Are You Knowing about NRI Income Tax in India? No, Let’s Here Discuss about the Topic. Taxes are a vital constituent of a nation’s economy. The tax department of a nation levies several taxes on different services and goods availed by the citizens. Talking about India, particularly the property, service, income, and tax deducted at the source (TDS) are the most general forms of taxation. The main purpose served by the taxes is to add a better shade to the products and services consumed by the consumers. It is a well-known fact that the taxes collected from the citizens is the foundation of a nation’s economy. Non-Resident Indians are no exception; like other residential Indians, NRIs are also required to pay certain taxes. The Non-Residential Indians also need to pay appropriate taxes whenever they are covered under the Income Tax Act 1961. In the article below, we will be discussing the NRI income tax more comprehensively.
Taxation provision for NRIs in India
The Income Tax Act 1961 applies to those earnings of the Non-Resident Indian that are generated in the homeland. The benefits and perks available to Non-Resident Indians from income tax differ from the resident Indians. To understand the taxation system of Non-Resident Indians, firstly, an individual needs to know how an NRI is accountable for paying taxes in India. According to the Foreign Exchange Management Act (FEMA), an NRI is bound to pay taxes in India if he has earning sources in India. The Income Tax Department exempts Non-Resident Indians from paying taxes on the earnings generated abroad. A Non-Resident Indian must pay taxes on the capital gains from mutual funds, property rentals, termed deposits, shares, etc., if they exceed the basic exemption limit set by the Income Tax Department of India.
Who is a resident Indian, according to the definition of Income Tax as an NRI in India?
The Income Tax Department of India has specified the criteria for a resident of India. To maintain the status of an Indian resident, the individual is required to meet one of the below-given criteria: –
If the individual resides in India for at least 182 days in that financial year, then they claim the status of Indian resident.
By any chance, the individual could not complete the 182 days in India; still, they can claim the status of Indian resident if he has resided in India for at least 365 days during the last four years and 60 days during that year.
To understand this in a better way, let’s take the example of Tara. Tara resided in India for 217 days in 2018, so for the year 2018, she is a resident Indian. But if Tara could not reside in India in the year 2019, for any reason, it doesn’t mean that she lost her status as a resident Indian. Tara can still claim the status of Indian resident if she was in India for 70 days in 2019 and completed 365 days stay in India during the year 2014 to 2018.
So, if an individual cannot satisfy the above two cases, then they will be considered a Non-Resident Indian per the Income Tax Regulations.
In simple words, to maintain the status of an Indian resident, you need to reside in India for at least six months or, to be more specific, 182 days during that financial year. If you have been residing in India for two months and completed 365 days in the last four years, you will still be regarded as an Indian resident as per income tax regulations.
These rules do not imply to the Indian citizen working abroad or a crew member working on an Indian ship. If you belong to any of the two categories, you only have the first option to claim your status as an Indian resident. It simply means that you need to reside in India for at least 182 days; you don’t have the second option to sustain your Indian resident status.
The same regulation applies to a person of Indian Origin who frequently visits India. If you don’t know who is a person of Indian Origin. In that case, a person of Indian Origin is a child or grandchildren of the people who were born in undivided India or India before independence. A person can claim the status of a person of Indian Origin if any of his parents or grandparents were born in undivided India.
Changes in the definition of Non-Resident Indian through Income Tax amendment 2020 in India
The Income Tax department of India has introduced some amendments through the Income Tax Act amendment 2020. The amendment is for the Non-Resident Indians whose taxable income in India exceeds Rupees 15 lakh. The criteria defined by the Income Tax Act amendment 2020 are as follows:-
In the recent amendment, the income tax has stated that the individual needs to reside in India for at least 120 days in a financial year. Earlier the duration of stay was 180 days, but now it has been reduced to 120 days.
Besides this, the income tax department has clarified that they also calculate whether the individual was in India for at least 365 days during the last four years before the financial year.
If the individual fulfills both criteria, she will be considered a resident Indian.
What taxes an individual needs to pay is decided by the residential status of that individual. An NRI income tax is imposed based on the income of the NRI. For example, if an individual is an Indian resident, then her global income will be taxable in India.
While on the other hand, the global income of a Non-Resident Indian is not taxable in India. In the case of an NRI, the Indian government imposes tax only on the income generated in India.
