NRI Taxation: Global Income is Taxed in India for Tax Residents

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We are all aware that Indian Economy survives majorly because of the tax collected from the citizens. Under the Income Tax Act of 1961, Section NRI Taxation applies to those who are earning outside of India. The income tax rules and advantages that they can have are completely different from those of resident Indians. Let us take a look at the income tax rules applicable to NRIs.

Determining your Residential Status

Before going through the income tax rules for NRI, one need to determine the residential status first. Anyone is considered to be a resident of India if they meet the following conditions:

  • Any individual is qualified as non-resident if he/she is present in India for less than 60 days period during a financial year.

Any individual who leaves the country for employment outside India, this limit of 60 days has been increased to 182 days for that specific financial year. If you are a citizen of India working abroad or if you are a part of the crew on the Indian ship, only the first of the rules mentioned above will have to be true for you. The same rule applies to a Person of Indian origin who is visiting India. For individuals belonging to both these categories mentioned, the second rule does not hold. They need to only stay in India for a period of 182 days during a financial year. In case you do not meet the conditions above, you are an NRI.

Income Tax Rules for Money Earned Abroad

The income tax rules for a non resident Indian are dependent on their residential status for the current financial year. If the status is ‘resident’, according to income tax rules, global income is subject to taxes in India. However, if the status is nonresident Indian, according to income tax rules, only the income earned in India is subject to taxes. Examples for income accrued in India would be salary received in India, income from house property located in India, income from fixed deposits, capital gains on transfer of assets situated in India and interest on the savings bank account. According to income tax rules, all these are subject to taxes for an NRI. Income that is earned outside India will not be subject to taxes. Also, interest earned on FCNR account and NRE account is not subject to taxes. However, the interest on an NRO account is subject to taxes for a non resident Indian.

A few other things that NRIs need to keep in mind about income tax rules are:

  • An individual whose income exceeds 2, 50,000 is required to file an income tax return in India.
  • For NRIs, July 31st is the last date to file income tax returns.
  • According to income tax rules, if your tax liability crosses Rs 10,000 in a year, you will be required to pay advance tax.

Non-Residents: Income Tax Slab for AY 2019-2020

Non-resident: Individuals/AOP/HUF/BOI

Income Slab

Tax Rate

Up to Rs.2,50,000

NIL

Above Rs.2,50,000-Rs.5,00,000

5% of taxable income- 2,50,000

Above Rs.5,00,000-Rs 10,00,000

Rs.12,500 + 20%of taxable income-5,00,000

Above 10,00,000

Rs.1,12,500 + 30% of taxable income- 10,00,000

Surcharge

10% of Income Tax, if the taxable income is above Rs.50,00,000

15% of Income Tax, if the taxable income is above Rs.1,00,00,0000

Health and Education Cess

4% of Income Tax + Surcharge

Income Tax Rules for Taxable Income for NRIs

An individual’s salary income is subject to taxes when an individual gets their salary in India, or someone receives it on their behalf. This income is subject to taxes at the slab rate that the individual belongs to.

Income Tax Rules for Income from Salary

In case your services are rendered in India, income from salary will be considered to arise in India. Thus, under IT rule, even though an individual is an NRI, but if his/her salary is given for the services they have offered in India, it will be subject to taxes in India, irrespective of where they receive the income.  Also, according to income tax rules, the income of Diplomats and Ambassadors are not subject to taxes.

Income Tax Rules for Income from House Property

If an NRI has a property situated in India, then the income from that property is subject to taxes as per income tax rules. The calculation of this is the same way as it is done for a resident. This property may either be rented out or simply lying empty. An NRI can claim a deduction of up to thirty percent, is allowed to take property taxes and if there is a home loan, he/she can take advantage of an interest deduction. Also, according to income tax rules, Section 80C, an NRI is permitted a deduction for principal repayment. Under the same section, registration charges and stamp duty paid for the purchase of a property can be claimed.

Income Tax Rules for Rental Payments to an NRI

A tenant who is paying rent to an NRI will have to deduct TDS at thirty percent. According to income tax rules, the tenant will also have to get a Form 15CA and submit it to the Income Tax Department Online. Any individual making payment to an NRI has to submit a Form 15CA. Sometimes, a Form 15CB is required from a chartered accountant before one uploads Form 15CA online. In this form, the CA will be certifying the details of payment, TDS rate, and TDS deduction according to Section 195 of income tax rules.

Income Tax Rules for Income from Capital Gains

A capital gain due to the transfer of any asset situated in India will be subject to taxes in India. Also, the capital gains that arise due to investments in shares and securities in India will also be subject to taxes in India. For instance, if you sell a house property and have a long-term capital gain, then the buyer will be deducting TDS at a rate of twenty percent. However, according to Section 54, an investor can invest ina house property and can claim a capital gains tax exemption. According to Section 54EC, you can also do this by investing in capital gain bonds.

Special Provision Related to Investment Income

A non-resident Indian is taxed at 20% when he invests in certain Indian assets. In case the special investment income is the only income that the non-resident Indian has during that particular financial year, and if the TDS has been deducted on that, then, he/she is not required to file an income tax return.

