We all know that taxes collected from citizens is the foundation of Indian Economy. Section 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 in detail.
For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:
a. A resident
b. A resident not ordinarily resident (RNOR)
c. A non-resident (NR)
The taxability differs for each of the above categories of taxpayers. Before we get into taxability, let us first understand how a taxpayer becomes a resident, an RNOR or an NR.
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions:
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year
In the event an individual who is a citizen of India or person of Indian origin leaves India for employment during an FY, he will qualify as a resident of India only if he stays in India for 182 days or more. Such individuals are allowed a longer time greater than 60 days and less than 182 days to stay in India. However, from the financial year 2020-21, the period is reduced to 120 days or more for such an individual whose total income (other than foreign sources) exceeds Rs 15 lakh. In another significant amendment from FY 2020-21, an individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India. The condition for deemed residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence or any other criteria of similar nature.
Resident Not Ordinarily Resident
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR. From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment outside India during the year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more.
However, this condition will apply only if his total income (other than foreign sources) exceeds Rs 15 lakh. Also, a citizen of India who is deemed to be a resident in India (w.e.f FY 2020-21) will be a resident and ordinarily resident in India. NOTE: Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in India or profession set up in India).
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the year. Certain common issue which are raised commonly by NRI’s are clarified below:
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 earned or accrued in India, exceeds Rs.2,50,000 is 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.
Your salary income is taxable when you receive your salary in India or someone does 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 rate you belong to.
Income under the Income Tax Act in India is classified based on the nature of Income as given below:
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. Vijay was working in USA on a project from an Indian company for a period of 3 years. Vijay 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 Vijay in India would have been taxed as per Indian laws, Ajay decided to receive it in USA then such salary will not be taxable here in India.
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. Kiran owns a house property in Kerala and has rented it out while she lives in Singapore. She has set up the rent payments to be received directly in her bank account in Singapore. Nandini’s income from this house which is in India shall be taxable in India.
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. Swapna pays a monthly rent of Rs.25,000 to her NRI landlord. She must deduct 30% TDS or Rs 7,500 before transferring the money to the landlord’s account. Swapna 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.
i. Remittance does not exceed Rs 5,00,000 (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.
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.
Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.
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.
When an NRI invests in certain Indian assets, he is taxed at 20%. If the special investment income is the only income the NRI 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.
Income derived from the following Indian assets acquired in foreign currency:
No deduction under Section 80 is allowed while calculating investment income.
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:
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.
Similar to residents, NRIs are also entitled to claim various deductions and exemptions from their total income. These have been discussed here:
a. Deductions Under Section 80C
b. Deductions allowed to NRIs under Section 80C
Most of the deductions under Section 80 are also available to NRIs. For FY 2019-20, a maximum deduction of up to Rs 1.5 lakhs is allowed under Section 80C from gross total income for an individual.
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 sum assured.
ii. Children’s tuition fee payment: Tuition fees paid to any school, college, university or other educational institution situated within India for the purpose of full-time education of any two children (including payments for play school, pre-nursery and nursery).
iii. Principal repayments on loan for the purchase of a house property: Deduction is allowed for repayment of loan taken for buying or constructing residential house property. Also allowed for stamp duty, registration fees and other expenses for purpose of transfer of such property to the NRI.
iv. Unit-linked insurance plan (ULIPS): ULIPS is sold with life insurance cover for deduction under Section 80C. Includes contribution to unit-linked insurance plan of LIC mutual fund e.g. Dhanraksha 1989 and contribution to other units -linked insurance plan 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 upto Rs 1.5 lakhs, 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.
Besides the deduction that an NRI can claim under Section 80C, he is also eligible to claim various other deductions under the Income tax laws which have been discussed here:
a. Deduction from House Property Income for NRIs
b. Deduction under Section 80D
c. Deduction under Section 80E
d. Deduction under Section 80G
e. Deduction under Section 80TTA
f. Deductions not Allowed to NRIs
g. Investment under RGESS (Section 80CCG)
h. Deduction for the Differently-Abled under Section 80DD
i. Deduction for the Differently-Abled under Section 80DDB
j. Deduction for the Differently-Abled under Section 80U
k. Exemption on Sale of Property for an NRI
l. How are You Taxed When You are a…
m. Income Tax Filing for Foreign Nationals
NRIs can claim all the deductions available to a resident from income from house property for a house purchased in India. Deduction towards property tax paid and interest on home loan deduction is also allowed. You can read about house property income in detail here.
