The Easiest Guide to Income Tax for Non-Resident Indians (NRIs)
From sunny California to bustling London, from the skyscrapers of Dubai to the tranquil beaches of Bali, Non-Resident Indians (NRIs) are all over the place, but so are their tax obligations. Whether you’re an NRI
by choice or circumstance, understanding the ins and outs of NRI taxation is your passport to financial peace.
So, today, we will help you decode the complexities of NRI taxation in India through this blog post and ensure that your global aspirations always stay financially sound.
In this article, we will cover…
- Who is considered a Non-Resident Indian (NRI)?
- Taxable income for a Non-Resident Indian (NRI)
- Income tax deductions for Non-Resident Indians (NRIs)
- Income tax exemptions for Non-Resident Indians (NRIs)
- Calculating income tax liabilities for Non-Resident Indians (NRIs)
- Income Tax Return (ITR) filing for Non-Resident Indians (NRIs)
- Avoiding double taxation for Non-Resident Indians (NRIs)
Who is considered a Non-Resident Indian (NRI)?
Understanding the residential status of NRIs is a fundamental aspect of NRI taxation.
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 182 days during the previous year or,
- You have been in India for at least 60 days in the previous year and 365 days or more in the four years immediately preceding the previous year.
An individual who does not satisfy both the conditions as mentioned above will be treated as Non-Resident Indian.
Residential status not only affects the extent of one’s tax liabilities but also determines the financial reporting and compliance requirements for NRIs.
Taxable income for a Non-Resident Indian (NRI)
If you are an NRI, you pay income tax in India only on the income earned in India. NRIs can have income originating from multiple avenues, each subject to specific tax regulations. These income sources include:
- Income from Salary: Any salary earned in India or received from an Indian source is subject to taxation. Understanding the tax treatment of this income is crucial for NRIs who may have employment or pension income from India.
- Property and Rental Income: Rental income from Indian properties is taxable, and NRIs are required to pay tax on it. Additionally, any capital gains arising from the sale of property may also be subject to taxation.
- Other Sources: For NRIs, interest earned on NRE and FCNR accounts is tax-free. However, income from NRO accounts is taxable. Interest income from fixed deposits and savings accounts held in Indian bank accounts as well as income from other sources like dividends, interest on bonds, and royalties etc. is also taxable under Indian income tax laws.
- Business/Profession: NRIs involved in business or profession in India must adhere to tax regulations relevant to their activities, including income tax and GST, if applicable.
- Capital Gains: Capital gains from the sale of assets like stocks, mutual funds, and real estate have specific tax implications for NRIs. There are also certain special provisions related to long-term capital gains in the income tax laws of India.
Apart from the above, there are certain special provisions related to investment income that qualify for special treatment in NRI taxation. Understanding how these income sources are taxed is crucial for NRIs to ensure compliance with Indian income tax laws and optimize their income tax liabilities.
Income tax deductions for Non-Resident Indians (NRIs)
NRIs, like Indian residents, have access to certain deductions to reduce their taxable income:
- Section 80C: NRIs can claim deductions for investments in instruments like ULIP, ELSS, Life Insurance Premium payment, principal repayment on loan of house property etc. subject to a maximum limit of ₹1.5 lakh.
- Section 80D: Deductions are available for health insurance premiums paid by NRIs for themselves and their families with a maximum limit of ₹50,000.
- Section 80E: NRIs can claim deductions on interest paid for educational loans under this section.
- Section 80G: Deductions can be claimed for donations made to eligible charitable institutions.
- Section 80TTA: Deductions of up to ₹10,000 on interest income from savings accounts can be claimed under the section.
Note that not all deductions available to residents are applicable to NRIs too. Deductions are not allowed to NRIs under Section 80C, 80DD, 80DDB, 80U of income tax act.
Income tax exemptions for Non-Resident Indians (NRIs)
NRIs get the benefit of the basic exemption limit of ₹2,50,000 from total income. However, if their total income in India consists of only STCG or LTCG, then the benefit of the basic exemption limit is not available in respect of such gains.
NRIs can claim exemptions under Section 54 and Section 54F on long-term capital gains arising from selling of a house property and Section 54EC on long-term capital gains arising from interest income earned through investment in government bonds.
There are certain other income tax exemptions available to NRIs on interest earned on government savings certificates and bonds, dividends earned from shares of domestic Indian companies and long term capital gains from listed equity shares and equity-oriented mutual funds; all of these are subject to prevailing income tax laws in India.
