Non-Resident Indians (NRIs) often need to deal with income tax rules that differ significantly from those for resident Indians. Due to income sources both in India and abroad, NRIs must understand the nuances of Indian tax laws to ensure compliance while minimizing their tax liability.
This blog will guide you through the essentials of Income tax for NRIs, including taxable income types, exemptions, deductions, and filing requirements.
Who is Considered an NRI for Tax Purposes?
The definition of an NRI for tax purposes is determined by the individual’s residency status under the Income Tax Act, based on the number of days spent in India during a financial year:
- Non-Resident Status: An individual is considered an NRI if they stay in India for less than 182 days during the financial year.
- Resident but Not Ordinarily Resident (RNOR): There is also a classification for individuals who have been an NRI in nine out of the ten previous financial years, or have stayed in India for 729 days or less in the last seven years. They qualify as RNORs, with different tax implications than regular residents.
Understanding this classification is crucial, as it determines what portion of income is taxable in India.
Taxable Income for NRIs
NRIs are taxed in India based only on the income that is earned or accrued in India. Their global income, or income generated outside India, is not subject to Indian income tax. The following are some types of income that attract tax for NRIs in India:
- Income from Salary: If the salary is earned in India, it is subject to Indian income tax, regardless of where the payment is made. Income is considered earned in India if the services are rendered within the country.
- Income from House Property: Rental income from a property located in India is taxable. NRIs are entitled to the same deductions as residents, such as the standard deduction of 30% on rental income and interest on a home loan.
- Capital Gains Income: Any gains from the sale of assets like property, stocks, or mutual funds in India are taxable. The applicable rates differ based on whether the asset is held for the short term or long term.
- Interest Income: Interest earned from bank deposits in India, except for interest on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts, is taxable.
- Income from Business or Profession: Any income generated from a business established in India or from a profession exercised in India is taxable.
Tax Slabs Applicable to NRIs
The tax rates for NRIs are similar to those for resident Indians, with some variations:
- Income up to ₹2.5 lakh: No tax is payable.
- Income from ₹2.5 lakh to ₹5 lakh: Taxed at 5%.
- Income from ₹5 lakh to ₹10 lakh: Taxed at 20%.
- Income above ₹10 lakh: Taxed at 30%.
There are no exemptions for NRIs under the age of 60, unlike resident senior citizens who enjoy higher exemption limits.
Capital Gains Tax for NRIs
Capital gains tax is an essential consideration for NRIs, especially for those involved in property transactions or investments in Indian equities. Here’s how capital gains tax is levied:
- Short-Term Capital Gains (STCG): If shares or mutual funds are sold within one year, or property within three years, the gains are considered short-term. The tax rate for equity-related STCG is 15%, while for other assets, it is based on the applicable tax slab.
- Long-Term Capital Gains (LTCG): For shares and mutual funds held for more than one year, and property held for more than three years, the gains qualify as long-term. The tax rate on LTCG for equity-related investments is 10% for gains above ₹1 lakh, while for other assets, it is 20% after indexation.
Deductions and Exemptions Available for NRIs
NRIs can claim various deductions and exemptions to reduce their taxable income:
- Section 80C Deductions: NRIs can claim up to ₹1.5 lakh in deductions under Section 80C for investments in eligible financial instruments like Equity-Linked Savings Schemes (ELSS), life insurance premiums, principal repayment on home loans, and contributions to Public Provident Fund (PPF). However, NRIs cannot open new PPF accounts, though existing accounts can be maintained until maturity.
- Interest on NRE and FCNR Accounts: Interest earned on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is fully exempt from tax, making these attractive options for NRIs.
- Health Insurance Deductions (Section 80D): Premiums paid for health insurance for self, spouse, and children are eligible for deductions up to ₹25,000 annually. If covering parents above 60, the limit increases to ₹50,000.
- Exemption on Long-Term Capital Gains (Sections 54 and 54EC): NRIs can save on capital gains tax by reinvesting the proceeds from the sale of a property in another residential property or specified bonds.
TDS (Tax Deducted at Source) for NRIs
Income earned in India by NRIs is subject to Tax Deducted at Source (TDS), often at higher rates than for resident Indians:
- Rental Income: TDS on rental income is set at 30%.
- Capital Gains: TDS for short-term capital gains from equity investments is 15%, while for other short-term gains, it is based on the applicable tax slab. For long-term capital gains on property, TDS is set at 20%.
- Interest Income: TDS on interest from fixed deposits or other non-exempt accounts is 30%.
Even if TDS is deducted, NRIs should still file income tax returns to ensure they receive refunds for any excess tax deducted.
Filing Income Tax Returns for NRIs
Filing an income tax return is mandatory for NRIs if their taxable income in India exceeds the basic exemption limit of ₹2.5 lakh. Even if the income is below this limit, it may be beneficial to file a return to claim a refund or carry forward capital losses for future tax adjustments. Here are some key steps in the filing process:
- Determine Residency Status: Verify the residential status for the financial year, as this affects tax liability.
- Select the Appropriate ITR Form: NRIs typically use ITR-2 or ITR-3 for filing, depending on the sources of income.
- Provide Details of Income and Investments: Ensure accurate reporting of all Indian income sources, investments, and TDS details.
- E-Filing and Verification: The return can be submitted electronically through the Income Tax Department’s e-filing portal and verified using Aadhaar OTP, net banking, or by sending a signed physical copy of the ITR-V.
Double Taxation Relief for NRIs
NRIs may face the challenge of double taxation if income earned in India is also taxed in the country of residence. The Double Taxation Avoidance Agreement (DTAA) between India and various countries provides relief from this issue. Under the DTAA, NRIs can claim a tax credit, exemption, or reduced tax rate on income taxed in India.
Common Mistakes NRIs Make in Tax Planning
- Incorrect Declaration of Residency Status: Misreporting residency status can lead to incorrect tax filings and penalties.
- Not Disclosing Foreign Assets: Failure to report foreign assets can attract penalties under the Black Money Act.
- Ignoring DTAA Benefits: Not claiming relief under the DTAA may result in double taxation.
- Neglecting Capital Gains Tax Considerations: Misunderstanding the implications of capital gains tax can lead to unexpectedly high tax liabilities.
Conclusion
Income tax for NRIs involves a complex mix of tax laws, regulations, and requirements that differ from those for resident Indians. Understanding taxable income types, deductions, exemptions, and TDS implications is essential for proper tax planning and compliance. By leveraging the available benefits and seeking professional advice, NRIs can optimize their tax liabilities and ensure compliance with Indian tax laws. Filing returns on time and utilizing DTAA provisions can further enhance tax efficiency for NRIs.
