NRI Taxation

Taxes collected from citizens are the foundation of the Indian economy. NRI taxation under the Indian Income Tax Act, 1961 applies to those earning income outside the home country. The income tax rules and perks allowed to them are drastically different from those applicable to resident Indians.

The income of a non-resident Indian (NRI) earned in India is taxable. Whether a person will be classified as NRI or not will depend on the number of days he or she has stayed in India and the quantum of income earned.Tax on an individual’s income depends on the source of such income and the residential status in India. The residential status of an Indian citizen needs to be determined individually for every financial year which may vary from year to year.

Who is a Non-Resident?

“Non-Resident” is a person who has not been residing in India for a specified period of time. The Residential Status of an individual in a given year determines whether the individual is a Resident or Non-Resident for the year.

Non-Resident Indian (NRI)” is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India. In India, Non-Resident Indians are mainly governed by two Acts-

The income Tax Act, 1961 &
Foreign Exchange and Management Act, 1999(FEMA).

The term “Non-Resident Indian” is defined differently under both acts. However, one needs to understand that for the purposes of Income-tax, the FEMA Act holds no relevance, and you just need to conform to the provisions of the Income Tax Act 1961.

Person of Indian origin (PIO) – A person is said to be of Indian origin if he or any of his parents or any of his grandparents were born in undivided India.

Types of Non-Resident

Under the Income Tax Act 1961, a non-resident is broadly classified under the following three heads:

Non-Resident Indian/Person of Indian Origin
Foreign Company
Other Non-Resident Person

How do I determine my residential status?

You are considered an Indian resident for a financial year if you satisfy any of the conditions below:

When you are in India for at least 6 months (182 days to be exact) during the financial year
You have been in India for 2 months (60 days) in the previous year and have lived for one whole year (365 days) in the last four years.

Note: If you are an Indian citizen working abroad or a crew member on an Indian ship, only the first condition is available to you – which means you are a resident when you spend at least 182 days in India.

The same applies to a Person of Indian Origin (PIO) who visits India. The second condition does not apply to these individuals. A PIO is a person whose parents or any of his grandparents were born in undivided India.

If you do not meet any of the above conditions, you are a Non-Resident Indian.

Resident but Not-Ordinary Resident (RNOR) definition amended

Individuals will be considered as RNOR for the year if they meet the following conditions:

If you’ve been a non-resident in India for 9 years out of 10 previous years preceding the year of consideration, or
If you have stayed in India for 729 days or less during 7 previous years preceding the year of consideration

The Finance Act 2020 has amended the residency provisions to include Indian Citizen/Person of Indian Origin, who comes to visit India and shall now be considered as RNOR subject to the following conditions:

Total income other than foreign income is Rs 15 lakh or more
The individual has stayed in India for more than 120 days but less than 182 days in the previous year
The individual has stayed in India for 365 days or more in four years preceding the previous year

Before this amendment, such individuals were classified as non-residents. Due to the amendment mentioned above, the individual’s residential status may be classified as RNOR, which will lead to loss of DTAA benefits, increased scope of total income for taxability, loss of various exemptions allowed, etc.

It is to be further noted that in the above amendment, an individual staying for more than 182 days shall be classified as a resident irrespective of the level of income in the previous year.

Deemed residency status introduced in Finance Act 2020

Finance Act 2020 introduced the concept of ‘Deemed residency’. According to this, Citizens of India earning more than Rs 15 lakh from Indian sources shall be deemed a resident of India if they are not liable for payment of taxes in any other country.

The deemed residents shall be classified as RNOR with effect from the financial year 2020-21. This amendment was brought into force to tax the incomes of Indian citizens who are not liable to pay tax in any country.

Special relief due to COVID lockdown

For FY 2019-20, if individuals have come to India on a visit before 22nd March 2020 and they are:

Unable to leave India because of lockdown on or before 31st March 2020– the period of stay from 22nd to 31st March shall not be considered.
Quarantined due to COVID-19 on or after 1st March 2020 and departed on an evacuation flight on or before 31st March 2020, or unable to leave India- the period of stay from the beginning of quarantine to 31st March shall not be considered.
Departed on an evacuation flight on or before 31st March 2020– the period of stay from 22nd March 2020 to the date of departure shall not be considered.

Is my income earned abroad taxable?

An NRI’s income taxes in India will depend upon his residential status for the year as per the income tax rules mentioned above.

If your status is ‘resident’, your global income is taxable in India. If your status is ‘NRI,’ your income earned or accrued in India is taxable in India.

