a time of constantly looking for ways to save income tax that you have to pay on your hard earned money. Indeed NRI taxation rules India are generally friendly towards bringing NRI income into India and the ground rule is that income which is earned outside India by an NRI is not taxed in India.

There are also a variety of other incomes that aren’t taxed in India. In fact, most NRIs have bank accounts in India – either non-resident external accounts or foreign currency non-resident account. While Indian residents have to pay tax on their savings bank account interest above Rs. 10,000, NRIs do not have to pay tax on the interest arising out of these bank accounts. For the most part, returns NRI investment in India are exempt from tax.

NRI taxation norms are favorable to garnering more investments made from income generated in countries other than India because this directly adds to the economy’s growth. Since the government does not have to spend money on non-residents, they incentivize their options to park these funds back home. Long-term or short term gains from investments or sale of assets such as house would however, be taxed in India. In addition, rental income is taxed in India, but a standard deduction of 30% of the rent, after subtracting municipal taxes is allowed in India.

Inherited assets from Indian parents or relatives are not taxed when they are transferred. However, recurring gains as rental income or income from sale or transfer from these assets would be liable to tax. Certain important benefits of income tax slab rates under section 54, 54EC and 54F can be availed if you invest the proceedings of any long term or short term capital gains in India. It is only if earnings from all sources put together such as rent, dividend, capital gains, investment income, etc goes beyond Rs. 2.5 Lacs or Rs. 3 Lacs for those between 60 to 80 years of age, Rs. 5 Lacs for those above 80 years that you need to go through the process of filing taxes.

Should your income still exceed this threshold, you can still claim all the deductions by investing in various investment avenues eligible for 80C. However, NRIs are not allowed to invest in National Saving Certificates (NSC), Senior Citizens Savings Scheme, Post Office Time Deposits or open new PPF accounts or extend them. Other tax saving instruments such as home loan, life insurance, pension plan, and equity-linked savings schemes of mutual funds are allowed. Tuition fee paid for spouse or children in India too can be claimed for deduction. Health insurance policies or health check-ups paid for parents or dependents in India too are allowed for deduction under section 80D.

How do I determine my residential status?

Income tax specifications under the Income Tax Act 1961 change drastically over the residential status of the taxpayer. Whether the person stays in India or is earning outside the home country not only involves separate rules, but separate perks also. 

So, how does one determine the residential status from the purview of income tax?

A person is considered a resident of India for the financial year if any of the following conditions is satisfied:

• When he/she is in India for at least 182 days in a financial year
• When he/she has been in India for at least 60 days in the previous year and has lived in this country for a 365 days during four years immediately preceding financial year

However, for an Indian citizen working in a foreign country or a crew member on an Indian ship and a Person of Indian origin (PIO) visiting India, only the first condition will be valid or applicable for being a resident of India. 

In income tax for NRI, a person who doesn’t meet any of the conditions is termed as a Non-resident Indian (NRI). 

Types of Non-residents

Taxation for NRIs differs from that of residents. A non-resident Indian under the Income Tax Act can be broadly classified into three categories:

• Non-resident Indian/Person of Indian Origin
• Not ordinarily resident Indian
• Foreign company 

Do NRIs have to pay taxes in India for income earned abroad?

Yes, NRIs are entitled to pay taxes in India for earning in a foreign country. After determining the residential status, one has to identify the income taxable according to the said status. Here’s a glance at it.

For resident Indians, the global income is taxable, i.e. irrespective of whether it’s earned in India or abroad. 

For non-resident Indians, income tax is payable for income earned or accrued or deemed to be accrued or arise in India only. Income earned anywhere outside India is not taxable in this country. 

What is income earned or accrued in India?

