Income Tax for NRI

Income tax for NRI is governed by the Income Tax Act, 1961, specifying the rules to administer a suitable NRI Tax regime. As a first step to understanding NRI Taxation, it is essential to learn who qualifies for the status.

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Let’s dive into the details:

Determining My Residential Status

Before getting into NRI Taxation details, let’s get to know who actually qualifies to be an NRI.

Well, NRI is an acronym for a Non-Resident Indian, implying that the individual resides outside the country.

Is this it?

No!

The individual can be an Indian citizen or a person of Indian origin. The residential status for income tax purposes is defined in Section 6 of the IT Act.

This is not it!

The Foreign Exchange Management Act (FEMA) has set down some rules to determine if an Indian origin citizen is a Resident or a Non-Resident Indian.

Accordingly, an individual is deemed an NRI if the following conditions are satisfied:

  • The person stays in the country for 182 days during the financial year, or
  • If the person is in the country for 60 days and 365 days or more during the immediately preceding 4 years
  • There are variations to the above for the person visiting India in the current year, where 60 days is substituted by 182 days. This concession is applied to Indian crew members travelling abroad for employment.

Now that determining your residential status is clear, let’s dive into some basic questions related to Income Tax for NRIs:

  1. If my income generated or earned abroad taxable

Well, NRI Income Tax in India depends upon the status of your residential for that financial year. If you’re a resident, then, of course, your comprehensive income (global income, to be precise) is taxable in India.

If you’re an NRI then your income accrued or earned in India is liable for tax in India.

Now, what would income accrued or earned include?

Well, income received in India, salary for any service offered in India, capital gains on transfer of assets located in India, income earned from any house property located in India, interest on the savings bank account, and income from FDs, are all the examples of income accrued or earned in India.

All these incomes are taxable in India for an NRI. Income accrued outside of the country is not taxable in the country.

Interest earned on the FCNR account and NRE account is not taxable. However, interest earned on an NRO account is taxable.

  1. Do I need to File My ITR in India?

Well, whether you’re an NRI or not, every individual having an income of more than Rs 2.5 Lakh must file an Income Tax return in India.

NRIs should file their ITR when they:

  • Have a loss to carry forward
  • Wish to claim a refund
  1. The Last Date to File ITR in India

July 31 is the last date to file ITR in India for a Non-Resident Indian (NRI).

  1. How about Advance Tax? Do I need to pay for it?

Yes, you will have to pay advance tax as an NRI, if the tax liability is more than Rs 10,000. However, when you don’t pay advance tax, interest u/s 234B and 234C is applicable.

How Are NRIs Taxed in India?

A question often raised is, do NRIs have to pay tax In India?  

The answer is, YES, if the NRIs income falls under the following categories:

  • If the income is directly or indirectly received in India, or
  • The income arises or accrues in India

It essentially means that only NRI income generated or earned within India is liable to be taxed.

Well, the Finance Bill 2020 amends that an NRI is a deemed resident if the residency period has been reduced to 120 days for the NRIs whose sourced income exceeds Rs.15 Lakh.

But, what are these individuals called?

Such NRIs are termed as RNOR (Residents but Not Ordinary Residents).

Which Income Categories are Liable for NRI Taxation?

Now that NRIs pay tax in India is amply clarified, the obvious question is which incomes qualify for Income Tax Rules for NRI application. We already know that an NRI is liable to pay Income Tax on income earned or generated in India. The specifics are described below:

Salary Income

Salary paid for services in India is considered to arise in India regardless of where it is received. If the Government of India pays a salary in India for services rendered abroad, it is taxable.

Did you know?

The income of Ambassadors and Diplomats are tax-free.

Income from Business or Profession

The NRI must pay Income Tax for income from business enterprises controlled and set up in India.

Income from House Property

NRI property located in India is taxable similar to a resident, even if it is vacant, and is subject to applicable tax deductions.

An NRI can claim a standard deduction of 30%, remove property taxes, and avail benefit of interest deduction in case of a home loan.

Being an NRI, you can avail of a deduction on principal repayment u/s 80C.

Wait, what?

An NRI can claim for stamp duty and registration charges paid by him/her while buying the property u/s 80C.

Rental Income

The income is subject to TDS at 30% and deposited in the account in India or the resident country. The NRI can receive this income to an account in India or his account in the country he resides in.

Apart from this, an individual who makes a remittance to an NRI has to submit Form 15CA online.