The taxation system in India for Non-Resident Indians
By default, the income earned by an NRI abroad is not taxable in India. However, if the NRI is earning money from Indian sources like mutual funds, capital gains, deposits, investment in shares, property rental, etc., exceeding the fundamental limit described by the Income Tax Act, 1961. In that case, according to the Income Tax Act 1961the NRI needs to file an income tax return. The Tax Deducted at Source (TDS) charged at the maximum rate on interest produced on the capital gains earned from the Indian sources is calculated after considering the tax imposed on NRI income. The income earned from deposits, mutual funds, shares, property rentals, etc., mostly cancel the need to file a tax return. However, in some cases, it might occur that the overall Tax Deducted at Source (TDS)does not include the primary tax liability of the NRI. In such cases, filing returns is the only way to file a tax refund claim.
Taxable income for NRIs in India
As already said above, if you are an NRI, then the Income Tax Department of India imposes a tax on the income generated in India. Now the question arises what kind of income is taxable? If an individual receives their salary directly in an Indian account, then the salary will be subject to taxation as per the Indian tax laws. Your income will be taxed depending on the slab rates you belong to. There are different types of income that are taxable in India; they are as follows: –
Income from house property as an NRI in India
If the NRI is generating income from a property situated in India, he is liable for taxation. If the NRI earns money from the property in India, then the income will be taxed in the same manner as applicable to a resident Indian. Here the property doesn’t need to be rented; even if the property is lying vacant, the Income Tax Department can levy tax on that property. Here being an NRI, you can claim a standard deduction of 30%, deduct property taxes, and get benefitted from an interest deduction of a home loan.
Under Section 80, all the NRIs are allowed a deduction for the principal repayment. An NRI can also claim the stamp duty and registration charges paid while purchasing a property. The income generated from rental property or house property will be taxed according to the applicable slab rates.
For example, Tara lives in Paris and owns a property in Chennai, and she has rented that property. The rental amount is transferred into her bank account in Paris. So, the income of Tara generated from the rent of that property will be taxable in India because the house is located in India.
Income from salary as an NRI in India
An individual’s salary will be considered to arise in India if their services are rendered in India. It means that even if you are NRI, your salary can be taxed if it is paid towards services you provide in India, irrespective of the place from where you are receiving the income.
For example, if your employer is the Government of India and your service is rendered outside India. Still, if you are a citizen of India in that financial year, then your income from your salary will be taxable in India.
Here it would help if you remember that the income of foreign diplomats and ambassadors is exempted from taxation.
Rental payments made to a Non-Resident Indian in India
If you are a tenant paying rent to an NRI owner in India, you should deduct a 30% Tax Deducted at Source (TDS)while paying the rent to the owner. One can receive that rental income in an Indian or NRI account. To understand this better, let’s take the example of Mahesh. Mahesh is paying a monthly rent of 30,000 rupees to his NRI landlord in Hyderabad. So, Mahesh must deduct a 30% TDS, 9,000 rupees, while transferring the money to his landlord’s account. All the tenants who are paying rent to an NRI landlord must need to submit Form 15 CA to the Income Tax Department.
So, Mahesh should fill the Form 15 CA and submit it online to the Income Tax Department. In some rare cases, the individual also needs to attach a certificate from a chartered accountant in Form 15 CB before uploading the Form 15 CA. The Form 15 CB certifies the details of the payment, Tax Deducted at Source (TDS)rate, and TDS deduction according to Section 195 of the Income Tax Act and any other detail or purpose of the remittance. All these details mentioned in Form 15 (CB) must be certified by a chartered accountant; that’s why the Form 15 CB needs to be attested by a chartered accountant. The income tax department has allowed people to submit the form online to make the process more convenient.
Generally, the tenant only needs to fill out Form 15 CA. But in some cases, they also need to fill out Form 15 CB. The tenant doesn’t need to fill Form 15 CB in the below-given situations: –
If the remittance doesn’t exceed 5 lakh rupees in a financial year, then the tenant only needs to fill out Form 15 CA.
The individual does not need to fill the Form 15 CB if lower Tax Deducted at Source (TDS)has to be deducted and a certificate is received under Section 197. Remember that the lower TDS has to be deducted by order of the Assessing Officer (AO).
Lastly, if the transaction falls under rule 37 BB of the Income Tax Act, the individual does not need to fill out any forms.
Except for these three situations, if the remittance is generated outside India, the individual demanding remittance should attach a chartered accountant certificate in Form 15 CB.