As per the Income Tax Act 1961, all the income that is generated or accrues through a source in India is taxable in this country. This follows the source rule of taxation. So, to estimate the taxes, the primary task is to identify the source of income. If the source of the earnings is identified in India, directly or indirectly, the corresponding income will be taxable in this country. The following set of incomes falls in this category:

• Salary received in India.
• Salary received for services in India.
• Income/interests from deposits in India
• Interest earned in a savings bank in India.
• Rental income from a property in India
• Capital gain generated from a transfer of property or asset in India

Filing income tax for NRIs

NRI taxation laws in India mandates NRIs to pay taxes for income earned, generated, or perceived to be originated or accrued in India. Money received or presumed to be received is taxable here.

Below are the steps to be followed for filing income tax for NRIs. 

Determine residency status:

The residency status is to be determined considering whether or not the person has stayed in India in the concerned fiscal year. If you haven’t stayed in this country for 182 days, you’ll be counted as a Non-resident Indian for the year. However, it’s a little complicated if you’ve recently come back or relocated abroad.

Figure out taxable income:

If your gross income is more than Rs 2.5 lakhs, it is taxable in India. This might include a pay hike, capital gains from market-linked funds, interest on NRO deposits and rental earnings. NRIs can claim a tax deduction of up to Rs 1.5 lakhs a year under section 80C of the Income Tax Act 1961. They can also claim a refund for the TDS deduction by submitting the details of the tax credit and advance tax as appearing in Form 26AS. But remember, investing in PPF is not permissible and declaration of assets and liabilities is mandatory if your income in India is above 50 lakhs. 

Enjoy double taxation treaty benefit:

The Double Taxation Avoidance Agreement enables an NRI to avoid paying double taxes on the same income. According to it, if you have paid taxes for an income in India, you can claim a tax credit for the same in your country of residence. 

Taxable income for non-resident Indian

The Income Tax Act of 1961 state, that an NRI has to pay taxes in the following scenarios:

• For a financial year, taxable income in India exceeds Rs.2.5 lakh (exemption limit)
• Long- or short-term capital gains are earned through the sale of any property.

The taxable income comprises the following:

Property income and home loan:

Capital gains in India through, sale or lease of an asset are taxable in India. An NRI can claim a 30% standard deduction on house property as well along with a claim of deduction for principal repayment, registration fees, and stamp duty under Section 80C. If an NRI receives rent, then he has to pay taxes & the tenant has to deduct TDS of 30% and file Form 15CA.

Salary:

If any income is earned by or on behalf of an NRI, for services rendered in India, it is subject to taxation.

Investment:

Short- term and long-term capital gains by an NRI from market-linked funds in India are taxable. Taxes are also to be paid for capital gains on the transfer of an asset. If a NRI sells a property, buyer is liable to deduct TDS at 20% where property is a long-term asset, otherwise deduct @30%. Long Term capital gains are taxed @ 20% and short term capital gains are taxed as per applicable slab rates.

Third Source Incomes: 

Taxes are payable on interest earned through savings in banks and fixed deposits held by an NRI in India.

Special provision related to long-term capital gains

No indexation benefits or tax deductions are available for long-term capital gains from foreign assets. An NRI can still claim exemptions on capital gains under section 115F of the Income Tax Act. To avail this, one needs to reinvest the net consideration received into the following “Specified assets” mentioned u/s 115C. 

• Deposits with banks and Indian public companies
• Shares in an Indian company
• Securities issued by the Central Govt
• Debentures of an Indian Public Company
• NSC VI and VII issues

It needs to be noted here that the capital gain will be tax-free if the entire net consideration is reinvested. Exemption will be partial if the purchase value of the new asset is less than the consideration. Also, the exemption will be withdrawn if the new asset is transferred or liquidated within 3 years of the purchase. An NRI can also choose to withdraw from this special provision at any point in time, post which the investment income and LCTG will be taxable under usual laws. 

Under the following sections of the Income Tax Act 1961, NRIs are entitled to some special provisions when he has certain income as

1. Investment Income

      and/or

2. Long term Capital gains on transfer of such investment.

Computation of Tax (Section 115D)

• The investment income of an NRI is not eligible for any deduction of expenditure made.

