Do NRIs Pay Income Tax in India?

Many Indians stay abroad these days. These people have their roots in India and might have gone to other countries either to visit, study or settle down. Such Indians are called Non-Residents of India or simply NRIs. 

Do You Qualify as an NRI?

Answer these quick questions:

• Have you been in India for at least six months (182 days precisely) in a financial year?

• Have you been in India for two months or 60 days to be exact in the previous year?

• Have you lived in India for at least 365 days in the past four years?

If you answered ‘yes’ to any one of these questions, then you are a Resident of India. If you’ve answered ‘No’ to all three, then you are an NRI or Non-Resident Indian.

NRI or not, you must file your Income Tax Returns in India. In order to do so, you must be aware of the taxation rules. Being an NRI, you must file taxes in both countries - in India and in the country where you’re currently residing. So, let’s get you started on NRI taxation.

Factors Determining NRI Taxation

Many factors determine the taxation of NRI. Here is the list of them:

Resident Indian on a Temporary Foreign Assignment

A highly skilled analyst, Priya was sent to Singapore for 5 months on a temporary assignment.  She earned a good amount in Singaporean Dollars during that time, which got credited to her bank account in India. She returned to India. How is Priya supposed to file her taxes now?

The first thing that Priya needs to do is determine her residential status. She was in Singapore for five months, which clearly states that she wasn't away from India for 182 days. Hence, she is not an NRI. Being a Resident Indian, Priya must file her income tax here in India. Income earned in Singapore was credited to her Indian bank account, and hence, this income is taxable.

If the assignment tenure is for more than 182 days, then Priya would be an NRI. Now, she can pay the tax only on the Indian income. But, there is something you must keep in mind. If your salary is credited to your Indian bank account, that income is taxable. So, if you are staying away from India for a minimum of six months, it would be better to have a bank account in the country of residence. 

Resident Indian Recently Moved Abroad

Sharath was given an opportunity to move to the US for a new assignment. He earns his income in dollars now, which gets credited to his NRE account in India. He has some money in savings and continues to invest in FDs.  He received Form 16 from his employer who’s based out of India. Now, should he file his ITR this year in India?

Every individual must file their ITR if his/her income exceeds Rs 2,50,000. However, NRIs are only taxed for income earned in India. So, Sharath will have to pay taxes on income earned while he was in India, and income accrued from the savings account and FDs.

Living in a Foreign Country

Varun moved to the US 4 years ago and started earning in dollars. He had his money invested in FDs and savings account in India. He owns a flat and gave it on rent for Rs. 35,000 per month. He earns an interest of Rs 30,000 from FDs and savings account. He gifted his parents a car and looked after their household expenses by depositing Rs. 10,000 per month to their account during the year. Also, he transfers Rs. 20,000 to his father's account to pay the insurance premium he purchased for his parents. How would Varun pay income tax?

A standard rate of 30% is deducted from the rental income which is INR 4,20,000 annually. 30% deduction would amount to INR 1,26,000. So, the income from house property is 2,94,000. Varun's gift to his father of Rs 10,000 is exempted from tax as the income is earned in the US. Regarding the insurance expenses on his parents, Varun is allowed to claim a deduction of Rs 20,000 under Section 80D since his father is over 65 years of age. So, the gross income amounts to Rs. 3,02,000. He will be required to file an ITR in India as his gross income exceeds Rs 2,50,000.

NRI Recently Moved Back to India

If you’re a returning NRI, you would assume ‘Resident, Non-Ordinary Resident’ (RNOR) status under the following circumstances:

• You must be an NRI in 9 out of 10 financial years prior to the year of your return.

• You must have lived in India for less than or equal to 2 years (less than or equal to 729 days) in the last seven financial years.

The IT Department allows RNORs to enjoy the exemptions available to NRIs for a period of two years after their return. So, deposits held in foreign currency that are exempt for an NRI shall be exempted to returning NRIs for two years. After these two years, returning NRIs are treated as resident individuals.

A Resident with Global Income

If you are a resident Indian with global income, it is taxable in India. You may earn your income within or outside India, and this income is taxable. In case this income is also taxable in another country, you can take the benefit of Double Tax Avoidance Agreement (DTAA).

Tax Filing for NRIs

You have to face the tax brunt for sure, but that doesn’t merit e-filing income tax returns unless your income is more than the threshold limit. If your earnings from all sources put together – rent, dividends, investment income, capital gains, etc. is beyond Rs. 2.5 Lacs (Rs. 3 Lacs for people who are between 60 – 80, Rs. 5 Lacs for those above 80 years) for the financial year, only then you would have to file a tax return.

If your income exceeds the limit, you must check whether you can skip filing tax returns through provisions given under Chapter (XII-A). Here, if all taxes have been deducted at source for specified income, then there is an option where an NRI need not file a tax return.

Also, if the income earned is due to sale/transfer/regular income from any foreign exchange asset, then there is no need for the NRI to file tax returns.

To Sum Up

Though one cannot escape tax completely, he/she can save tax by investing in various investment avenues that are eligible for 80C deductions. However, being an NRI, you aren’t permitted to invest in any of the National Saving Certificates (NSC), Post Office Time Deposits, Senior Citizens Savings Scheme, and even open new PPF accounts or extend them.

Other taxation benefits under life insurance, home loan, pension plan, equity-linked savings schemes of mutual funds are allowed. Tuition fee used for spouse or children in India can also be claimed for deduction. Health check-ups or health insurance policies paid for parents/dependants in India are also allowed for deduction under section 80D. So, invest well and save tax!