Income Tax for NRI

Taxes levied on citizens constitute the bedrock of the Indian economy. Non-Resident Indian (NRI) taxation, governed by the Indian Income Tax Act of 1961, pertains to individuals earning income beyond their home country’s borders. 

How do I determine my residential status?

To qualify as an Indian resident for a financial year, you must meet one of the following criteria:

– Residing in India for a minimum of 6 months (specifically, 182 days) during the financial year.

– Being present in India for 2 months (60 days) in the preceding year and residing for a full year (365 days) within the last four years.

Note: If you are an Indian citizen employed abroad or serving as a crew member on an Indian ship, you are eligible for only the first condition, implying residency when you spend at least 182 days in India.

The same rule applies to Persons of Indian Origin (PIO) visiting India. A PIO is someone whose parents or any of their grandparents were born in undivided India.

If you fail to satisfy any of the above conditions, you are classified as a Non-Resident Indian (NRI).

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Definition of Resident but Not-Ordinary Resident (RNOR) amended

Individuals will be categorized as Resident but Not-Ordinary Resident (RNOR) for the year if they fulfill the following criteria:

– Having been a non-resident in India for 9 out of the 10 previous years preceding the year of consideration, or

– Residing in India for 729 days or fewer during the 7 previous years preceding the year of consideration.

The Finance Act 2020 has revised the residency provisions to encompass Indian Citizens/Persons of Indian Origin who visit India, now to be considered as RNOR provided they meet the following conditions:

– Total income, excluding foreign income, amounts to Rs 15 lakh or higher.

– The individual has resided in India for more than 120 days but less than 182 days in the preceding year.

– The individual has stayed in India for 365 days or more in the four years preceding the previous year.

Prior to this amendment, these individuals were categorized as non-residents. However, as a result of the mentioned amendment, the individual’s residential status might now be classified as RNOR. This reclassification could result in the loss of DTAA benefits, an expanded scope of total income subject to taxation, and the loss of various exemptions previously allowed.

It is important to highlight that according to the above amendment, an individual staying for more than 182 days will be classified as a resident, regardless of their income level in the previous year.

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Special relief due to COVID lockdown

For the financial year 2019-20, if individuals have visited India before March 22, 2020, and they are:

– If they were unable to leave India due to lockdown on or before March 31, 2020, the period of stay from March 22 to March 31 will not be counted.

– If they were quarantined due to COVID-19 on or after March 1, 2020, and departed on an evacuation flight on or before March 31, 2020, or were unable to leave India, the period of stay from the beginning of quarantine to March 31 will not be considered.

– If they departed on an evacuation flight on or before March 31, 2020, the period of stay from March 22 to the date of departure will not be counted.

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The rate at which TDS is to be deducted under section 194Q of the Income Tax Act

– An NRI’s income taxes in India will be determined by their residential status for the year according to the aforementioned income tax regulations.

– If your status is ‘resident’, your worldwide income is subject to taxation in India.

– Salary received in India or for services provided in India, income from a house property located in India, capital gains from the transfer of assets situated in India.

– However, interest on NRO accounts is taxable in the hands of an NRI.

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

July 31st is the deadline for NRIs to file income tax returns in India, unless extended by the government.

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Do NRIs have to pay advance tax?

If an NRI’s tax liability exceeds Rs 10,000 in a financial year, they are required to pay advance tax. Interest under Section 234B and Section 234C applies if advance tax is not paid.

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Taxable income for an NRI

When you receive your salary in India, whether directly or through someone else, it becomes taxable under Indian tax laws. Hence, if you are an NRI receiving your salary directly into an Indian account, it will be subject to Indian taxation. This income is taxed at the applicable slab rate based on your income level.

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Income from salary

Income from salary will be considered to arise in India if the services are provided within the country.

So even if you are an NRI, if your salary is paid for services provided within India, it will be subject to taxation in India regardless of where you receive the income.

For instance, if you are a citizen of India and your employer is the Government of India, and if your services are rendered outside India, your salary income will still be taxable in India.

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Income from house property

Income from a property located in India is taxable for an NRI.

The computation of this income follows the same rules as for a resident. The property may be rented out or vacant. Additionally, the NRI is eligible for a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid when purchasing a property can also be claimed under Section 80C.

Income from a house property is taxed at the applicable slab rates.

