The Indian Income Tax Act of 1961 imposes NRI taxation for individuals earning income outside of India. The regulations and benefits for NRIs are vastly dissimilar to those that apply to residents of India.
NRI taxation in India
An individual must meet certain conditions to be considered a resident in India during a fiscal year. These conditions are either spending at least 182 days in India during the fiscal year or spending at least 60 days in India during the fiscal year and at least 365 days in the previous four years. If an individual does not meet either of these conditions, they will be considered a non-resident for that fiscal year.
However, there are exceptions for Indian citizens and persons of Indian origin who visit India during the year. For these individuals, the 60-day requirement mentioned above gets replaced with a requirement of 182 days. Similar exemptions are provided for Indian citizens who leave India during the year as crew members or for employment outside India.
Types of residential statuses in India and their taxation implications
There are three types of residential statuses in India, namely, Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR). The determination of residential status is based on an individual's total physical presence in India in the current fiscal year and the preceding ten fiscal years, as well as the amount of income earned in India during the current fiscal year. Residential status must be determined each fiscal year.
If an individual is classified as ROR, they will be taxed on their worldwide income in India and must report foreign income and assets held outside of India in their tax return. However, if an individual is classified as NR or RNOR, they will not be required to pay taxes in India on their foreign income unless it is earned in India.
Important Deadlines for NRI taxation ITR Filing
The deadline for NRIs to file their income tax returns in India is July 31st unless the government decides to extend the deadline.
Types of Income Taxable in India for NRIs and different ITR Forms and provisions for NRIs:
Income from salary is taxable in India if the services are rendered in India, regardless of where the income is received.
Income from house property situated in India is taxable and can be claimed as a deduction under Section 80C.
Rental payments made to an NRI landlord must have TDS deducted at 30% and a Form 15CA prepared and submitted online to the income tax department.
Interest income from fixed deposits and savings accounts held in Indian bank accounts is taxable, while interest on NRE and FCNR accounts is tax-free and interest on NRO accounts is fully taxable.
Please note that any income earned by an NRI from a business headed or set up in India gets taxed.
Capital gains on the transfer of capital assets in India, such as house property and investments in Indian shares and securities, are taxable in India. TDS at 20% is deducted on capital gains from the sale of house property, which can be claimed as an exemption under Section 54 by investing in a house property or capital gain bonds under Section 54EC.
Primary changes introduced to NRI taxation in the budget 2023
1) To prevent misuse by non-ordinarily resident Indians, from April 1, 2024, all gifts over Rs 50,000 to non-ordinarily resident individuals without consideration from an Indian resident would be deemed to arise in India and would be subject to tax.
2) In an attempt to increase the number of taxpayers, the government implemented a policy of collecting and deducting tax at twice the usual rate for individuals who did not file income tax returns. However, this policy negatively impacted non-resident Indians who did not receive TDS and TCS payments exceeding Rs 50,000 in a year. The 2023 Union Budget introduces a measure to exempt non-resident Indians without a permanent establishment in India from these special provisions, effective from April 1, 2023.
3) The Union Budget has suggested broadening the range for reduced or zero tax deduction at the source, provided that the Assessing Officer is content that the receiver's total income validates the reduced rate.
Commencing from April 1, 2023, amounts that are subject to tax deduction according to section 194LBA would qualify for a reduced tax rate.
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