One of the major contributors to Indian economy is the yearly tax collected from its citizens. However, not all Indians are taxed the same way. One such difference is the income tax for Non-Resident Indians (NRI). NRI income is treated significantly different from that of a Resident Indian.
For an NRI, the eligibility criteria to pay tax in India, possible exemptions, tax structure are determined by the Finance Ministry.
Let’s look at the aspects of NRI taxation right from eligibility to avoiding double taxation.
Criteria for NRI Status
An Indian can be categorised as an NRI if they meet any of the following criteria:
- If they have lived in India for fewer than 182 days (6 months) during a financial year.
- If they have resided in India for fewer than 60 days (2 months) in the preceding financial year, and fewer than 365 days (one year) in the 4 years immediately preceding the previous financial year.
- If the Indian citizen is employed as a crew member in the Indian merchant navy or lives abroad for employment, then they are considered an NRI only if they live in India for fewer than 182 days as opposed to 60 days.
- If the Indian citizen or Person of Indian Origin visits Indian for fewer than 182 days, only then will they be considered as an NRI.
Unless an Indian citizen meets either of the above criteria, they will be considered as a resident Indian and liable to pay taxes as a Resident Indian.
Income tax for NRI
If you are categorised as an NRI in the current financial year, only the following income earned or accrued in India will be taxable as per the rules for NRI taxation:
- Salary received
If you receive a salary in India, the income will be taxable. If you live abroad but have your salary credited to resident savings account in India, the income will be liable for taxation. If you’re a government of India employee (apart from a bureaucrat), your income will be taxable regardless of where you render your services.
- Income from a business set up or controlled in India
Any revenue generated from operating a business situated or registered in India is liable for income tax as per the appropriate tax slab.
- Income from capital gains
When an NRI makes a capital asset transfer, the capital gains are eligible for taxation. The applicable NRI tax will also include capital gain on assets such as shares and securities. Here, buyers need to deduct a mandatory TDS of 20%.
- Rental income from residential property owned in India.
An NRI who has given a house on rent in India is liable to pay tax on this income. They can claim a deduction (mentioned ahead in the article), but the exceeding rent amount will be taxable as per the appropriate tax slab. For a tenant, they need to deduct a mandatory TDS at 30% before they pay the rent. They can deposit or transfer the rent amount to the NRI house owner’s Indian account or any other account they may hold.
- Income from other sources
Revenue generated from fixed accounts or savings account held in a financial institution in India is taxable for the NRI. However, income credited into a Non-Resident External and Foreign Currency Non-Resident account is non-taxable.
Any income earned outside of India, known as Global Income, is not liable for NRI tax in India.
The NRI will be liable to pay income tax in India as per the tax slabs. However, for an NRI senior citizen, they cannot enjoy the higher tax exemption slab as that is valid only for resident Indians.
An NRI is liable to pay advanced tax if their tax liability exceeds Rs.10, 000 in the given financial year.
Filing the Income Tax Return for NRI tax
An NRI needs to file an Income Tax Return under any of the following conditions:
- The taxable income in India exceeds Rs.2, 50, 000.
- Claim an income tax refund.
- Wish to carry forward any loss incurred on sale on investment.
The Income Tax Return form delineating the NRI tax payable to the Indian government needs to be submitted by July 31st of the year.
Applicable Exemptions and Deductibles for NRIs
- Deductions under Section 80C
A maximum of Rs.1,50, 000 can be a deduction from the gross annual income under Section 80C. Any amount exceeding the upper limit is liable for taxation. Here are the possible deductions under Section 80C of the Income Tax Act, 1961:
- Payment of life insurance premium
To be applicable for deduction, the life insurance policy should be in the NRI’s name or their spouse or their child’s name. The insurance premium amount must be less than 10% of the insurance amount.
- Child’s tuition fee
Payment made as a fee towards a child’s pre-school, school, college or university education within the territory of India can be claimed as a deduction. The claim can be made for a maximum of two children and only for full-time education.
- Repayment of home loan
The NRI can claim a deduction on the principal repayments of a home loan taken to either purchase or build a residential property. Apart from principal repayments, the deduction is applicable for registration fees, stamp duty, and other expenses incurred for such property transfer to the NRI.
- Unit-linked insurance plan
A ULIP serves as an insurance policy as well as investment. A part of the ULIP premium is used towards maintaining the life insurance policy while the rest is invested in debt or equity instruments of the NRI’s choice. The ULIP premium is deductible for NRI tax.
- Equity Linked Savings Scheme
Investments made in ELSS can be claimed as a deduction. ELSS is considered one of the most popular investment options for NRIs due to its Exempt-Exempt-Exempt status.