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Rental payments to an NRI

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

Form 15CB is not required under the following circumstances:

– When the remittance does not exceed Rs 5,00,000 (in total in a financial year). In this case, only Form 15CA needs to be submitted.

– If lower TDS (Tax Deducted at Source) needs to be deducted and a certificate is received under Section 197, lower TDS should be deducted as per the order of the Assessing Officer.

– Neither form is required if the transaction falls under Rule 37BB of the Income Tax Act, which lists 28 specific items.

– In all other cases, where there is a remittance outside India, the individual requesting the remittance should obtain a CA’s certificate in Form 15CB. After receiving the certificate, Form 15CA should be submitted to the government online.

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Income from other sources

Interest earned from fixed deposits and savings accounts maintained in Indian banks is subject to taxation in India. However, interest accrued on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is exempt from tax. Conversely, interest earned on NRO (Non-Resident Ordinary) accounts is fully taxable.

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Income from business and profession

Any income earned by an NRI from a business controlled or established in India is taxable to the NRI.

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Special provision related to investment income

When NRIs invest in specific Indian assets, they are taxed at a rate of 20% on the income earned. If the special investment income is the sole income the NRI has during the financial year and TDS (Tax Deducted at Source) has been deducted, then the NRI is not required to file an income tax return.

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Income from capital gains

Any capital gain on transfer of a capital asset situated in India is taxable in India.

Capital gains from investments in Indian shares and securities are also subject to taxation in India. If you sell a house property and realize a long-term capital gain, the buyer is required to deduct TDS (Tax Deducted at Source) at a rate of 20%. However, you can claim an exemption on capital gains by investing in another house property under Section 54 or by investing in capital gain bonds under Section 54EC.

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What are the investments eligible for special treatment?

Income derived from the following Indian assets acquired in foreign currency qualifies for special treatment:

– Deposits with banks and public companies

– Shares in a public or private Indian company

– Debentures issued by a publicly-listed Indian company (excluding private companies)

No deduction under Section 80 is permitted when calculating investment income.

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Special provision related to long-term capital gains

For long-term capital gains arising from the sale or transfer of these foreign assets, there is no provision for indexation benefit, and deductions under Section 80 are not permitted.

However, you can claim an exemption on the profit under Section 115F when you reinvest the profit back into:

– Deposits with banks and Indian public companies

– Central Government securities

– Shares of an Indian company

– Debentures of an Indian public company

– National Savings Certificates (NSC) VI and VII issues

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

It’s important to note that if the newly purchased asset is transferred or sold within 3 years, the exempted profit will be added to the income in the year of sale or transfer.

These benefits may still be applicable to NRIs even after they become residents, until such time as the asset is converted into money, and upon submission of a declaration by the NRI to apply the special provisions to the assessing officer.

The NRI has the option to opt out of these special provisions. In such a case, the income (investment income and LTCG) will be subject to tax under the regular provisions of the Income Tax Act.

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Deductions under Section 80C

Most of the deductions under Section 80 are also available to NRIs. For the financial year 2020-21, an individual can claim a maximum deduction of up to Rs 1.5 lakh under Section 80C from their gross total income.

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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:

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, their spouse’s name, or any child’s name (whether dependent or independent, minor or major, married or 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 located within India for the 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 permitted for repaying the loan taken to acquire or construct a residential house property. The deduction is also allowed for stamp duty, registration fees, and other expenses related to transferring such property to the NRI.

iv. Unit-Linked Insurance Plan (ULIP): ULIPs are sold with life insurance cover and qualify for deduction under Section 80C. This includes contributions to unit-linked insurance plans offered by LIC mutual fund, such as Dhanraksha 1989, and contributions to other unit-linked insurance plans offered by UTI.

v. Investments in ELSS: ELSS (Equity Linked Savings Scheme) has become the most favored option in recent years. It enables you to claim a deduction under Section 80C of up to Rs 1.5 lakh. ELSS also provides the EEE (Exempt-Exempt-Exempt) benefit to taxpayers, meaning the investment, returns, and withdrawals are all tax-exempt. Additionally, ELSS offers an excellent opportunity for earnings as these funds primarily invest in the equity market in a diversified manner.

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Deduction from house property income for NRIs

NRIs can claim all the deductions available to residents, including deductions for parents’ insurance, from income derived from house property for a property purchased in India. Deductions for property tax paid and interest on home loan are also permitted. You can find detailed information about income from house property here.