Other sources of income as an NRI in India
The income generated in the form of interest from other sources like fixed deposits, mutual funds, and savings accounts held in Indian bank accounts is taxable in India. The interest generated on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is tax-free. In contrast, the interest earned on a Non-Resident Ordinary account is taxable.
Income earned from capital gains as an NRI in India
An income will be taxed if it is generated from capital gains or transfer of capital assets that are situated in India. The capital gains on investments in Indian shares, mutual funds, and security are also taxable in India. For example, if you sell a house property and have a long-term capital gain, the buyer will deduct a Tax Deducted at Source (TDS) at 20%. However, the individual is completely eligible to claim capital gains exemption by investing in house property. Section 54 of the Income Tax Act allows the individual to claim the capital gains exemption if the money is invested in house property or capital gain bonds under Section 54 (EC).
Income generated from business as an NRI in India
Your income will be taxed in India if earned from a business controlled or set up in India. It means that if you have a business in India and you are residing outside India, or you are a Non-Resident Indian still, the income earned from the business located in India is taxable. The business located and controlled in India is taxable irrespective of the owner being a Non-Resident Indian.
Special provisions related to income generated from investment as an NRI in India
An individual will be taxed at 20% on the income earned from the investment in certain Indian assets. If the special investment is the only income, the NRI earned during that financial year, and the Tax Deduction at Source (TDS) has been deducted from that income – the NRI does not need to file an income tax return in such cases. Certain investments qualify for special treatment, they are discussed in the next section.
Are you eligible for the special treatment of special provision as an NRI in India?
The income derived from certain investments that qualify for special treatment as an NRI in India are as follows: –
Income generated from shares in a public or private Indian economy is eligible for special treatment.
The deposits with banks and public companies will also be treated specially.
Debentures issued by a publicly listed Indian company will also receive special treatment. Remember that the company should be a publicly listed Indian company, not a private company.
The investment will receive special treatment if there is any security from the central government.
Lastly, other central government assets specified for the official gazette will also receive special treatment.
Now you must be thinking, what is that special treatment. There will be no deduction done under Section 80 while calculating investment income.
Important taxation rules for Non-Resident Indian in India
The taxation rules for a Non-Resident Indian are very different from a resident Indian. There are some essential points that one should note; they are as follows: –
The tax slab for Non-Resident Indians depends on the earnings barring age, gender, and other specifications and requirements.
Even usually, the Non-Resident Indians don’t need to fill tax if their income falls in the category of clause Under Section 115G of the Income Tax Act, 1961.
For the Tax Deduction at Source (TDS), the entire income of the Non-Resident Indian is levied irrespective of any threshold value.
In the case of Non-Resident Indians, no economic deductions are applicable on investment income; there are some exceptions under certain conditions.
The Income Tax Act 1961 has provided some special provisions for Non-Resident Indians under the following sections: –
Section 115(D): – Calculation of Tax of an NRI in India
This section does not allow any deduction in the investment income calculation of an NRI in India.
The Section 115(D) also states that if the assesses is a Non-Resident Indian: –
No tax deduction is permitted on the total gross income of the NRI. The total gross income includes the earnings from long-term capital gains and investments.
If the income of the NRI from investment and long-term gains form only a part of the total gross income of the individual. In that case, such income will be reduced, and the remaining amount may be eligible for availing deductions under Chapter VI A.
Section 115(E): – Tax levied on income generated from long-term capital investments and gains of an NRI in India
In case the total income of Non-Resident Indian in India includes any of the following: –
First is, income generated from long-term capital gains.
The earnings gained from
- investments and long-term capital gains of any asset apart from an Indian company
- Debentures issued by or the deposits made with any non-private Indian firm
- The assets further mentioned by the Indian Government or any Central Government Security
Then the tax needed to be paid by the Non-Resident Indian will be an aggregate of: –
The tax is calculated at a 20% interest rate on the total income generated from investment as specified in 2(a).
The tax is calculated at a 10% interest rate on long-term capital gains as specified under section 2(b).
Lastly, the tax will be charged if both clauses 2(a) and 2(b) have been deducted from the aggregate income of the Non-Resident Indian.
Section 115(F): – Non-chargeable capital gains of an NRI in India
Section 115(F) covers non-chargeable capital gains earned on the transfer of the foreign exchange assets in some cases. Generally, it involves the exceptions where the foreign exchange asset transfers will not incur any amount of tax.
