Tax laws for NRIs

Although Non-Resident Indians (NRIs) don’t reside in their home country, they are still citizens of India. So, many of the Indian income tax laws also apply to them. If you are an NRI, it is essential to get to know the income tax rules and laws applicable to you, so you can make more informed decisions with regard to Indian investments.

And so, we’ve dedicated this entire chapter of Smart Money towards understanding the Indian income tax rules for OCI and NRIs. However, before we delve deep into the income tax rules for NRIs, let’s quickly take a look at the definition of NRI as per Income Tax Act, 1961.

Who is an NRI as per Income Tax Act, 1961?

The Income Tax Act, 1961 labels a non-resident as an individual who is not a resident of India. And so, to be able to properly understand who an NRI as per Income Tax Act, 1961 is, we would have to take a look at the definition of a ‘resident’.

According to the Act, any individual who has satisfied at least one of the following two conditions is considered to be a resident Indian. 

1. Stayed in India in a year for a total period of 182 days or more; or 
2. Stayed in India in a year for a total period of 60 days or more and in the four preceding years, stayed in India for a total period of 365 days or more

Now, any individual who does not satisfy the above two conditions is automatically considered to be an NRI as per Income Tax Act, 1961.

Income tax rules for NRIs

Let’s now move on to the main part of the chapter - NRI tax rules. Here, we’ll take a look at some of the key income tax laws that apply to NRIs.

1. Taxability of income

According to section 5 of the Income Tax Act, 1961, any income that is received, deemed to be received, accrued, or deemed to be accrued in India is taxable in the hands of the NRI. To put it simply, any income that you receive in India or has its source in India is taxable in your hands. For instance, let’s say you receive rental income from a property in India. Since the income has its source in India, it is taxable in India.

On a similar note, any income that is received, deemed to be received, accrued, or deemed to be accrued outside India is not taxable in the hands of the NRI. Again, to simplify, any income that is received outside India or has its source outside India is not taxable in your hands. For instance, say you receive dividend income from an investment that you made in a foreign company. Since the income has its source and is received outside India, it is not taxable in India.

That said, here’s something that you need to know. There are certain situations where the above two NRI tax rules don’t apply. Here’s a quick look.

• Salaries or incomes that you receive for providing services in India is taxable even if the receipt of the income is outside India. 
• And if you’re an employee of the Government of India, any income that you receive for providing services outside India will also be taxed.

2. Income tax slabs for NRIs

Okay so, now that we’ve taken a look at the kinds of income that are taxable and the kinds that are not, let’s briefly go through the rates of tax that NRIs would have to pay. The income tax slab rates for NRIs are the same as that of a resident Indian, and are as follows.

As long as your taxable income in India doesn’t exceed Rs. 2.5 lakhs, you don’t have to pay any tax. However, once it crosses Rs. 2.5 lakhs, the tax rate according to the income slabs will apply.

3. Deductions available to NRIs

Despite being an NRI, you can still claim many of the deductions offered by the Income Tax Act, 1961. Here’s a quick look at the ones that are available for Non-Resident Indians. These deductions are available for resident Indians as well.

• Deductions under section 80C

You can claim the following investments as deductions under section 80C up to a maximum of Rs. 1.5 lakhs in a financial year. 

1. Life insurance premiums 
2. Children’s tuition fees
3. Principal repayments on home loans
4. Unit-Linked Insurance Plan (ULIP)
5. Equity-Linked Savings Scheme (ELSS)

• Deductions under section 80D

Health insurance premium payments for yourself, your spouse, your children, and your dependent parents can be claimed as deductions.

• Deductions under section 80E

You can claim interest payments on education loans taken in favour of yourself, your spouse, or your children for a maximum of 8 years.

• Deductions under section 80G

You can claim donations made under this section as deductions from your total taxable income.

• Deductions under section 80TTA

You can claim interest from your savings bank account as deductions to the tune of Rs. 10,000 each year.

• Deductions under section 24

You can claim interest payments on home loan to the tune of up to Rs. 2 lakhs each year as deductions from your total taxable income. 

4. Deductions unavailable to NRIs

On the other hand, according to the income tax rules for NRIs, there are certain deductions that are unavailable to you. Let’s take a quick look.

• Deductions under section 80C

The following investments cannot be claimed as deductions under section 80C since only resident Indians can invest in them. 

1. Public Provident Fund (PPF) investments 
2. National Savings Certificate (NSC) investments 
3. 5-year post office deposit scheme
4. Senior Citizen Savings Scheme (SCSS)

5. Tax exemptions for NRIs

In addition to the deductions available under NRI tax rules, you also get to enjoy several tax exemptions. Here’s a brief look at the various exemptions available.

• Exemption from long-term capital gains tax if the sale proceeds are invested in a house property or specified bonds.
• Interest earned on FCNR/NRE bank accounts
• Interest earned on savings certificates and government bonds
• Exemption from Long-term capital gains tax in the case of listed equity-oriented mutual funds and equity shares
• Dividends from Indian companies

6. Relief from double taxation

The Indian income tax rules for NRI allow you to claim relief from being taxed twice; once in India and once in the country of residence. India has signed Double Tax Avoidance Agreements (DTAA) with several countries that allow you to claim tax relief in two different ways - the exemption method and the tax credit method. Therefore, as an NRI investor, always make sure that there’s a DTAA between India and the country of your residence before investing to avoid being taxed twice.

Wrapping up

With this, we’re finally done with the income tax rules for NRIs. In the next chapter, we’ll deal with a new topic concerning NRI investors. Until then, stay tuned.

A quick recap

• According to section 5 of the Income Tax Act, 1961, any income that is received, deemed to be received, accrued, or deemed to be accrued in India is taxable in the hands of the NRI. 
• The income tax slab rates for NRIs are the same as that of a resident Indian.
• Despite being an NRI, you can still claim many of the deductions offered by the Income Tax Act, 1961, like deductions under sections 80C, 80D, 80E, 80G, 80TTA and 24.
• However, NRIs cannot invest in Public Provident Fund (PPF) investments , National Savings Certificate (NSC) investments, 5-year post office deposit scheme and Senior Citizen Savings Scheme (SCSS).
• India has also signed Double Tax Avoidance Agreements (DTAA) with several countries that allow you to claim tax relief in two different ways - the exemption method and the tax credit method.