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Deduction under Section 80D

NRIs are eligible to claim a deduction for the premium paid for health insurance. This deduction is available up to Rs 25,000 for insurance covering oneself, spouse, and dependent children. Additionally, an NRI can claim a deduction for parents’ insurance (father, mother, or both) up to Rs 25,000.

However, the deduction limit increases to Rs 50,000 if the insurance premium is paid for resident senior citizens (self, family, and parents). Therefore, insurance premiums 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 is also available. Moreover, medical expenses of up to Rs 50,000 incurred for resident senior citizens can be claimed within the existing limits of Section 80D. However, the individual on whom the medical expenses are incurred should not be covered under any health insurance policy.

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Deduction under Section 80E

Under this section, NRIs can claim a deduction for 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 that can be claimed as a deduction under this section. The deduction is available for a maximum of eight years or until the interest is paid, whichever is earlier. It’s important to note that the deduction is not available on the principal repayment of the loan.

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Deduction under Section 80G

NRIs are permitted to claim a deduction for donations made to charitable causes under Section 80G. Here are the donations that NRIs can claim under Section 80G:

Deduction under Section 80TTA

This deduction is applicable to deposits in savings accounts (not time deposits) held with a bank, cooperative society, or post office, and has been available since the financial year 2012-13.

Deduction for the differently-abled under Section 80DD

Deduction under this section is for the maintenance, including medical treatment, of a handicapped dependent (a person with a disability as defined in this section). However, such deduction is not available to NRIs.

Deduction for the differently-abled under Section 80DDB

Deduction under this section for the 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, applicable when the taxpayer himself has a disability as defined in the section, is allowed only to resident Indians.

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Exemption on sale of property for an NRI

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

NRIs have the option to claim exemptions under Section 54, Section 54EC, and Section 54F on long-term capital gains. This means that an NRI can take advantage of these exemptions 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 from the sale of a house property, while exemption under Section 54F is available on the sale of any asset other than a house property. 

– If you prefer not to reinvest your profit from the sale of your first property into another one, you have the option to invest it in bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC), up to Rs 50 lakh.

– You have a window of 6 months to invest the profit in these bonds. However, to claim this exemption, the investment must be made before the tax filing deadline.

– The invested amount can be redeemed after 3 years but cannot be sold before 5 years from the date of sale. As of FY 2018-2019, the redemption period has been increased to 5 years.

– From FY 2018-19 onwards, the exemption under Section 54EC is limited to the capital gain arising from the transfer of long-term capital assets such as land and buildings. Previously, the exemption was available for the transfer of any capital assets. The NRI must make these investments and provide relevant proof to the buyer to avoid TDS deduction from the capital gains. Additionally, the NRI can claim a refund of excess TDS deducted at the time of filing the return.

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NRI recently moved back to India

Returning NRIs assume RNOR (Resident, Non-Ordinary Resident) status when they meet the following criteria:

– They have been an NRI in 9 of the 10 financial years preceding the year of their return.

– They have resided in India for 2 years or less (729 days or less) in the last 7 financial years.

– The Income Tax Department allows RNORs to continue enjoying exemptions available to NRIs for 2 years after their return. Therefore, deposits held in foreign currency, which are exempt for NRIs, remain exempt for returning NRIs during this 2-year period. After this duration, returning NRIs are treated as resident individuals for taxation purposes.

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FAQ’s

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

An NRI, similar to any other individual taxpayer, is required to file their income tax return in India if their gross total income received in India exceeds Rs 2.5 lakh for a given financial year. Additionally, the due date for filing a return for an NRI is also 31 July of the assessment year or any extension provided by the government.

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 considered a resident if your stay in India for a given financial year meets any of the following conditions:

(i) 182 days or more

(ii) 60 days or more in the financial year and 365 days or more in the four immediately preceding previous years.

If you do not meet either of the above conditions, you will be considered an NRI.

Should taxes be deducted when payments are being made to NRIs?

Specified payments such as rent, professional or technical fees, made to an NRI require tax deduction at source by the individual making the payment. The individual must obtain a Tax Deduction and Collection Account Number (TAN) to deduct taxes at source. Additionally, Form 15CA (to be filed by the person making the payment) and Form 15CB (to be obtained from a Chartered Accountant) are also required for making payments to non-residents.