NRI Taxation under the Indian Income Tax Act, 1961, applies to those earning outside the home country. The income tax rules and perks allowed to them are drastically different from those applicable to resident Indians. In this article, we will discuss Income Tax for NRIs.
- Determining your Residential Status
- NRE & NRO
- Taxable Income for an NRI
1. How do I Determine My Residential Status?
You are considered an Indian resident for a financial year:
a. When you are in India for at least 6 months (182 days to be exact) during the financial year
b. You are in India for 2 months (60 days) for the year in the previous year and have lived for one whole year (365 days) in the last four years If you are an Indian citizen working abroad or a member of a crew 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 is applicable to a Person of Indian Origin (PIO) who is on a visit to India. The second condition is not applicable to these individuals. A PIO is a person whose parents, or any of his grandparents were born in undivided India. You are an NRI if you do not meet any of the above conditions.
- Is My Income Earned Abroad Taxable?
- Am I Required to File My Income Tax Return in India?
- When is the Last Date to File Income Tax Return in India?
- Do NRIs Have to Pay Advance Tax?
a. Is My Income Earned Abroad Taxable?
An NRI’s income taxes in India will depend upon his residential status for the year. If your status is ‘resident,’ your global income is taxable in India. If your status is ‘NRI,’ your income which is 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 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 account is taxable for an NRI.
b. Am I Required to File My Income Tax Return in India?
NRI or not, any individual whose income exceeds Rs.2,50,000is required to file an income tax return in India.
c. When is the Last Date to File Income Tax Return in India?
July 31st is the last date to file income tax return in India for NRIs.
d. Do NRIs Have to Pay Advance Tax?
If your tax liability exceeds Rs 10,000 in a financial year, you are required to pay advance tax. Interest under Section 234B and Section 234C is applicable when you don’t pay your advance tax.
2. Opening an NRI Bank Account? The Difference Between NRE and NRO Accounts
NRIs (Non-Resident Indians) managing income earned in India and abroad may benefit from having two different types of bank accounts in India, an NRE (Non-Resident External) account and an NRO (Non-Resident Ordinary) account. Both NRE and NRO accounts may be opened in the form of savings, current, recurring, or fixed deposit accounts, and depending on your banking needs, one or both may help you more easily manage foreign and Indian-earned incomes.
What is an NRE Account?
The NRE account is an Indian Rupee denominated account, which is freely repairable. This form of NRI account can be in the form of savings, current, recurring or fixed deposits. The income is deemed to be earned outside India. Indian Rupees cannot be deposited into this account, only foreign currency can be deposited which will be converted into Indian Rupee at the time of deposit. The interest earned on the balances at the end of quarter is free from any income tax. However, the NRI can send his remittances from abroad into this type of account. The bank pays interest on the balance at their own determined rates.
For a comparison of the best NRE Accounts, check our NRE Accounts Section
What is an NRO Account?
An NRO account is a savings or current account held in India that helps NRIs manage income earned in India such as rent, dividends, or pension from abroad. The account holder can deposit and manage accumulated rupee funds conveniently through an NRO account. Foreign currency deposited into the NRO account is converted into Indian Rupees. Any NRI can open a NRO account.
For a comparison of the best NRO Accounts, check our NRO Accounts Section
NRIs may also convert their existing resident savings account into an NRO account when their status changes from resident to non-resident. A minimum amount of Rs.10,000 must be maintained in an NRO account on a daily basis. Any repatriation done through this account should be reported to RBI.
3. Taxable Income for an NRI
Your salary income is taxable when you receive your salary in India or someone does it on your behalf. Therefore, if you are an NRI and you receive your salary directly to an Indian account it will be subject to Indian tax laws. This income is taxed at the slab rates you belong to.
- Income from salary
- Income from House Property
- Rental Payments to an NRI
- Income from Other Sources
- Income from Business and Profession
- Income from Capital Gains
- Special Provision Related to Investment Income
- What are the Investments that Qualify for Special Treatment?
- Special Provision Related to Long-Term Capital Gains
a. 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, but if your salary is paid towards services provided by you in India, it shall be taxed in India immaterial of where you are receiving the income. In case your employer is Government of India and you are the citizen of India, income from salary, if your service is rendered outside India is also taxed in India. Note that income of Diplomats, Ambassadors are exempt from tax. Ajay was working in China on a project from an Indian company for a period of 3 years. Ajay needed the salary in India to take care of the needs of his family and make payments towards a housing loan. However, since salary received by Ajay in India would have been taxed as per Indian laws, Ajay decided to receive it in China.
b. Income from House Property
Income from a property which is situated in India is taxable for an NRI. The calculation of such income shall be in the same manner as for a resident. This property may be rented out or lying vacant. An NRI is allowed to claim a standard deduction of 30%, deduct property taxes, and take benefit of an interest deduction if there is a home loan. The NRI is also allowed a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid on the purchase of a property can also be claimed under Section 80C. Income from house property is taxed at slab rates as applicable. Nandini owns a house property in Goa 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. Nandini’s income from this house which is in India shall be taxable in India.
c. Rental Payments to an NRI
A tenant who pays rent to an NRI owner must remember to deduct TDS at 30%. The income can be received to an account in India or the NRI’s account in the country he is currently residing.
Priya pays a monthly rent of Rs30,000 to her NRI landlord. She must deduct 30% TDS or Rs 9,000 before transferring the money to the landlord’s account. Priya 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, if any DTAA (Double Tax Avoidance Agreement) is applicable, and other details of nature and purpose of the remittance. Form 15CB is not required when:
i. Remittance does not exceed Rs 50,000 (single transaction) and Rs 2,50,000 (in total in a financial year). Only Form 15CA has to be submitted in this case.
ii. If lower TDS has to be deducted and a certificate is received under Section 197 for it or lower TDS has to be deducted by order of the AO.
iii. Neither is required if the transaction falls under Rule 37BB of the Income Tax Act, where it lists 28 items.
In all other cases, if there is a remittance outside India, the person who is making the remittance will take a CA’s certificate in Form 15CB and after receiving the certificate submit Form 15CA to the government online.
d. 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 account is tax-free. Interest on NRO account is fully taxable.
e. 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.
f. 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 India in 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 are allowed to claim capital gains exemption by investing in a house property as per Section 54 or investing in capital gain bonds as per Section 54EC.
g. Special Provision Related to Investment Income
When an NRI invests in certain Indian assets, he is taxed at 20%. If the special investment income is the only income the NI has during the financial year, and TDS has been deducted on that, then such an NRI is not required to file an income tax return.
h. What are the Investments that Qualify for Special Treatment?
Income derived from the following Indian assets acquired in foreign currency:
i. Shares in a public or private Indian company
ii. Debentures issued by a publicly-listed Indian company (not private)
iii. Deposits with banks and public companies
iv. Any security of the central government
v. 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.
i. Special Provision Related to Long-Term Capital Gains
For long-term capital gains made from the sale of 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 115 F when the profit is reinvested back into:
i. Shares in an Indian company
ii. Debentures of an Indian public company
iii. Deposits with banks and Indian public companies
iv. Central Government securities
In this case, capital gains are exempt proportionately if the cost of the new asset is less than net consideration. Remember, if the new asset purchased is transferred or sold back within 3 years, then the profit exempted will be added to the income in the year of sale/transfer. The benefits above may be available to the NRI even when he/she becomes a resident – until such an asset is converted to money, and upon submission of a declaration for the application of the special provisions to the assessing officer by the NRI. 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 usual provisions of the Income Tax Act.
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