NRI Taxation in India: An Overview
Updated: Aug 5
Understanding the implications of NRI taxation in India is crucial for compliance and effective financial planning. The Indian Income Tax Act, 1961, outlines specific rules and benefits for Non-Resident Indians (NRIs), which differ significantly from those for resident Indians. This article provides an in-depth look into these regulations, helping NRIs navigate their tax liabilities and file returns accurately.
Table of Content
NRI Taxation in India: Determining Residential Status
First, you have to determine your residential status. You are considered to be an Indian resident if:
You are in India for 182 days or more in any financial year.
You stayed in India for 60 days or more in the previous year and 365 days or more in the last four years.
Otherwise, you are a Non-Resident Indian. There is, moreover, a category for Resident but Not-Ordinary Resident and a deemed residency in certain conditions under the Finance Act 2020.
Taxable Income for NRIs
Residential status determines the taxability of your income in India. In the case of an NRI, only the income that is earned or received in India or deemed to accrue or arise in India is considered for taxation. Principal sources of taxable income therefore include:
Income from Salary: Taxable if salary is received in India or for services rendered in India.
Income from House Property: Taxable if the property is situated in India.
Rental payable to an NRI: TDS at 30% applies.
Income from Other Sources: Interest from NRO account is taxable while interest from the NRE account is tax-free.
Income from Business and Profession: Tax is levied if the business is controlled or set up in India.
Income from Capital Gains: It is taxable on the transfer of capital assets situated in India.
Special Provisions for NRI Taxation in India
There are special provisions for NRIs both in respect of their investment income and long-term capital gains:
Investment Income: The income is taxed at 20% if it is derived from certain Indian assets acquired in foreign currency.
Long-term Capital Gains: It is taxed without indexing, though exemptions are available in certain cases.
Deductions and Exemptions for NRIs
NRIs are allowed various deductions and exemptions like residents:
Deductions under Section 80C: Section 80C deductions on a sum of investments that include life insurance premiums, tuition fees of children, and repayment of the principal amount on home loans are up to INR 1.5 lakh.
Other allowable deductions: Premiums paid for health insurance under Section 80D of the Income-tax Act, interest on education loans under Section 80E, donations under Section 80G, and interest on savings accounts under Section 80TTA.
Deductions not allowed: It consists of investments in PPF, NSCs, Post Office schemes, and SCSS.
Deductions for the differently-abled: NRIs are not entitled to any of the deductions under Sections 80DD, 80DDB, and 80U.
Exemption on Sale of Property for NRIs
In NRIs' cases, long-term capital gains are taxed at 20%, while TDS is deducted at the time of sale. Exemptions under Sections 54, 54EC, and 54F can be claimed if the gains are reinvested in some specified assets or bonds.
Double Taxation Avoidance Agreement (DTAA)
Under DTAA, NRIs can avoid double taxation by exemption method, where it is taxed in one country, or by tax credit method, where credit is allowed for taxes paid in other countries. This is how the double taxation on foreign retirement accounts was remedied with the insertion of Section 89A in Budget 2021.
NRI Taxation in India: Income Tax Slabs
Old Regime of Taxation FY 2023-24: Progressive rates of taxation are applicable on income over and above INR 2,50,000.
FY 2023-24 New Tax Regime (default): Simplified slabs with reduced rates, starting from 5% for income above INR 3,00,000.
Surcharge Rates for NRIs
Surcharge rates are applicable with income levels higher than INR 50 lakhs. Marginal relief is available to ease the impact of surcharges.
FAQ
Q1. When are you considered a Non-Resident Indian (NRI)?
One is considered an NRI if the conditions of being a resident are not fulfilled, which means staying in India for a minimum period of 182 days in a financial year or 60 days in the previous year and 365 days in the last 4 preceding years.
Q2. What type of income is taxable in India for NRIs?
Incomes such as salary, rental income, interest, capital gains, and business income are considered to arise or accrue in India and hence are taxable in the hands of NRIs.
Q3. Do NRIs need to file any income tax returns in India?
Yes, NRIs need to file their returns in India if total income in India is more than INR 2,50,000.
Q4. How can NRIs avoid double taxation?
NRIs can avoid double taxation by making use of the provisions between India and their country of residence as per the Double Taxation Avoidance Agreement.
Q5. Are there any exemptions on sale of property for NRIs?
Yes, NRIs can get exemption under Sections 54, 54EC, and 54F on long-term capital gain by reinvesting the gains in specified assets or bonds.
Q6. Which deductions can NRIs claim under Section 80C?
NRIs can get deductions of up to INR 1.5 lakh on various investments included under Section 80C, such as life insurance premiums, children's tuition fees, and the principal repayment of the home loan.
Q7. Is the interest on NRE and FCNR accounts taxable?
Interest on the NRE and FCNR accounts is totally exempt from tax for NRIs, while the interest on NRO accounts is totally taxable.
Q8. What are the rates of taxes on long-term capital gains for NRIs?
Long-term capital gains for NRIs attract 20% tax, and TDS is deducted on such gains at the time of sale.
Q9. Does an NRI pay advance tax?
Yes, NRIs have to pay advance tax if the total tax liability in a financial year exceeds INR 10,000.
Q10. What is the surcharge rate on NRIs?
Surcharge rates vary from 10% for income over INR 50 lakhs to 37% for income above INR 5 crores.
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