One might have to obtain a certificate in Form 15CB from a CA (Chartered Accountant) before submitting Form 15CA online. This Form 15CB contains details such as TDS rate, payment details, and TDS deduction according to Section 195 of the IT Act, etc.

Income from Other Sources

Interest earned in the NRO account is fully taxable under the extant laws. However, interest on FCNR and NRE account is exempt from tax in India.

Income from Capital Gains

Income on the transfer of assets within India is subject to 20% TDS. However, exemptions may be sought under relevant sections.

Investment Income

Dividend earned from Indian companies, even if paid abroad is subject to 20% TDS.

What investments are eligible for ‘Special Treatment’?

Income earned from the following assets acquired in a foreign country:

  • Deposits with public companies and banks
  • Shares in a public or private Indian company
  • Debentures issued by any publicly-listed Indian company that is not private
  • Any securities of the Central Government
  • Other assets of the central government as mentioned in the official gazette for this purpose

NRI Income Tax Slab Rates

NRIs are liable to pay income tax in India for income sourced within or accrued in India. What is the applicable rate for tax payment? The tax rates defined in the Finance Act for a Financial Year and its relevant Assessment Year for resident Indian are also applicable to the NRIs. For good measure, let us recall the current applicable Income Tax Slab Rates for the Financial Year 2021-22, where the taxpayer has the option to choose between two options, depending on whether exemptions are availed of or not:

Option 1

Up to and equal to Rs 2.5 Lakh

Nil

Above Rs 2.5 Lakh to Rs 5 Lakh

5%

Above Rs 5 Lakh to Rs 10 Lakh

20%

Above Rs 10 Lakh

30%

 

Option 2

Up to and equal to Rs 2.5 Lakh

Nil

Above Rs 2.5 Lakh to Rs 5 Lakh

5%

Above Rs 5 Lakh to Rs 7.5 Lakh

10%

Above Rs 7.5 Lakh to Rs 10 Lakh

15%

Above Rs 10 Lakh to Rs 12.5 Lakh

20%

Above 12.5 Lakh to Rs 15 Lakh

25%

Above 15 Lakh

30%

Over and above the defined rates, the NRI has to pay the following on the tax liability to arrive at the final tax payable figure:

Surcharge

An additional surcharge is levied if the taxable income exceeds specified amounts, as under:

Exceeding Rs 5 Lakh

10%

Exceeding Rs 1 Crore

15%

Exceeding Rs 2 Crore

25%

Exceeding Rs 5 Crore

37%

Cess

An amount equal to 4% of the calculated tax plus surcharge is payable for all NRI assesses.

Income Tax Return for NRI

Merely paying the Income Tax does not suffice. It is imperative for the resident and the NRI to earn over Rs.2.5 Lakh in a financial year has to file returns mandatorily as per norms. But the ITR For NRI is different from the one used by the resident tax filer.

As an illustration, an NRI has to use ITR 2 for filing returns against salary income, which for the resident is ITR 1. While choosing the correct Income Tax Return Form for NRI is essential, getting to know about the tax exemptions is also important to save on the payable tax amount. The NRI is entitled to seek tax exemptions under the following sections of the Income Tax Act, 1961.

  • Section 80C: The maximum amount is Rs 1.5 Lakh, but deductions for contribution to PPF, NSC, PO 5-Years Deposit Scheme, and Senior Citizens Savings Scheme are not considered.
  • Other Permissible Deductions: Besides Section 80C, the NRI is allowed deductions under the following sections:
    • Section 80D
    • Section 80E
    • Section 80G
    • Section 80TTA
  • Deductions Not Permitted
    • Section 80CCG
    • Section 80DD
    • Section 80DDB
    • Section 80U
  • Exemption for Property Sale.

Points to be Noted

The following are important for the filing of Income Tax Return for NRI:

  • As per the residency rules defined in the Income Tax Act, when an individual is determined a Non-Resident, he or she is liable to pay tax for income earned or accrued directly or indirectly originating in India.
  • A person visiting India in the current financial year for less than 182 days is determined as a Non-Resident until the Financial Year 2019-20.
  • A recent amendment in the Budget 2020 for NRI Tax 2020 effective from the Assessment Year 2021-22, 120 days is the new reduced residency period if the individual’s total reckoned income exceeds Rs 15 Lakh.

Tax Application in the Following Situations

Resident Indian’s Temporary Assignment Abroad

For assignments under 182 days, the individual will pay taxes as a resident. If the assignment exceeds 182 days, the individual becomes an NRI and pays taxes for the income during Indian residents only.