- Deduction under Section 80D
This section allows for deductions based on health insurance premium payments. An NRI can claim a deduction a maximum deduction of Rs.50, 000 for health insurance for parent(s) who is senior citizens, and a maximum of Rs.25, 000 if the parent(s) is not a senior citizen. For health insurance policy for self, spouse or dependent children, the maximum deduction is Rs.25, 000 unless the NRI is a senior citizen in which case the maximum deductible amount is Rs.50, 000. A maximum of Rs.5, 000 can be claimed as a deduction for preventive health check-up done for self, spouse, children, or parents.
- Deduction under Section 80E
This section pertains to the deduction of interest paid on an education loan for higher studies, but not for principal repayment of the education loan amount. The loan can be for the NRI, their spouse, children, or a minor that they are the legal guardian of. The deduction is applicable on interest for a maximum of 8 years or till the interest is paid off, whichever is earlier. There is no limit on the interest amount that can be claimed as deductible.
- Deduction under Section 80G
Any donations made towards a charitable organisation holding an 80G registration can be claimed as a deductible. While there are various charitable organisations in India, not all of them contain an 80G registration.
- Deduction under Section 80TTA
The liable income tax for NRI includes the interest earned on Savings Account; however, they can claim a deduction of up to Rs.10, 000 on the same.
- Deduction from Residential Property Income
NRI taxation has the same deductions as resident Indians when it comes to income earned from renting their residential property. They can claim a maximum of 30% deduction on rental income. They can also claim an income tax deduction based on the property tax paid and the interest on their home loan.
- Exemption on long-term capital gains
When the owner has held a property for more than 3 years, it’s considered as long-term capital. Any profits from such capital are eligible NRI tax exemption. While Section 54 allows for tax exemption on the sale of residential property, Section 54F provides for exemption on the sale of an asset apart from a residential property. Another Section 54 exemption is under subsection C, which includes an exemption on capital gains when the gains are reinvested into specific bonds such as those issued by the National Highway Authority of India.
Exemptions not applicable for NRIs
While an NRI can claim the benefits of the deductibles and exemptions mentioned above, they cannot claim deductions or exemptions under the following:
- Investment in Public Provident Fund (unless the account was opened when the NRI was still a Resident Indian.
- Investments in National Saving Certificates.
- Five Year Deposit Scheme with a post office.
- Senior Citizen Savings Scheme.
- Investment under the Rajiv Gandhi Equity Savings Scheme (Section 80CCG).
- Deduction for the differently-abled under sections 80DD/ 80DDB/80U.
Avoiding double taxation
NRIs may face a problem wherein they are taxed twice on the same declared income- once from their country of residence and once from India. To avoid such unprofitable taxation, Indian has signed bilateral Double Tax Avoidance Agreement with over 80 countries including countries with a sizeable NRI population such as Singapore, United States of America, United Kingdom, Canada, and Australia. Under this agreement, the NRI tax relief can be claimed using either of two ways:
- Tax credit method: The NRI can claim tax relief in their country of residence.
- Exemption method: The income tax for NRI is payable in only one country- either the place of residence or India.
To avoid double NRI taxation, the individual must ensure that they have the necessary proofs of residence and taxes paid.
Implications for stateless NRIs
Just as India has specific criteria for determining the residential status of an India citizen, many other countries also adhere to a set of rules to deem someone as a resident of their country. In the case of some NRIs, they do not fit the criteria to be called ‘residents’ in any country. For individuals who regularly travel for work, they may not spend a sufficient number of days in any country to be termed as a resident of that country. Such NRIs are considered ‘stateless’.
In the Finance Bill of 2020, the Finance Ministry has proposed that ‘stateless NRIs’ who do not pay income tax in any other country will be liable to pay tax in India. To that end, the applicable income tax for NRI will be based on their global income.
Taxation for a Resident Indian, temporarily abroad
Let’s consider a Resident Indian who has temporarily moved to Canada for work. Their total income will be liable for taxation in India as they have lived abroad for less than 182 days. However, if the same Indian citizen resides in Canada for more than 182 days, their residential status will change to Non-Resident Indian, and they will have to pay tax on only that income that they earned in India.
NRI moving back to India
In case of an NRI who has recently moved back to India, they will be considered as a Resident, Non-Ordinary Resident (RNOR) if they have lived in India for fewer than 730 days in the past 7 years or has been an NRI for 7 out of the past 10 years. For such a retuning NRI, they can enjoy the exemptions extended to NRIs for up to 2 years after their return to India. Any income parked in an NRE account will continue to be exempted from taxation for up to 2 years after their arrival. After that, the RNOR will be treated as a Resident Indian.
Resident Indian with global income
Any Resident Indian needs to disclose their income earned from other countries, in their Income Tax Return. Any income that is collected or received from a foreign source will be taxable in India. In the case of double taxation, the Resident Indian can avail the provisions of the Double Tax Avoidance Agreement and claim relief.
It is possible to be confused by the changing criteria for residential status and income tax norms. To get the most out of your NRI status and ensure that you pay only the tax that is due and not a rupee more, read up on the policies surrounding NRIs and enlist the help of an expert.