For the Non-Residential Indians (NRIs), obeying the tax rules of two different countries is quite challenging. The NRIs are obligated to pay tax for any income, which is accrued or earned in India. The major difference between the taxes paid by Indian resident and Non-resident Indians is that the income earned or accrued by an NRI in India in taxable, whereas the income which is earned abroad is not taxable in India.
It is important to note that the income received in India such as income from a house property situated in India, interest earned on the savings bank account or fixed deposits, capital gains on transfer of asset situated in India, etc. are income which is taxable for NRIs under Income Tax Act of India.
Considering the taxation levied on the NRIs income through different sources based in India, the TDS is imposed at the highest rate on the interest earned on the capital gain from shares, term deposits and mutual funds. Further in this article, we will elaborately discuss some of the tax-saving solutions for NRI.
Tax Exemptions for NRIs
The types of Income, which is exempted from tax, are as follows-
- The interest earned on FCNR/NRE accounts.
- Interest earned on notified bond and government-issued savings certificates.
- Dividends earned from shares of domestic Indian companies.
- Long term capital gains from equity-oriented mutual funds and listed equity shares.
- NRIs can claim for tax exemption U/S 54, Section 54EC and Section 54F on the long-term capital gain.
- Exemption U/S 54 is applicable to long-term capital gain on sale of house property.
- Exemption U/S 54F is applicable on sale of any asset other than a house property.
- The NRIs can avail the benefit of exemption from capital gains while filling return and claim refund of TDS deducted on capital gains.
Tax Deductions for NRIs
As compared to the Indian residents, taxation for NRIs is done in a more strict way. However, similar to residents, the NRIs are also eligible to claim various exemptions and deductions from their total income. Let’s take a look at it.
Deductions Under Section 80C
The NRIs are eligible to claim most of the deductions under Section 80C. For the financial year 2018-19, an individual can claim up to maximum Rs.1.5 Lakh U/S 80C from his/her gross total income.
Deduction U/S 80C that are allowed to NRIs is:
Life Insurance Premium Payment
The life insurance policy must be purchased in the name of the NRI or in the name of their spouse and children. The premium paid towards the policy must be 10% less than the sum assured amount.
Children’s Tuition Fees Payment
Tax exemption U/S 80 C is applicable on any tuition fees paid towards school, university, college and other educational institute situated within India for the purpose of full-time education of any two children.
Principal Repayment of Loan for the Purpose of House Property
The tax deduction is applicable for repayment of loan taken for construction and buying of residential house property. For the purpose of transfer of house property to NRI deduction is also allowed for stamp duty, registration fees and other expenses.
Unit Linked Insurance Plan (ULIPs)
ULIP offers the combined benefit of insurance cum investment. The premiums paid towards the ULIP plan are applicable for tax deduction under section 80C of Income Tax Act. Moreover, the NRIs can also avail tax deduction on the interest earned towards the investment U/S 10(10D) of IT Act. Along with the benefit of life cover, ULIP plans offer an excellent opportunity to gain profitable investment returns, as in ULIP plans a part of the premium is invested in market funds with an objective to gain higher returns.
Investment in ELSS
ELSS is considered as one of the most preferred options of the tax deduction for NRIs, as one can claim up to maximum deduction of Rs.1.5 lakhs in a year under section 80C of IT Act. The ELSS scheme offers the benefit of EEE i.e. exempt, exempt and exempt. The contribution made towards the ELSS, the interest earned and returns are all tax deducted.
Other Applicable Deductions
Beside deductions U/S 80C that the NRIs can claim, there are other deductions too that comes under the income tax laws.
Deduction from house property income for NRIs
NRIs can claim a tax deduction on income from house property which is purchased in India. The tax deduction is also applicable on the interest on home loan and property tax paid.
Deductions Under Section80D
NRIs can also claim a tax deduction on the premium paid towards health insurance. The deduction up to Rs.50,000 can be claimed for senior citizens and Rs.25,000 can be claimed for self, spouse and dependent children.
Deductions Under Section 80E
NRIs can claim a deduction for donation for social cause under section 80G of IT Act.
Deductions Under Section 80TTA
NRIs can claim a tax deduction on income from interest on savings bank account up to maximum Rs.10,000. This deduction is applicable on deposits in savings account with bank, post-office and co-operative.
Tax Returns for NRIs
Even though every individual is obliged to pay taxes, he/she can claim a tax deduction by making investments in various financial instruments that eligible for tax exemption. However, NRIs are not permitted to invest in NSC (National Saving Certificate), post office time deposits, senior citizen savings scheme or open new PPF account.
As mentioned in the above section, the taxable income of an NRI does not essentially include certain income from long term capital gains and investments. Those aspects of income have TDS (tax deducted at sources). If an NRI has other sources of income besides the prior mentioned sources then it will need to be declared and would be taxable according to the prevailing tax rules.
However, in certain cases, the TDS earned on income from long term capital gains and investment amounts are more than the tax liability of the individual. Thus, it is very important to file a tax return in order to have a tax refund or claim an exemption.
NRIs can visit the online portal of Income Tax Department of India to file their tax returns as it is a preferred way of filing tax returns.
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