Salary received in India or salary for service provided in India, income from a house property situated in India, capital gains on transfer of asset situated in India, income from fixed deposits or interest on a savings bank account are all examples of income earned or accrued in India. These incomes are taxable for an NRI.
Income which is earned outside India is not taxable in India.
Interest earned on an NRE account and FCNR account is tax-free. Interest on NRO accounts is taxable in the hands of an NRI.

Am I required to file my income tax return in India?

NRI or not, any individual whose income exceeds Rs 2,50,000 is required to file an income tax return in India.

Do NRIs have to pay advance tax?

If NRIs tax liability exceeds Rs 10,000 in a financial year, they must pay advance tax. Interest under Section 234B and Section 234C is applicable if advance tax is not paid.

When is the last date to file an income tax return in India?

July 31st is the last date to file income tax returns in India for NRIs unless the government extends it.

Taxable income for an NRI

When you receive it in India, your salary income is taxable, or someone does it on your behalf. Therefore, if you are an NRI and receive your salary directly to an Indian account, it will be subject to Indian tax laws. This income is taxed at the slab rate you belong to.

Income from salary- Income from salary will be considered to arise in India if your services are rendered in India.

So even though you may be an NRI, if your salary is paid towards services you provide in India, it shall be taxed in India immaterial of the place where you are receiving the income.

Suppose your employer is the Government of India and you are a citizen of India. In that case, if your service is rendered outside India, your income from salary shall be taxable in India.

Note that the income of Diplomats and Ambassadors are exempt from tax. For instance, Arun was working in USA on a project from an Indian company for 3 years. Arun needed the salary in India to take care of his family’s needs and make payments towards a housing loan. However, since the salary received by Arun in India would have been taxed as per Indian laws, Arun decided to receive it in USA.

Income from house property- Income from a property that is situated in India is taxable in the hands of an NRI.

The calculation of such income shall be in the same manner as applicable to a resident. This property may be rented out or lying vacant. An NRI can claim a standard deduction of 30%, deduct property taxes, and benefit from an interest deduction from a home loan. The NRI is also allowed a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid on purchasing a property can also be claimed under Section 80C.

Income from house property is taxed at slab rates as applicable.

For instance, Nancy owns a house property in mumbai and has rented it out while she lives in Bangkok. She has set up the rent payments to be received directly in her bank account in Bangkok. Nancy’s income from this house which is located in India, shall be taxable in India.

Rental payments to an NRI- A tenant who pays rent to an NRI owner must remember to deduct TDS at 30% while paying rent.

The income can be received to an account in India or the NRI’s account in the country they are currently residing in.

For instance, Meena pays a monthly rent of Rs 30,000 to her NRI landlord. She must deduct 30% TDS or Rs 9,000 before transferring the money to the landlord’s account.
Meena must also get a Form 15CA prepared and submit it online to the income tax department. A person making a remittance (a payment) to a Non-Resident Indian has to submit Form 15CA. This form has to be submitted online. In some cases, a certificate from a chartered accountant in Form 15CB is required before uploading Form 15CA online. In Form 15CB, a CA certifies details of the payment, TDS rate, and TDS deduction as per Section 195 of the Income Tax Act, any DTAA (Double Tax Avoidance Agreement) applicable, and other details of nature and purpose of the remittance.

Form 15CB is not required when:

Remittance does not exceed Rs 5,00,000 (in total in a financial year). Only Form 15CA has to be submitted in this case.
If lower TDS has to be deducted and a certificate is received under Section 197, lower TDS has to be deducted by order of the AO.
Neither is required if the transaction falls under Rule 37BB of the Income Tax Act, listing 28 items.

In all other cases, if there is a remittance outside India, the person asking for the remittance should take a CA’s certificate in Form 15CB. After receiving the certificate, submit Form 15CA to the government online.

Income from other sources- Interest income from fixed deposits and savings accounts held in Indian bank accounts is taxable in India. Interest on NRE and FCNR accounts is tax-free. Interest on NRO accounts is fully taxable.

Income from business and profession-Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.

Income from capital gains- Any capital gain on transfer of capital asset which is situated in India shall be taxable in India.

Capital gains on investments in Indian shares, securities shall also be taxable in India. If you sell a house property and have a long-term capital gain, the buyer shall deduct TDS at 20%. However, you can claim capital gains exemption by investing in a house property as per Section 54 or investing in capital gain bonds as per Section 54EC.

Special provision related to investment income-When NRIs invest in certain Indian assets, they are taxed at 20% on the income earned. If the special investment income is the only income the NRI has during the financial year and TDS has been deducted, then such an NRI is not required to file an income tax return.