NRIs are allowed to claim a deduction for premium paid for health insurance. This deduction is available up to Rs 30,000 ( increased to Rs 50,000 effective 1 April 2018) for senior citizens and up to Rs 25,000 in other cases for insurance of self, spouse, and dependent children. Additionally, an NRI can also claim a deduction for insurance of parents (father or mother or both) up to Rs30,000 (raised to Rs 50,000 effective 1 April 2018) if their parents are senior citizens, and Rs 25,000 if the parents are not senior citizens. Beginning FY 2012-13, within the existing limit a deduction of up to Rs 5,000 for preventive health check-ups are also available.
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, or NRI’s spouse or children or for 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 8 years or till the interest is paid, whichever is earlier. The deduction is not available on the principal repayment of the loan.
NRIs are allowed to claim a deduction for donations for social causes under Section 80G. Here are all the donations which are eligible under Section 80G.
Non-resident Indians can claim a deduction on income from interest on savings bank account up to a maximum of Rs 10,000 like resident Indians. This is allowed on deposits in savings account (not time deposits) with a bank, co-operative society or post office and is available starting FY 2012-13.
Deduction under Section 80CCG or Rajiv Gandhi Equity Savings Scheme was introduced in effective assessment year 2013-14. The main purpose behind this deduction was to increase retail investor participation in equity markets. Upon satisfaction of certain conditions the deduction allowed is lower of 50% of the amount invested in equity shares or Rs 25,000. This deduction is not available to NRIs. No deduction under this section shall be allowed in respect of any assessment year commencing on or after the 1st day of April, 2018.
Deduction under this Section is allowed for maintenance including medical treatment of a handicapped dependent (a person with a disability as defined in this Section) is not available to NRIs.
Deduction under this Section towards medical treatment for a dependent who is disabled (as certified by a prescribed specialist) is available only to residents.
Deduction for disability where the taxpayer himself suffers from a disability as defined in the Section is allowed only to resident Indians.
Long-term capital gains (when the property is held for more than 3 years) is taxed at 20%. Do note that long-term capital gains earned by NRIs are subject to a TDS of 20%.
NRIs are allowed to claim exemptions under Section 54, Section 54 EC, and Section 54F on long-term capital gains. Therefore, an NRI can take benefit of the exemptions from capital gains at the time of filing a return and claim a refund of TDS deducted on Capital Gains. Exemption under Section 54 is available on long-term capital gains on sale of a house property. Exemption under Section 54F is available on sale of any asset other than a house property.
Exemption is also available under Section 54EC when capital gains from sale of the first property is reinvested into specific bonds.
Rahul worked out of Singapore on a temporary assignment for 4 months and earned in Singaporean Dollars during that time. He got this income credited to a bank account here in India. He has returned back home now. How should he file his income tax return? Rahul’s taxes for this year will depend on his residential status. Since Rahul has not been outside of India for more than 182 days, he will be considered a resident. He will be required to file his income taxes in India this year. This will also include his salary earned during the foreign assignment in Singapore. If the assignment extends to more than 182 days, Rahul’s residential status will change and he will be required to pay taxes only on the Indian income earned thus far. Here, note that Rahul’s foreign income credited to an Indian bank account is taxable in India.
Rahul moves to the US on a new assignment. He gets his US income credited to an NRE account in India. He continues with his FD investments and has some money put away in a savings account in India. He just received Form 16 from his Indian employer. Should he file his returns this year in India? NRI or not, every individual must file a tax return if their income exceeds Rs 2,50,000. But note that NRIs are only taxed for income earned/collected in India. So, Rahul will pay taxes on income earned while in India, and income accrued from FDs and savings account.
|Rahul’s income from India|
|Income from Indian employer||Rs 3,00,000|
|Interest income from FDs||Rs 25,000|
|Bank account savings interest||Rs 4,500|
|Gross total income||Rs 3,29,500|
|Section 80C – PPF investments||Rs 20,000|
|Section 80TTA exemption||Rs 4,500|
|Taxable income||Rs 3,05,000|
|Tax slab at 10%||Rs 5,500|
|Cess at 3%||Rs 165|
|TDS deducted by employer||Rs 4,000|
|TDS deducted by bank||Rs 4,500|
|Tax Refund||Rs 2835|
It’s been 3 years since Arjun moved to the US. He is paid in US dollars. He has his money invested in a savings account and FDs in India. He has bought an apartment and gave it on rent for Rs.35,000 per month. He gifts his parents a car and transfers Rs.10,000 every month to their account to help with their household expenses during the year. He also transfers Rs 20,000 in his father’s account to meet the cost of the insurance policy he has purchased for his parents.