Income Tax Rules for Investments that Qualify for Special Treatment

Income gained from the mentioned Indian assets in foreign currency:

  • Shares in a private or public Indian company
  • Deposits with public companies and banks
  • Debentures that are issued by a publicly listed Indian company
  • Any security of the central government

As per income tax rules, no deductions under Section 80C is allowed when calculating investment income.

Income Tax Rules for Deductions and Exemptions for NRIs

Just like Indian residents, NRIs are allowed to claim deductions from their total income.

Deductions Under section 80C -

A majority of the deductions under Section 80C are also allowed for NRIs. For the current financial year, a maximum deduction of 1.5 lakhs is allowed under Section 80C for an individual’s gross total income. According to income tax rules, the following are the deductions allowed to NRIs:

Tuition fee Payment for Children -

This includes the fee paid for pre-nursery, nursery, play school, school, college, university or any educational institution for the purpose of full-time education of a maximum of 2 children.

Unit Linked Insurance Plans (ULIPs) -

Unit Linked Life Insurance Plan is an investment scheme with life insurance cover. According to income tax rules, a deduction is allowed under section 80C.

Life Insurance Premium Payment -

According to income tax rules, the policy should be either in the name of the NRI, the NRI’s partner or the NRI’s spouse. The child can be a major or a minor, married or married and dependent or independent. Also, the premium should lower than ten percent of the sum assured.

Investments in Equity-Linked Savings Scheme (ELSS) -

ELSS is a popular option among Indians, as according to income tax rules of Section 80C, an individual can claim deductions up to Rs 1,50,000. The taxpayers are benefitted with the EEE (Exempt-Exempt-Exempt) and at the same time, provides a really good opportunity to earn money since these funds mostly invest in equity markets and follow diversification.

Principal Repayments on Loan for the Purchase of a House Property -

According to income tax rules, if an individual has taken a loan for buying property or constructing property in India, then deductions are allowed on the repayment of those loans. Deductions are also allowed for registration fees and stamp duty for the purpose of transfer of such property to a non-resident Indian.

Other Allowable Deductions

Besides the deductions allowed under Section 80C, income tax rules also allow other deductions:

Deduction from Income from House Property for NRIs

All the deductions that are available to a resident for income from house property purchased in India are also made available to an NRI by income tax rules. Deductions are also allowed on the property tax that is paid. Income tax rules also allow deductions on a home loan.

Deduction Under Section 80D

NRIs can claim deductions for the premium paid for health insurance. The deduction can be claimed up to Rs 50,000 for senior citizens, and in case of insurance for self, spouse and dependent children, it will be Rs 25000. Apart from this, a non-resident Indian can claim deductions on insurance for their parents too. Income tax rules permit them to claim up to Rs 50,000 if their parents are senior citizens.

Deduction Under Section 80E

Income tax rules allow an individual to claim deductions on interest paid for an educational loan. This loan can be for the education of the NRI itself, the NRI’s spouse or the NRI’s children. Income tax rules also allow also an NRI to take a loan for a student whom they may be a guardian to. The advantage here is there is no maximum limit to the amount that can be claimed as a deduction. The deduction will be available till the interest is paid or up to a maximum of 8 years, whichever is earlier. However, the deduction will not be available for the principal repayment of the loan.

Deductions Under Section 80G

Income tax rules under section 80G permit non-resident Indians to claim a deduction on donations that they have made for social causes.

Deduction Under Section 80TTA

Income tax rules permit NRIs to claim a deduction on income from interest on savings bank account up to a maximum limit of Rs 10,000, just like resident Indians.

Deductions not Allowed to NRIs

There are certain deductions that income tax rules don’t allow NRIs to claim.

These are the investments which they aren’t allowed.

  • Investments in NSCs
  • Senior citizens savings scheme
  • Post office 5-year deposit scheme
  • Investment in PPF

Investment Under RGESS (Rajiv Gandhi Equity Savings Scheme)

The primary purpose of this deduction was to increase the involvement of retail investors in equity markets. Upon meeting certain conditions, a deduction of 50% or less of the amount invested (up to Rs 25,000) in equity shares is allowed. Income tax rules don’t allow this deduction to NRIs.

Deduction for the Differently Abled -Section 80DD

Income tax rules allow this deduction for resident Indians for maintenance, which includes medical treatment of a dependent who is handicapped. However, this is only applicable to resident Indians.

Deduction for the Differently Abled - Section 80DDB

Income tax rules allow this deduction for resident Indians for medical treatment of a dependent who is disabled. However, this is only applicable to resident Indians.

Deduction for the Differently Abled - Section 80U

Income tax rules allow this deduction when the taxpayer himself is handicapped. However, this is only applicable to resident Indians.

How can NRIs Avoid Double Taxation?

Double taxation is getting taxed twice on the same income. That means you will be taxed once in the country of residence and once in India. Non-resident Indians can avoid double taxation by seeking a double taxation avoidance agreement (DTAA) between the two countries. Under this, there are 2 ways to claim tax relief - tax credit method and exemption method. In the tax credit method, a non-resident Indian will be taxed in both countries. The tax relief here can be claimed in the country of residence. The other one is the exemption method. In this, non-resident Indians will be taxed in only one country and will be exempted from taxes in the other.

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