Special provision related to long-term capital gains

For long-term capital gains made from the sale or transfer of these foreign assets, there is no benefit of indexation and no deductions allowed under Section 80.

But you can avail an exemption on the profit under Section 115F when the profit is reinvested back into:

Shares of an Indian company
Debentures of an Indian public company
Deposits with banks and Indian public companies
Central Government securities
NSC VI and VII issues

In this case, capital gains are exempt proportionately if the cost of the new asset is less than the net consideration.

Remember, if the new asset purchased is transferred or sold within 3 years, then the profit exempted will be added to the income in the year of sale/transfer.

The above benefits may be available to NRI even when they become a resident – until such an asset is converted to money and upon submission of a declaration by the NRI to apply the special provisions to the assessing officer.

The NRI may choose to opt out of these special provisions, and in that case, the income (investment income and LTCG) will be charged to tax under the regular provisions of the Income Tax Act.

What are the investments that qualify for special treatment?

Income derived from the following Indian assets acquired in foreign currency:

Shares in a public or private Indian company
Debentures issued by a publicly-listed Indian company (not private)
Deposits with banks and public companies
Any security of the Central Government
Other assets of the central government as specified for this purpose in the official gazette.

No deduction under Section 80 is allowed while calculating investment income.

Deductions and exemptions for NRIs

Similar to residents, NRIs are also entitled to claim various deductions and exemptions from their total income. These have been discussed here:
Deductions under Section 80C-Most of the deductions under Section 80 are also available to NRIs. For FY 2020-21, a maximum deduction of up to Rs 1.5 lakh is allowed under Section 80C from gross total income for an individual.
Of the deductions under Section 80C, those allowed to NRIs are:

i. Life insurance premium payment: The policy must be in the NRI’s name or in the name of their spouse or any child’s name (child may be dependent/independent, minor/major, or married/unmarried). The premium must be less than 10% of the sum assured.

ii. Children’s tuition fee payment: Tuition fees paid to any school, college, university or other educational institution situated within India for full-time education of any two children (including payments for play school, pre-nursery and nursery).

iii. Principal repayments on loan to purchase house property: Deduction is allowed to repay the loan taken for buying or constructing residential house property. The deduction is also allowed for stamp duty, registration fees and other expenses to transfer such property to the NRI.

iv. Unit-Linked Insurance Plan (ULIP): ULIP is sold with life insurance cover for deduction under Section 80C. It Includes contribution to the unit-linked insurance plan of LIC mutual fund, e.g. Dhanraksha 1989 and contribution to other units-linked insurance plans of UTI.

v. Investments in ELSS: ELSS has been the most preferred option in recent years as it allows you to claim a deduction under Section 80C up to Rs 1.5 lakh, it offers the EEE (Exempt-Exempt-Exempt) benefit to taxpayers and simultaneously offers an excellent opportunity to earn as these funds invest primarily in the equity market in a diversified manner.
Other allowable deductions-Besides the deduction that an NRI can claim under Section 80C, they are also eligible to claim various other deductions under the income tax laws, which have been discussed here:

Deduction from house property income for NRIs- NRIs can claim all the deductions available to a resident, including parents’ insurance deductions from income from house property for a house property purchased in India. Deduction towards property tax paid and interest on home loan deduction is also allowed.

Deduction under Section 80D- NRIs are allowed to claim a deduction for the premium paid for health insurance. This deduction is available up to Rs 25,000 in the case for insurance of self, spouse, and dependent children. In addition, an NRI can also claim a deduction for parents’ insurance (father or mother or both) up to Rs 25,000.

However, the deduction limit is set up to Rs 50,000 if the insurance premium is paid for resident senior citizens (self, family and parents). Hence, insurance premium paid for senior citizen NRIs cannot be claimed under Section 80D.

Within the existing limits allowed, a deduction of up to Rs 5,000 for preventive health check-ups are also available. Moreover, medical expenditure of up to Rs 50,000 incurred for resident senior citizens can also be claimed within the existing limits of Section 80D. However, the person on whom the medical expenditure is incurred should not be covered under any health insurance policy.

Deduction under Section 80E- Under this section, NRIs can claim a deduction of interest paid on an education loan.

This loan may have been taken for higher education for the NRI, NRI’s spouse, children, or a student for whom the NRI is a legal guardian.

There is no limit on the amount which can be claimed as a deduction under this section. The deduction is available for a maximum of eight years or till the interest is paid, whichever is earlier. The deduction is not available on the principal repayment of the loan.

Deduction under Section 80G-NRIs are allowed to claim a deduction for donations for social causes under Section 80G.