|Rental Income||Rs 4,20,000|
|Less: Standard 30% deduction under Section 24||Rs 1,26,000|
|Income from house property||Rs 2,94,000|
|Income from FDs and bank account||Rs 30,000|
|Gross total income||Rs 3,24,000|
|Deduction under Section 80D||Rs 20,000|
|Taxable income||Rs 3,04,000|
Arjun’s gift to his father and money transfer of Rs 10,000 to his mother are exempt from tax. Regarding the insurance expenses on his parents, Rahul can claim a deduction under Section 80D of Rs 20,000, since his father is over 65 years of age. He will be required to file a tax return in India as his gross income exceeds Rs 2,50,000.
Returning NRIs assume RNOR (Resident, Non-Ordinary Resident) status when: a. You have been an NRI in 9 of the 10 financial years preceding the year of your return b. You have lived in India for 2 years or less (729 days or less) in the last 7 financial years The IT Department allows RNORs to continue to enjoy exemptions available to NRIs for a period of 2 years after their return. Therefore, deposits held in foreign currency, which are exempt for an NRI, shall be exempt to returning NRIs for 2 years. After these 2 years, returning NRIs are treated as resident individuals.
If you are a resident Indian, your global income is taxable in India. This income may have been earned or received outside – but it shall be taxed in India. In case this income is also taxable in another country, you can take benefit of DTAA (Double Tax Avoidance Agreement).
Shreya returned to India in 2010 after living in London for more than 5 years. The French company she worked for has retained her as a consultant and sends her fees in pounds. Her salary is credited to a bank account there, and Shreya pays tax on it in the UK. Does Shreya Have to Pay Tax on this Income or Include it in Her Income Tax Return in India? Shreya is a resident of India. Taxability of income in India depends upon residential status. A resident has to pay tax on their global income. The resident must disclose all the income earned by them from all sources and all countries in their income tax return and pay tax on it in India. (An NRI pays tax only on income earned or accrued in India). Therefore, all of Shreya’s income, including the fee that she earns in foreign currency will be taxable in India. Her income in pounds shall be converted to Indian rupees for the purpose of income tax calculation and added to her total income, which will be taxed at slab rates prescribed by the tax department. If Shreya has already paid tax on the foreign income in the UK, she can claim the benefit under DTAA. Based on the relevant provisions of the DTAA between the two countries, Shreya will be saved from getting taxed twice.
If you are a resident and have earned any income from abroad, remember to disclose it in your income tax return.
NRIs can avoid double taxation (meaning: getting taxed on the same income twice in the country of residence and India) by seeking relief from DTAA between the two countries. Under DTAA, there are two methods to claim tax relief – exemption method and tax credit method. By exemption method, NRIs are taxed in only one country and exempted in another. In tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.
A person who is not a resident of India is considered to be a non-resident of India (NRI). You are a resident if your stay in India for a given financial year is : 182 days or more or 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.
Do note that after amendment in the provisions relating to the residency rule, the below criteria has been added in section 6.
Since you are an NRI, only the income that accrues to you in India will be taxable. You would not be taxed on your global income. Accordingly, you will have to pay taxes in India on the rental income from the flat situated in India. However, you will not be liable to pay any taxes on the salary income that you receive from the USA.
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 lakhs for any given financial year. Further, the due date for filing return for an NRI i also 31 July of the assessment year.
The basic exemption of Rs 3 lakhs and Rs 5 lakhs is available only for resident senior citizens and resident super senior citizens. Hence, as an NRI, even if you are a senior citizen, the moment your income in India exceeds Rs. 2.5 lakhs, you will be liable to file your return of income in India.
Specified payments in the nature of rent, professional or technical fees etc made to an NRI requires tax deduction at source by the individual making the payment. The individual must obtain a TAN for himself in order to deduct taxes at source. Further, 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.
An NRI in receipt of income in India is taxable in India on such income i.e. India as a source state has the right to tax such income. However, the country of which such NRI is a resident, will also have a right to tax such income as it is the residence state. In the process, the NRI will end up getting taxed twice on the same income. To overcome this, India has entered into DTAAs with various countries which help eliminate such double taxation by allowing the taxpayer to claim credit for foreign taxes paid while filing their return of income in the home country.
Yes. You will be liable for capital gains tax in India upon sale of your flat. Further, the purchaser himself must deduct taxes on the quantum of gains you make. The rate of tax deduction for a long term asset would be 20% while taxes at slab rates would be deducted at source if the asset is a short term asset.