The capital gains won’t be levied tax if the Non-Resident Indian invests a portion of the profits earned from capital gains from foreign exchange asset transfer into the assets defined by the government of India. Here it would help if you remember that the investment should be made within a tenure of 6 months, and the cost of acquisition of the new assets should be equal to the earlier asset value.
If the Non-Resident Indian converts or transfers the foreign exchange asset into money within a duration of 3 years from the acquisition date. In that case, the capital gain not levied from the asset transfer depends on the cost; the new assets will be considered taxable income.
Section 115(G): – Non-filing returns of income as an NRI in India
Non-filling returns of income in some instances are allowed; they are as follows: –
Firstly, if the total income during the previous year is only through the income from investment or long-term capital gains.
Secondly, the Tax deduction at source (TDS) has been deducted from the aforementioned income.
Section 115(H): – Taxation advantages once the NRI becomes a resident Indian
Section 115(H) deals with the advantages of taxation received by Non-Resident Indian after he becomes a resident. It simply means that if a person was holding the status of a Non-Resident Indian in the preceding year and becomes a resident Indian in the following year, it will make him accessible differently to different tax laws. Still, the individual needs to declare his return of income from investment on foreign exchange assets. It will allow all the taxation provisions to remain unbroken until the assets are converted into monetary amounts.
Section 115(I): – Provisions for non-application for the Non-Resident Indian taxation in India
Section 115(I) is an exclusion rule which allows an NRI to choose whether he wants his income to be considered from investment or capital gains. In case the individual chooses not to, then all the sources of income of the individual in India will be considered taxable.
Remember that the rules mentioned above are liable to change according to the discretion and direction of the central government and the Income Tax Department of India.
Non-Resident Indian tax exemptions in India
Certain types of incomes are exempted from taxes; they are as follows: –
An Individual will be exempted from tax on the interest earned on government-issued saving certificates and notified bonds.
The interest on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts will also be exempted from tax.
The long-term capital gains from the listed equity and shares will also be tax exempted. Along with this, equity-oriented mutual funds will also share the same privilege.
Dividends earned from shares of domestic Indian companies will not be taxed.
Under the following sections and circumstances, the capital gains can also be exempted from tax: –
Section 54
Under section 54, tax exemption is possible if a house property held for three or more years is sold, and part of the profit or income earned from that property is used to purchase other properties. Section 54 allows the tax exemption if the individual invests the income earned from selling that property into a Public Sector Undertaking (PSU) or other banks, according to the capital-gains scheme of 1988.
Section 54(F)
Section 54 allows tax exemption if any property other than a house is sold and the capital gains are incurred; then, the individual can claim the exemption on the construction and purchase of a new house. The exemption will be proportional to the amount of the same proceeds spent on the new asset.
Section 54(EC)
An individual can apply for tax exemption under section 54(EC) if the long-term capital gains are invested in bonds issued by the National Highway Authority of India and Rural Electrification Corporation by the NRI. These bonds must have a redemption value after three years, and the individual is not allowed to sell them before that.
Here you need to remember, that the above exemptions are liable to the tax laws prevailing at that time.
Conclusion of NRI Income Tax in India
So far, we have discussed the different taxes paid by the Non-Resident Indians. Many people assume that NRIs need to pay taxes on their entire income, which is not an absolute truth. The Non-Resident Indians do not need to pay taxes on their entire income as the Income Tax Department of India exempts the taxes on income generated abroad. The NRIs are required to pay taxes on the income earned in India. The sources of income can be capital gains, investments, rental payments, etc. Besides this, the Income Tax Department of India allows Non-Resident Indians to claim some deductions if eligible. Here you should know that being an NRI; you can only use your Non-Resident External (NRE) account, Non-Resident Ordinary (NRO) account, and Foreign Currency Non-Resident (FCNR) account for any financial transaction.
Acquiring the status of Non-Resident Indians has some advantages and disadvantages. Unlike other resident Indians, the Non-Resident Indians are required to pay taxes only on the income generated in India through legal means. After reading this article, you will have gained a lot of information about the NRI income tax and taxation system in India for Non-Resident Indians. Like an aware and obliged NRI, you should pay your income tax on time because tax theft is a punishable offense in any nation, especially India. It is a very well-known fact that no one can escape from the sight of the Income Tax Department of India in case of tax theft. So, like a vigilant Non-Resident Indian, you should pay your tax on time and complete your duty.