Deduction under Section 80TTA- Non-resident Indians can claim a deduction on income from interest on savings bank accounts up to a maximum of Rs 10,000 like resident Indians.

This is allowed on deposits in savings accounts (not time deposits) with a bank, co-operative society or post office and is available starting FY 2012-13.

Deductions not allowed to NRIs

Some investments under Section 80C:

Investment in PPF is not allowed (NRIs are not allowed to open new PPF accounts. However, PPF accounts that are opened while they are a resident are allowed to be maintained)
Investments in National Savings Certificates (NSCs)
Post office 5-year deposit scheme
Senior Citizen Savings Scheme (SCSS)

Deduction for the differently-abled under Section 80DD-Deduction under this section is for maintenance, including medical treatment, of a handicapped dependent (a person with a disability as defined in this section). Such deduction is not available to NRIs.

Deduction for the differently-abled under Section 80DDB- Deduction under this section towards medical treatment of a dependent who is disabled (as certified by a prescribed specialist) is available only to residents.

Deduction for the differently-abled under Section 80U- Deduction for disability where the taxpayer himself has a disability as defined in the section is allowed only to resident Indians.

Exemption on sale of property for an NRI

Long-term capital gains are taxed at 20%. Do note that long-term capital gains earned by NRIs are subject to a TDS of 20%.

NRIs can claim exemptions under Section 54, Section 54EC, and Section 54F on long-term capital gains. Therefore, an NRI can take benefit of the exemptions from capital gains when filing a return and claim a refund of TDS deducted from Capital Gains.

Exemption under Section 54 is available on long-term capital gains on the sale of a house property. Exemption under Section 54F is available on the sale of any asset other than a house property.

The exemption is also available under Section 54EC when capital gains from the first property sale are reinvested into specific bonds.

Suppose you are not very keen to reinvest your profit from the sale of your first property into another one. In that case, you can invest them in bonds for up to Rs 50 lakh issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
The homeowner has 6 months to invest the profit in these bonds, although to be able to claim this exemption, the investment should be
before the tax filing deadline.
The money invested can be redeemed after 3 years but cannot be sold before the lapse of 5 years from the date of sale. With effect from the FY 2018-2019, the period of 3 years has been increased to 5 years.
With effect from FY 2018-19, the exemption under Section 54EC has been restricted to the capital gain arising from the transfer of long-term capital assets being land and building or both. Earlier, the exemption was available on the transfer of any capital assets. The NRI must make these investments and show relevant proof to the buyer to get no TDS deducted from the capital gains. The NRI can also claim a refund of excess TDS deducted at the time of return.

Double Taxation Avoidance Agreement (DTAA)

A Double Taxation Avoidance Agreement (DTAA) is a treaty signed between two countries to prevent residents of one country from being taxed twice on the same income earned in the other country. This is crucial for individuals like NRIs (Non-Resident Indians) who may work abroad and earn income in their country of residence while still maintaining ties to India. Without a DTAA, they could face the double whammy of paying taxes in both countries on the same income.

Here’s how a DTAA benefits NRIs:

Tax relief: DTAAs typically establish which country has the primary right to tax specific types of income. For example, income from employment may be primarily taxed in the country where the work is performed, while dividends and interest income may be taxed in the country of residence.
This reduces the total tax burden on NRIs by ensuring they’re not taxed twice on the same income.Some DTAAs also allow for tax credits or exemptions to avoid double taxation.
Clarity and certainty: DTAAs provide clear guidelines and rules for determining where income is taxed, reducing uncertainty and potential disputes with tax authorities. This makes it easier for NRIs to comply with tax regulations in both countries.
Increased investment and trade: By preventing double taxation, DTAAs encourage cross-border investment and trade between countries. This can benefit NRIs by creating more employment opportunities and business ventures.
Improved tax cooperation: DTAAs often include provisions for information exchange between tax authorities in both countries. This helps combat tax evasion and ensures fair tax compliance.

FAQs

Q: When are you considered as a non-resident Indian (NRI)?

A person who is not a resident of India is considered a non-resident of India (NRI).
You are a resident if your stay in India for a given financial year is:
(i) 182 days or more
(ii) 60 days or more and 365 days or more in the 4 immediately preceding previous years
In case you do not satisfy either of the above conditions, you will be considered an NRI.

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

Yes, as an NRI you can save taxes by investing in mutual funds

Q: When should an NRI file his return of income in India?

An NRI, like any other individual taxpayer, must file his return of income in India if his gross total income received in India exceeds Rs 2.5 lakh for any given financial year. Further, the due date for filing a return for an NRI is also 31 July of the assessment year or extended by the government.

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