For an NRI assessee, if the gross total income of NRI includes only income from investment and long-term capital gains he shall not be entitled to deductions. However, if only a part of the gross total income consists of long-term capital gains and investment income, the remaining might be eligible for deductions under Chapter VI-A.

Investment income and long-term capital gains taxability (Section 115E)

Non-filing of income tax returns is allowed in specific cases (Section 115G)

It is not necessary for an NRI to mandatorily file returns u/s 139(1) if his source of income is only through following ways:

• Investment income and/or long-term capital gains in the previous year

            AND

• TDS has been deducted from the above-mentioned income.

If an NRI becomes a resident (Section 115H), he/she gets certain tax benefits. If an individual was an NRI in any of the previous year and becomes an Indian resident in any subsequent year he/she avail the benefits of special provision, by submitting a declaration to the Assessing Officer along with his return of income stating that provisions of taxation shall continue to apply to him until that asset is converted into monetary value. 

Non-application of provisions for NRI taxation (Section 115I)

• A non-resident Indian may choose not to be governed by the special provisions for any assessment year by furnishing his return of income for that assessment year under the normal provisions of IT Act.

Tax Exemptions for NRIs

Following NRI incomes are eligible for tax exemption –

1. Interests from NRE/FCNR accounts

2. Interest from national savings certificates and notified bonds issued by the government

3. Long-term capital gains to the extent of Rs 1 lakh from listed equity shares and equity-oriented mutual funds

4. Under the following sections and conditions, capital gains are entitled to tax exemption-

• Section 54 – Where the house property is held for more than 3 years and is subsequently sold, the proceeds so received should be utilised to purchase or construct another house property within the given time frame.
  Exemption would be decided on the basis of investment of receipts.
• Section 54F – If capital gains arising out of the sale of any property other than a house, the exemption can be claimed on the construction or purchase of a new house, proportional to the sale proceeds spent on the new asset
• Section 54EC - When long-term capital gains are invested in bonds issued by govt authorities like the National Highway Authority of India and Rural Electrification Corporation within a period of 6 months, exemption could be claimed up to the total amount out of gains or a maximum of INR 50 lakhs whichever is lower in a financial year. Investment cannot be transferred before the end of 3 years.

All the above exemptions are subject to the prevalent tax laws.

Tax Deductions for NRIs

Tax deductions for NRIs is as follows –

1. Section 80C deductions upto Rs 1.5 lacs for investments in the following

• Life Insurance premium- Tax deductions shall be of actual premiums paid in a financial year but it should not be exceeding 10% of the death sum assured for policies issued after 31 March, 2012 & 20% for policies issued before that.  
• Tuition fees - Full-time education fees of any 2 children paid to any institution in India
• Principal payment on home loan – EMI payment of a home loan as well as stamp duty registration fees and other expenses towards the transfer of a house property
• ULIPs – Premium payment towards Unit Linked Insurance Plans

2. Deduction from House Property Interest - Deduction up to Rs 2 lakhs for interest paid on a home loan.

3. Deductions under Section 80D

• Premium paid for health insurance plans are eligible upto Rs. 25,000 for self, spouse & children & additional Rs 25000 for parents.

4. Deductions under Section 80E – Any amount of interest paid on an education loan taken for self, spouse, or children are subject to deduction for a maximum period of 8 years. 

5. Deductions for Donations under Section 80G - Only if appropriate donations have been made as per the section’s provisions. 

6. Deductions under Section 80TTA – Up to Rs 10,000 on interest earned on savings bank account deduction is allowed.

Tax Returns for NRIs

Tax returns for NRIs also differ from that of the resident Indians. NRIs can e-file their tax returns by visiting the portal of the Income Tax Department of India. The following things need to be noted here:

An NRI does not necessarily pay taxes for certain investment incomes and long-term capital gains, for which TDS has been deducted. If the TDS incurred turns out to be higher than the tax liability of the individual, the NRI can seek a tax refund or claim an exemption. For this, filing of tax returns is required. 

