Income Tax Rules For NRIs

Maya is an Indian Citizen, presently working and living in the US. When she checked her Form 26AS, she found a TDS deduction of Rs. 20,000 from her Income. Does she really have to pay Tax in India if she is presently residing in the US? Confusing, right? 

It is clearly evident to every citizen of India that the Indian Economy depends on the taxes collected from them. Apart from the people living in India, the Income Tax Department collects tax from NRIs too. If you are an NRI, you really need to be aware of these taxation rules in order to know if the tax deducted from your income is exact, else you may end up paying unnecessary tax.

The NRI Taxation section of the Indian Income Tax Act of 1961 is applicable to those who are earning outside the country. This article drives you through the taxation rules for Non-Resident Indians.

So, before getting into the details of the Income Tax rules, let’s help you understand your residential status.

Determine Your Residential Status

Income tax structure largely depends upon your residential status. The tax calculation for a resident Indian differs from that of an NRI. As we all know that Income Tax must be paid on a yearly basis, your residential status would be considered accordingly for the financial year. You qualify as an Indian resident for a financial year if you come under these categories:

1. If you have lived in India for at least six months (182 days to be precise) in a financial year.

2. If you are in India for two months (60 days to be precise) in the previous year and had lived for 365 days spread over the last four years.

If you do not fall under any of the categories mentioned above, then you are a Non-Resident Indian (NRI).

Now that you have got a clear idea of your residential status and have determined whether you are an NRI, the next thing you need to know is your taxable income. 

Determine Taxable Income of an NRI

There are a lot of factors on which you are taxed. Here is the list of those:

Income from Salary

The salary received by you or someone on your behalf in India is taxable. So, it is quite simple to understand that if you receive salary directly to your Indian account, that amount is subject to the Indian Tax laws. Also, your income is taxable if you utilize it to render services outside India. The income of Diplomats or Ambassadors is exempted from tax.

Income from Property

a. House property

• Income earned from a property that is located in India is taxable for an NRI. It is applicable even if the property is rented out or vacant. The tax deduction, in this case, is similar to that of an Indian citizen. Income acquired from the house property is taxed at slab rates.

• A standard deduction of 30% is levied on an NRI, and he/she can take the tax benefit if there is a home loan.

• Under Section 80C, an NRI is allowed to have a deduction for principal repayment. Also, registration charges and stamp duty paid at the time of property purchase can be claimed.

b. Rental Payments

• The income received as rent of an Indian property to an NRI's Indian or the foreign account is taxable. A TDS deduction of 30% from the rental payments is applicable.

• In this case, the tenant making a remittance/payment to an NRI must submit Form 15CA online. In some cases, you must also submit Form 15CB (a certification from CA regarding the payments, TDS rate and deduction as per section 195 of the Income Tax Act) before uploading Form 15CA. 

• Form 15CB need not be furnished by the tenant in the following instances:

  • If the remittance does not exceed a total of Rs 5,00,000 in a financial year. 

  • Both the forms are not required if the transaction falls under Rule 37BB of the Income Tax Act.

Income from Other Sources

The interest you acquire from any savings accounts or fixed deposits in Indian bank accounts is taxable. Interest on NRO accounts is taxable, while interest on NRE and FCNR accounts is tax-free.

Income from Business and Profession

An NRI is bound to pay the concerned tax if he/she has a business set up in India.

Income Acquired from Capital Gains

Capital gains on transfer of capital asset and investment in shares in India are taxable. 

So, if you are planning to sell your house that qualifies as a capital gain, the buyer deducts a TDS of 20%. However, you can claim capital gains exemption if you either invest in a house property under Section 54 or invest in capital gain bonds under Section 54EC.

Income from Investments

If an NRI invests in certain Indian assets, 20% tax is applicable.

Tax Deductions for NRIs

• NRIs can claim tax deduction benefits under Section 80C. Investments/expenses for premium payments such as life insurance, ELSS and ULIPs, term deposits, pension schemes and so on come under this category.

• NRIs cannot claim tax benefits on investments such as Public Provident Fund (PPF), National Saving Certificate (NSC), senior citizen saving schemes, etc. as they are not allowed to invest in these options.

• NRIs can also claim the other deductions available to resident Indians under the Income Tax Act, 1961 under section 54, 80D, 80G, 80E, and 80U.

Tax Exemptions for NRIs

• Income tax is exempted for NRIs if the interest is either earned from Foreign Currency Non-Resident (FCNR) accounts or Non-Resident External (NRE) accounts.

• Dividend income received by the shares of Indian companies is exempted from income tax in India.

• NRIs are allowed to claim tax exemption under section 54, 54EC and 54F on long-term capital gains.

Taxation

It is mandatory for any resident or Non-Resident Indian to pay income tax as per the slab rate if he/she has a net taxable income of Rs. 2.5 lakh and file an Income Tax Return (ITR) as well. However, for an NRI, only the income earned or accrued in India will be considered as taxable income while the income earned outside India is not taxable here.

Avoid Double Taxation

Double taxation occurs when you are taxed twice for the same income source. It is quite common for NRIs to have several sources of income in different countries. NRIs need to pay tax in the countries where they have income sources. In order to make it easy for NRIs, India signed the Double Tax Avoidance Agreement (DTAA) with various countries. However, to avail this benefit, you must gather the necessary documents of tax paid in India as proof. Under DTAA, there are two different methods to avoid double taxation. 

• Exemption method: NRIs are taxed in only one country and exempt in the other country.

• Tax credit method: NRIs’ income is taxed in both countries, but he/she can claim tax relief in the country of residence.

To Sum Up

Hope you have a clear understanding of the taxes paid by NRIs. The taxation rules are slightly different as compared to that of resident Indians.

Ignorance may lead you to pay double tax. Try and understand the tax rules and make the most of the tax benefits that are available to you.