As a Non-Resident Indian (NRI), understanding your tax obligations in India is crucial for effective financial planning. Indian income tax laws are designed to tax NRIs only on income that arises in India, but navigating the rules can be challenging.
Whether you’re earning from investments, property, or business in India, this guide will help you understand the key aspects of Income tax for NRIs.
Determining NRI Status for Tax Purposes
Your residential status plays a key role in determining your tax liability. The Indian Income Tax Act classifies a person as a resident or a non-resident based on the number of days spent in India.
You are considered an NRI if:
- You have lived in India for less than 182 days during the financial year (April 1 to March 31), or
- You have spent 60 days or more in the financial year and 365 days or more in the preceding four years but still don’t meet the 182-day requirement in the current financial year.
Once classified as an NRI, you will only be taxed on income earned or accrued in India, not on global income.
Taxable Income for NRIs
NRIs are taxed only on income earned within India. The following types of income are subject to taxation:
1. Income from Salary
If you are an NRI employed in India or working abroad but receiving a salary in India, that income is taxable. If your employer is an Indian company, the income received for services rendered in India is also subject to Indian taxes.
2. Income from House Property
Owning property in India and earning rental income from it is taxable. The taxation rules for NRIs on rental income are similar to those for resident Indians. You can claim deductions like the standard 30% deduction for maintenance under Section 24, along with deductions for home loan interest.
3. Income from Capital Gains
NRIs are liable to pay tax on capital gains from the sale of assets such as property, shares, or mutual funds. The capital gains tax is split into two types:
- Short-term capital gains: Gains from assets held for less than 2 years (in the case of property) or 1 year (in the case of shares) are taxed at 15%.
- Long-term capital gains: Gains from assets held for more than the specified period are taxed at 20% for property (with indexation benefits) and 10% for shares.
4. Income from Investments
Interest earned on NRO (Non-Resident Ordinary) accounts, fixed deposits, and other investments in India is taxable at a flat rate of 30%. However, interest earned from NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is exempt from tax in India.
5. Income from Business
If you own or run a business in India, the profits generated from that business will be subject to Indian tax laws. NRIs who are partners in Indian firms are also liable to pay tax on the income earned from these businesses.
Deductions and Exemptions for NRIs
While NRIs are eligible for many of the same deductions as resident taxpayers, certain restrictions apply. Below are some key deductions available to NRIs:
1. Section 80C
NRIs can claim deductions under Section 80C for various investments and expenses, with a maximum limit of ₹1.5 lakh. These include:
- Life insurance premiums
- Principal repayment of home loans
- Investments in Public Provident Fund (PPF), National Savings Certificate (NSC), and ELSS mutual funds
However, investments like Senior Citizens’ Savings Scheme and Post Office savings are not available to NRIs.
2. Section 80D
NRIs can claim deductions for health insurance premiums paid for themselves, their spouse, or children. The maximum deduction is ₹25,000 for policies covering individuals below 60 years of age and ₹50,000 if the policyholder is above 60.
3. Section 24
NRIs who own property in India can claim deductions on the interest paid on home loans. The limit is ₹2 lakh for self-occupied property. For rented-out property, there is no maximum limit on the interest deduction.
4. Section 80G
Donations to specified charitable organizations and relief funds are eligible for deductions under Section 80G, allowing NRIs to lower their taxable income.
Double Taxation Relief: DTAA
One major concern for NRIs is the risk of double taxation, where they may be taxed in both India and their country of residence for the same income. To avoid this, India has entered into Double Taxation Avoidance Agreements (DTAA) with multiple countries.
Under DTAA, NRIs can claim tax relief in two ways:
- Tax Credit: You can offset the tax paid in India against the tax liability in your resident country.
- Tax Exemption: Income taxed in one country is exempted from taxation in the other.
For example, if you have already paid tax on rental income in India, you may be able to claim that amount as a tax credit in your country of residence, ensuring that you are not taxed twice.
TDS for NRIs
Many income streams earned by NRIs are subject to Tax Deducted at Source (TDS). The TDS rates vary based on the type of income:
- Rent: 30% TDS on rental income paid to NRIs.
- Interest: 30% TDS on interest earned from NRO accounts.
- Short-term capital gains on shares: 15%.
- Long-term capital gains on property: 20% with indexation benefits.
If the TDS deducted exceeds the tax liability, NRIs can file a tax return to claim a refund.
Filing Income Tax Returns in India
NRIs must file an income tax return in India if their total income exceeds ₹2.5 lakh in a financial year. Filing an ITR is mandatory even if the entire tax liability has been covered through TDS. Filing a return allows NRIs to claim deductions, refunds, and benefits available under the DTAA.
The deadline for filing returns is typically July 31 of the assessment year, although it may be extended based on government notifications.
Special Investment Accounts for NRIs
The Indian government offers NRIs several special types of bank accounts that help facilitate investment while offering tax advantages:
1. NRE Account
An NRE (Non-Resident External) account is used to deposit foreign earnings in India. The principal and interest in this account are fully repatriable, and the interest earned is tax-free in India.
2. NRO Account
An NRO (Non-Resident Ordinary) account is used to manage income earned in India. While the principal can only be repatriated up to a certain limit, the interest earned is taxable at 30%.
3. FCNR Account
The FCNR (Foreign Currency Non-Resident) account allows NRIs to deposit foreign currency in India. The interest earned is tax-free, and the principal is fully repatriable. This account also shields you from foreign exchange risks.
Conclusion
Income tax for NRIs can be complex, but understanding the basic rules and tax-saving strategies can help you manage your Indian income more efficiently. By taking advantage of available deductions, utilizing special accounts like NRE and FCNR, and leveraging DTAA benefits, NRIs can minimize their tax liabilities in India.