Apart from these, other income sources need to be declared and prevailing tax rules will be applicable. 

When is an NRI required to file his Income Tax Return?

If an NRI earns taxable income in India, he/she is required to file an income tax return in this country. Following are the situations where filing is necessary:

• If the gross total income before any deductions under section 80 exceeds Rs.2.5 lakhs. 
• If a refund from the government is desired.
• If the NRI requires to carry forward losses. 

Due Date for filing Income Tax Return

NRIs with taxable income in India need to file the returns by 31st July of assessment year for non-audit cases. If he/she is a working partner in any firm which requires an audit, the due date shifts to 30th September. 

Last date to file belated return is 31^st December of the relevant assessment year.

Do NRIs have to pay advance tax?

Like the residents, an NRI taxpayer can also pay advance taxes in a financial year based on his/her estimated tax liability. According to the Income Tax Act 1961, the assessee can pay the advance tax in 4 instalments if the tax-liability exceeds Rs 10,000. The corresponding due dates and amounts payable are detailed in the following table.

Failing to pay as per the above schedule or paying less than the tax liability will lead to interest payments under sections 234B and 234C.

Which ITR Form applies to the NRI assessee? 

NRIs were eligible to file ITR 1 till the assessment year 2017-18 for incomes earned or accrued in India. Now they only have the option to file ITR 2 or ITR 3 forms. If NRI has income other than that from business and profession like rent received in India, interest income, capital gains from share trading or sale of property in India, etc., returns have to be filed through ITR 2. But in case NRI is receiving income through business or services rendered in India, ITR 3 needs to be filed.

How can NRIs avoid Double Taxation?

NRIs can avoid double taxation of the same income through utilising the benefit of Double Taxation Avoidance Agreement (DTAA) between the two countries.

Under DTAA, one can claim tax relief by exemption or tax credit method.

Exemption method: Under this method exemption can be claimed from paying taxes in any one country, i.e. either residence or source country, subject to certain conditions.

Tax credit: Credit of tax paid is claimed in the country where he resides.

To save NRIs from double taxation scenarios, according to Section 89A of the Income Tax Act, income from such accounts is not taxed on an accrual basis. Instead, the notified foreign countries deduct tax at the time of withdrawal or redemption of funds from the said account.

NRI’s can claim benefit by submitting the following documents:

• Tax Residency Certificate obtained from Government of Resident country
• Form 10F
• PAN Details

Other important points for NRIs

Compared to the resident Indians, tax rules are marginally different for the NRIs. Here’s a guide to it:

• All incomes of NRIs are subject to TDS deduction at highest rates.
• If the income is subject to Section 115G of the Income Tax Act 1961, filing the ITR is not mandatory for the NRI
• NRI’s are not eligible for tax Rebate u/s 87A. Tax rebate is only available for resident individuals.

How are you taxed when you are a?

Resident individual on a temporary foreign assignment:

Suppose you have been to Canada on a temporary assignment. In this five-month project you have earned in US dollars and the income has been credited to your bank account in India. After coming back to India, your residential status will play a role when you file your tax returns. 

Here since you have not stayed abroad for more than 182 days, you will be considered a resident of India in your income tax calculations. Thus, the salary you earned during your foreign assignment phase which is already in your Indian bank account will be taxable in India. However, if you had stayed in Canada for more than 182 days, your residential status would alter and taxes would have been payable only on the Indian income earned.

Resident individual who recently moved abroad:

Suppose you have shifted to the UK for work. The salary you get in the UK gets credited to an NRE account in a bank in India. However, you are still maintaining your fixed deposits and savings account in India. Now your Indian employer has sent you the form 16. So, do you need to file returns in India this year? 

