Income Tax for NRIs in India - Rules, Exemptions & Deductions

Last Updated: 24 Sep 2024

Income tax regulations for Non-Resident Indians (NRIs) present distinct differences compared to those applicable to resident Indians. NRIs are obligated to pay taxes on all income and capital gains earned within India’s jurisdiction. This taxability of non resident in India diverges from that for resident Indians, emphasizing the need for NRIs to comprehend their tax obligations regarding capital gains and income generated within India’s borders. Understanding these differences is paramount for NRIs to make sure compliance with tax laws and fulfill their financial responsibilities effectively.

Guidelines for Income Tax Filing by NRIs

• Residency Status Determination: Residency status for NRIs is determined based on the number of days spent in India during the fiscal year, with a benchmark of 182 days outside India. Meeting this criterion qualifies an individual as an NRI for tax purposes, while fewer days may lead to classification as a resident for tax obligations.
• Taxable Income Calculation: Income tax for NRIs encompasses various sources, including salary increments, capital gains from stock and mutual fund sales, interest on NRO deposits, and rental income. Additionally, NRIs may benefit from tax treaties and claim refunds if TDS has been deducted from their income, subject to reconciliation with advance tax payments and compliance with Form 26AS.
• Mandatory Filing of Returns: Filing income tax returns is obligatory for NRIs, regardless of their gross revenue. Furthermore, they can avail of tax deductions of up to Rs 1.5 lakhs under Section 80C of the Income Tax Act, provided they adhere to NRI income tax slab rates and eligibility criteria.
• Asset and Liability Disclosure: NRIs are required to disclose their assets and liabilities in India if their income in the country exceeds Rs 50 lakhs. This disclosure is crucial for maintaining transparency and compliance with Indian tax laws.
• Double Taxation Avoidance Agreement (DTAA): The DTAA serves as a mechanism for NRIs to avoid double taxation on the same income. It allows for exemptions or reduced tax rates on income in one country if taxes have already been paid in another. NRIs can claim tax credits in their home country based on taxes paid in India, leveraging the provisions of the DTAA to optimize their tax liabilities.
• Verification of Filed Returns: Timely verification of filed income tax returns is essential for NRIs, as returns are considered invalid if not verified within 120 days of filing. Verification ensures the accuracy and authenticity of the tax filing process, preventing potential discrepancies or penalties.

Taxable Income for Non-Resident Indians

The Foreign Exchange Management Act and Income Tax Act of the year 1961 govern tax obligations for Non-Resident Indians (NRIs). Under these regulations, NRIs are subject to taxation under various circumstances:

• Income Exceeding Exemption Limit: NRIs are liable to pay taxes in India if their taxable income in a fiscal year exceeds Rs. 2 lakh, the exemption limit set by Indian tax laws.
• Capital Gains: Profits from the sale of any property, whether short-term or long-term, are subject to taxation in India. This includes gains from the sale, rent, or lease of assets, which are taxed under income tax rules for NRI in India. NRIs can claim a 30% discount on their house loans in India and deductions for principal repayment, registration fees, as well as stamp duty under Section 80C.
• House Property Income: Income from property located in India, whether rented out or vacant, is taxable for NRIs. They can claim a standard deduction of around 30%, deduct property taxes, and benefit from interest deductions on home loans. Additionally, deductions for principal repayment under Section 80C and stamp duty and registration charges are applicable.
• Rental Payments to NRIs: Tenants paying rent to NRI landlords must deduct TDS at a rate of 30% before transferring the rent amount. This income can be received in an Indian account or the NRI’s account in their current country of residence.
• Income from Other Sources: Interest income from fixed deposits as well as savings accounts held in Indian banks is taxable in India. Interest on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is tax-free, while interest on NRO (Non-Resident Ordinary) accounts is fully taxable.
• Income from Business and Profession: Any type of income earned by any of the NRI from the business controlled or set up in India is taxable.
• Capital Gains: The transfer of all the capital assets situated in India, including investments in Indian shares and securities, are taxable in India. TDS at a rate of 20% is deducted on the long-term capital gains directly from the sale of house property, but exemptions can be claimed by reinvesting in specified assets under Sections 54 and 54EC.