Resident Individual Recently Shifted Abroad

Every Indian citizen regardless of residency status must file returns if income exceeds Rs 2.5 Lakh. In this case, income earned in India before leaving is taxable.

Resident Indian Living Abroad

If the individual resides abroad with income originating in India, extant tax laws apply and filing returns is mandatory if it exceeds Rs 2.5 Lakh.   

NRI Returning to India

The NRI who has moved back to India recently is granted the RNOR (Resident, Non-Ordinary Resident) status to enjoy certain privileges under the Income Tax Rules for NRI Returning to India. It covers all the privileges of an NRI, including foreign currency deposits for two years. Upon expiry of this period, the returning NRI status is revoked and is treated as a resident individual.

How to File Income Tax Return for NRI?

Filing of ITR is compulsory for the NRI with tax liability for accrued and deemed income in India. The NRI has to follow all the norms applicable to the tax-paying Indian citizen as per norms defined in the Income Tax Rules for NRI. The entire process factors in the change in NRI Taxation in the following steps.

Step 1: Check Residential Status: Once the yearly residential status is confirmed, the NRI can proceed to the next step.

Step 2: Compute Taxable Income: The calculated taxable income must tally with the tax credits in Form 26AS for a seamless ITR filing experience.

Step 3: Invoke Double Taxation Avoidance Agreement Benefit: It is handy for the NRI to claim benefit under its provision to prevent paying tax on the same income twice.

Step 4: ITR Verification: As with the resident taxpayer, the NRI must verify the return within 120 days from the filing date.

NRI Deductions and Exemption

Here is a rundown of deductions and exemptions that are/not allowed for an NRI:

Deductions/Exemptions

Allowed

Not Allowed

Section 80 C

Payment of Life Insurance Premium

PPF Investment

 

Payment of Children’s tuition fee

NSCs Investment

 

Principal Repayment on Loan for buying House Property

Senior Citizen Saving Scheme

 

ELSS Investments

Post Office 5-year Deposit Scheme

 

ULIP Investments

 

Section 80CCG

-

Investments made under RGESS

Section 80D

Payment of Health Insurance Premium

-

Section 80DD

-

Expenses made towards the medical treatment of any differently-abled dependent

Section 80E

Interests paid on Education Loan

-

Section 80G

Donations made for social causes

-

Section 80TTA

Interests earned from Savings Bank Account

-

Section 80U

-

Deductions made available to differently-abled

 

 

 

Exemption on the Sale of Long-Term Property

Section 54: On the sale of long-term house property

 

Section 54F: On the sale of long-term asset except for the house property

 

Section 54EC: On the reinvestment in bonds of Rural Electrification Corporation (REC) and National Highway Authority of India (NHAI) and sale of any property

 

Deductions from House Property Income

Property Taxes paid

 

 

Standard deduction

 

 

Interest paid on home loan

 

How to Shun Double Taxation?

One of the most important questions that an NRI often asks is:

‘Do I need to pay taxes in both the countries, i.e. India and country of my residence?’

Well, the answer to this question is ‘NO’.

NRIs can save the trouble of paying double taxes. They just need to avail the Double Taxation Avoidance Agreement (DTAA).

Now, what’s DTAA?

DTAA is an agreement between foreign countries and India. The agreement’s terms and conditions may vary in terms of relief from country to country.

However!

Under DTAA, tax relief can be availed in two ways:

  • Exemption Method – The NRI is exempted to pay tax in one country and will be taxed in another.
  • Tax Credit Method – The NRI’s income is taxed in both countries. However, the individual claim to avail tax relief in his current residence.

A Quick and Final Rundown

Income Source

Non-Residents

Residents

Not Ordinary Residents

Income accrued in India

Taxable in India

Taxable in India

Taxable in India

Income accrued outside of India but received in India

Taxable in India

Taxable in India

Taxable in India

Any income received in India

Taxable in India

Taxable in India

Taxable in India

Any income accrued outside of India for a profession or business controlled in or from India

Not Taxable in India

Taxable in India

Taxable in India

Income accrued and earned and received  outside of India

Not Taxable in India

Taxable in India

Taxable in India

Income accrued outside of India from any source other than profession or business controlled from India

Not Taxable in India

Taxable in India

Not Taxable in India

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*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C apply.

**Tax benefit is subject to changes in tax laws. Standard T&C apply.

Written By: PolicyBazaar - Updated: 20 July 2021
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