Calculating income tax liabilities for Non-Resident Indians (NRIs)
In India, tax payers are given the choice to opt between old and new tax regimes. The tax slabs applicable to NRIs under both these regimes are given below:
Old Tax Regime
|Income Tax Slab
|Income Tax Rate
|Up to ₹2,50,000
|₹2,50,001 – ₹5,00,000
|5% above ₹2,50,000
|₹5,00,001 – ₹10,00,000
|₹12,500 + 20% above ₹5,00,000
|₹1,12,500 + 30% above ₹10,00,000
New Tax Regime: u/s 115BAC
|Income Tax Slab
|Income Tax Rate
|Up to ₹2,50,000
|₹2,50,001 – ₹5,00,000
|5% above ₹2,50,000
|₹5,00,001 – ₹7,50,000
|₹12,500 + 10% above ₹5,00,000
|₹7,50,001 – ₹10,00,000
|₹37,500 + 15% above ₹7,50,000
|₹10,00,001 – ₹12,50,000
|₹75,000 + 20% above ₹10,00,000
|₹12,50,001 – ₹15,00,000
|₹1,25,000 + 25% above ₹12,50,000
|₹1,87,500 + 30% above ₹15,00,000
On and above the income tax, qualified individuals also need to pay a surcharge, which is an additional tax levied on individuals with high incomes. The surcharge is subject to marginal relief and is applicable to the income of NRIs as well. However, the rebate under section 87A of a maximum of ₹12,500 is not allowed to a NRIs.
Also note that the provisions of advance tax are also applicable to NRIs. Advance tax is paid in the financial year based on estimated tax liability for the year. If the tax liability is higher than ₹10,000 then the assessee is required to pay his advance tax liability in four instalments as mentioned in the Act.
Income Tax Return (ITR) filing for Non-Resident Indians (NRIs)
For NRIs, the 31st July of every assessment year is the due date for filing an income tax return in India.
NRIs have the option to file either of these two ITR forms ITR 2 or ITR 3.
ITR 2 can be filed in case if you are having income other than income from Business and profession, whereas, ITR 3 is required to be filed in case of receiving any income from business or professional activity being carried out in India.
Avoiding double taxation for Non-Resident Indians (NRIs)
For NRIs, one common concern is the possibility of being taxed on the same income in both their host country and India. To avoid double taxation, India has entered into Double Taxation Avoidance Agreement (DTAA) with many countries to prevent double taxation.
NRIs can claim relief under DTAA by way of tax credits or exemptions, depending on the specific agreement with the country of residence. In the tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence. And in the exemption method, NRIs are taxed in only one country and exempted in another.
What are NRE, NRO, and FCNR Accounts?
NRE (Non-Resident External) accounts are primarily for parking foreign earnings in India. From these accounts, you can transfer both principal and interest abroad without any restrictions. The interest earned here is tax-free.
NRO (Non-Resident Ordinary) accounts are for managing income earned in India. While the interest income is taxable, there are provisions for claiming tax benefits under DTAA to prevent double taxation.
FCNR (Foreign Currency Non-Resident) accounts allow NRIs to maintain deposits in foreign currencies. The interest earned is generally tax-free, making it an attractive option for NRIs to park foreign currency funds.
What are some common challenges and pitfalls in Non-Resident Indian (NRI) taxation?
There are several issues that NRIs face in tax compliance. They might have a lack of awareness or confusion regarding residential status. NRIs may be subject to taxation in both India and their country of residence. This can lead to double taxation if not addressed properly. Sometimes, incomplete or incorrect documentation can lead to difficulties in filing income tax returns.
All of these challenges can be solved easily by seeking professional advice, keeping detailed records and timely filing, reviewing tax deductions, utilizing DTAA provisions and by staying updated with latest laws.
What are some income tax saving strategies for Non-Resident Indians (NRIs)?
NRE and FCNR accounts offer tax-free interest income. Knowing and taking advantage of DTAA provisions, deduction and exemption norms can be helpful while making investment decisions.
What are the TDS applications for Non-Resident Indians (NRIs)?
TDS is applicable to various income sources of NRIs, including interest, rent, capital gains, dividends and salary. The rates at which TDS is deducted can vary based on the type of income. Being an NRI, you should monitor TDS credits through Form 26AS and claim refunds when necessary.
NRIs, navigating the landscape of Indian taxation is just one of the many chapters in your worldly adventure. But know that you’re not alone in this voyage. Whether you’re in the heart of Mumbai or the heart of Manhattan, when the tax seas get stormy, we, at NRIHelpline, are always here to be your guiding star and help you navigate the world of NRI taxation no matter where you are. Reach out to our experts who understand your unique income tax needs and get your problems sorted as smoothly as possible.