Deductions and Exemptions for NRIs

Non-resident Indians (NRIs) have access to various deductions and exemptions from their total income, similar to residents. These provisions help NRIs optimize their tax liabilities and maximize savings. Let’s get into the deductions and exemptions available for income tax for NRIs:

Deductions under Section 80C:

NRIs can claim deductions under Section 80C, with a maximum limit of Rs 1.5 lakh from their gross total income. Eligible deductions include:

• Payment of life insurance premiums for policies in the NRI’s name, their spouse’s, or children’s names, offered the premium which is less than 10% of the sum assured.
• Tuition fees are paid for the full-time education of up to two children at educational institutions in India.
• Principal repayments on loans for purchasing or constructing residential property, including stamp duty, registration fees, and other related expenses.
• Investments in Unit-Linked Insurance Plans (ULIPs) and Equity Linked Savings Schemes (ELSS), among others.

Other Allowable Deductions:

Besides Section 80C, NRIs can claim deductions under various other sections:

• Deductions from house property income, including parents’ insurance deductions and deductions for property tax paid and interest on home loans.
• Deduction under Section 80D for health insurance premiums paid for self, spouse, and children, up to Rs 25,000, with an additional Rs 25,000 for insurance of parents.
• Deduction under Section 80E for interest paid on education loans taken for higher education for the NRI, their spouse, children, or a student for whom the NRI is a legal guardian.
• Deduction under Section 80G for donations made to eligible charitable institutions.
• Deduction under Section 80TTA for interest income from savings bank accounts, up to Rs 10,000.

Deductions Not Allowed to NRIs:

While NRIs can avail many deductions, some are not available to them:

• Investments in certain instruments under Section 80C, like the Public Provident Fund (PPF), National Savings Certificates (NSCs), and Senior Citizen Savings Scheme (SCSS).
• Deductions under Sections 80DD, 80DDB, and 80U for maintenance and medical treatment of handicapped dependents or disabled individuals, which are only available to residents.

How Can NRIs Avoid Double Taxation?

Through the Double Taxation Avoidance Agreement (DTAA) between the two nations, non-resident Indians (NRIs) can seek relief from double taxation, which is the practice of paying taxes on the same income twice—once in their country of residency and once in India.

The tax credit technique and the exemption method are the two ways under the DTAA to obtain tax relief. NRIs are subject to taxation in one nation and exemption in another under the exemption method. When using the tax credit technique, one can claim tax relief in their nation of residence even when their income is taxed in both countries.

The FM proposes a new Section 89A in Budget 2021, which publishes regulations for mitigating hardship resulting from double taxation on funds accumulated in overseas retirement accounts for Non-Resident Individuals (NRIs). The clause applies in cases when income from these accounts is not subject to accrual taxation but is instead subject to taxation by the notified foreign countries at the moment of account redemption or withdrawal.

The Bottom Line

As a non-resident Indian (NRI), understanding the complex nature of the legislation of NRI taxation in India necessitates a deep awareness of the tax responsibilities relative to resident Indians. NRIs have to go through a different tax environment, which includes figuring out their resident status, calculating their taxable income, and utilizing deductions and exemptions. Through a thorough knowledge of their tax responsibilities, including both domestic and foreign

Frequently Asked Questions

Who qualifies as a Non-Resident Indian (NRI) for tax purposes?

NRIs are individuals who do not meet the residency criteria outlined in the Income Tax Act, spending less than 182 days in India during a fiscal year. Their tax obligations differ from those of resident Indians.

What are the key differences in Income tax for NRIs and resident Indians?

NRIs are taxed on income and capital gains earned within India’s borders, while resident Indians are subject to tax on their global income. Understanding these distinctions is vital for NRIs to fulfill their tax obligations effectively.

What deductions are available to NRIs under Section 80C?

NRIs can claim deductions under Section 80C for various expenses, including life insurance premiums, tuition fees for children’s education, principal repayments on home loans, and investments in specified financial instruments.

Are NRIs eligible for exemptions on income from foreign sources?

Income earned by NRIs from foreign sources may be exempt from taxation in India under certain conditions, particularly if covered by provisions of the Double Taxation Avoidance Agreement between India and another country where the income is generated.

How can NRIs verify their filed income tax returns?

NRIs must ensure timely verification of their filed income tax returns, which must be done within 120 days of filing. Verification is essential for ensuring accuracy and authenticity, thus avoiding potential penalties or discrepancies in the tax filing process.