The answer is yes. Whether you are an NRI or not, the tax return should be filed if your income is over the basic exemption limit of Rs 2.5 lakhs. Here you need to note that, as an NRI, only the income earned or accrued in India will be taxed. So, the taxable income will include the Indian earnings from the employer and the interests from the FDs and savings. 

Here's an overview in the following table:

You are living in a foreign country:

Suppose you moved to Singapore 3 years back where you are earning in Singapore dollars. You hold savings in your bank account in India. Also, you have an apartment here which is rented out at Rs 35000 per month. You have also bought a car for your parents and transferred a monthly amount of Rs 10000 for household expenses. In addition, you have paid Rs 20000 for your parents’ insurance. 

Under the provisions of the Income Tax Act 1961, gifting the car to your parents and paying for their household expenses are exempted from tax. Also paying for your parents’ insurance entitles you to a deduction of Rs 20000 under section 80D. You’ll therefore need to file returns as your gross income is above the basic exemption limit of Rs 2.5 lakhs. 

The following table therefore illustrates the income tax scenario.

You are a NRI who recently moved back to India:

Suppose you have been a NRI for quite some time. Coming back to India, you’ll get an RNOR (Resident, Non-ordinary Resident) status if

• You have lived abroad for 9 out of 10 financial years preceding the year of returning to India
• You have lived in India for less than 2 years (729 days or less) in the last 7 financial years.

According to the Income Tax Act 1961, RNORs stay eligible for NRI exemptions up to 2 years from their return to India. Therefore, deposits held in foreign currency will continue to be exempted from tax in this period. Post 2 years, he/she will get back to an ordinary resident status. 

You are a resident with a global income:

As a resident of India, your global income is taxable. Even if you have earned or received income in a foreign country, it’ll be taken into account for the tax calculation in India. However, if the same income is taxable in another country, you can avail of the benefits of DTAA (Double Tax Avoidance Agreement) between the countries to avoid paying taxes twice. 

FAQs on Taxation for NRI

How much income is tax-free for NRI?

As an NRI, a total income till the basic exemption limit of Rs 2.5 lakhs is tax-free in India under the Old Tax Regime. However, if the total income in India comprises only long and short-term capital gains, the basic exemption limit doesn’t hold. 

Is the New Tax Regime Option available to NRIs?

NRIs can avail the new tax regime in India, which increases the basic exemption to Rs. 2,50,000. However, they cannot claim the rebate under Section 87A for income up to Rs. 7,00,000, which is only available to residents.

Does NRI have to pay double tax in both the countries ?

No, NRIs can avoid double taxation under a Double Taxation Avoidance Agreement (DTAA) between India and the country of residence. This rule applies through two methods: exemption and tax credit. 

What is the ITR form for NRI?

NRIs are supposed to file their income tax returns through Forms ITR2 and ITR3. 

Should an NRI pay advance tax?

Yes, an NRI also should pay advance tax and claim a refund if applicable by filing returns.

Is income which was earned in a foreign country tax-free if brought back to India?

If one is a resident of India, his/her global income is taxable. So, whether the income is earned in India or any other country can be taxed subject to DTAA. For a NRI Hence the taxable income earned in a foreign country is tax-free if brought back to India only if it has been taxed in the foreign country.

Are there any tax-saving advantages in NRI mutual funds?

Yes, NRIs can invest in tax-saving mutual funds or ELSS funds under the provisions of section 80C of the Income Tax Act 1961.

Is TDS required to be deducted for rent payment to NRI?

Tenant making payment to NRI is required to deduct TDS @ 30% and submit the details in Form 15CA.

Are dividends earned by an NRI for the shares/stocks/securities in India taxed?

Dividends earned from shares/stocks/securities earned by an NRI in India are now taxable.

Will tax implications be different for payments to/from NRE Account or NRO Account?

Tax implications depend upon the residential status of a person, hence whether the payments are made from/to NRE or NRO account does not matter.

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