As globalization continues to shrink borders, many Indians move abroad for better career opportunities or to settle permanently. These individuals, referred to as Non-Resident Indians (NRIs), often have income sources both in India and abroad.
Understanding how the Indian income tax system applies to NRIs is crucial for effective financial management and tax compliance. This blog provides a comprehensive guide to Income Tax for NRIs.
Who Qualifies as an NRI?
Before diving into tax specifics, it’s essential to define who qualifies as an NRI for tax purposes. The Indian Income Tax Act sets out residency rules based on the number of days an individual spends in India during a financial year. You qualify as an NRI if:
- You spend less than 182 days in India during a financial year, or
- You have spent 60 days or more in the financial year and have not been in India for 365 days or more in the last four years.
If you meet either condition, your tax status changes to NRI, affecting how your income is taxed.
What Income is Taxable for NRIs?
As an NRI, you are liable to pay taxes on income earned or accrued in India. Income sourced outside India is not taxable unless it is received or deemed to be received in India. Below are the primary types of income taxable for NRIs:
1. Income from Salary
If your salary is received in India or you provide services in India, it is subject to taxation. For example, if you are employed by an Indian company while working abroad and your salary is credited to an Indian bank account, it is considered taxable.
2. Income from House Property
Rental income from property located in India is taxable for NRIs. NRIs are eligible to claim deductions under Section 24 for property maintenance or home loan interest payments.
3. Income from Capital Gains
Capital gains tax applies to NRIs if they sell property, shares, or other capital assets in India. Short-term capital gains on listed equity shares are taxed at 15%, while long-term capital gains above ₹1 lakh attract a 10% tax without indexation.
4. Income from Investments
Interest earned from savings accounts, fixed deposits, and other investments in India is taxable. However, NRIs can benefit from exemptions on certain specified investments under Section 10(4) and 10(15) of the Income Tax Act.
5. Income from Business
If you own or run a business in India, your business income will be taxable in India, regardless of your residential status.
Deductions and Exemptions for NRIs
While NRIs are subject to taxes in India, they are also entitled to deductions under specific sections of the Income Tax Act:
1. Section 80C
NRIs can claim deductions under Section 80C for various investments and expenses such as:
- Life insurance premium payments
- Principal repayment of a home loan
- Contribution to Public Provident Fund (PPF)
- National Savings Certificate (NSC)
However, not all avenues available to resident Indians are accessible to NRIs. For instance, the Senior Citizens’ Savings Scheme and Post Office savings are not available to NRIs.
2. Section 80D
NRIs can claim a deduction for health insurance premiums paid for themselves, their spouse, or dependent children. The maximum deduction available is ₹25,000, and an additional ₹50,000 can be claimed for parents who are senior citizens.
3. Section 80G
Donations made to specific charities or relief funds are eligible for tax deductions under Section 80G.
4. Section 24
NRIs who own property in India can claim a deduction on the interest paid on a home loan, up to ₹2 lakh for a self-occupied property.
Tax Filing Requirements for NRIs
NRIs are required to file an income tax return in India if their total income exceeds the basic exemption limit of ₹2.5 lakh in a financial year. The filing deadline for NRIs is usually the same as for resident Indians—July 31 of the assessment year. If income exceeds ₹50 lakh, NRIs must also file the Asset and Liability Schedule, detailing assets held in India.
Double Taxation Avoidance Agreement (DTAA)
One of the major concerns for NRIs is the potential for double taxation—being taxed on the same income both in India and in the country of residence. Fortunately, India has signed Double Taxation Avoidance Agreements (DTAA) with several countries to prevent such situations. Under DTAA, NRIs can claim tax credits or exemptions in either country, depending on the specific terms of the agreement.
For example, if an NRI earns interest income from deposits in India and pays tax on that income in India, they may be able to claim a credit in their resident country to avoid paying tax on the same income twice.
Tax on Special Investments for NRIs
The Indian government offers various investment options specifically tailored to NRIs, which come with attractive tax benefits:
1. NRE and NRO Accounts
NRIs often maintain two types of bank accounts in India: Non-Resident External (NRE) and Non-Resident Ordinary (NRO). Interest earned on NRE accounts is tax-free, while interest on NRO accounts is subject to taxation at a rate of 30%, which is also subject to TDS (Tax Deducted at Source).
2. Foreign Currency Non-Resident (FCNR) Deposits
FCNR accounts allow NRIs to hold deposits in foreign currency without the risk of currency conversion losses. Interest earned on FCNR deposits is tax-free in India.
Tax Deducted at Source (TDS) for NRIs
For most forms of income earned by NRIs, tax is deducted at source (TDS). The TDS rates vary depending on the type of income. For example:
- TDS on income from rent is 30%
- TDS on capital gains depends on whether it is long-term or short-term
- TDS on interest from an NRO account is 30%
NRIs should be aware that they can claim a refund if excess TDS has been deducted, provided they file their tax returns correctly.
Conclusion
Navigating the complexities of income tax as an NRI can be challenging, but understanding the basic tax rules can help in effective financial planning. NRIs must be mindful of their income sources in India and ensure they meet their tax filing obligations. Additionally, leveraging the benefits of DTAAs and understanding the deductions and exemptions available can significantly reduce tax liabilities
