Income Tax for NRI: Tax Rates, Rules, Deductions, and Return Filing
Are you an NRI confused by the question, “Does an NRI have to pay tax in India?” You are not alone. With every-changing tax laws, it is important to stay updated on the NRI income tax rules in India. This article simplifies the income tax environment for NRIs, describing the basics, the tax brackets, and more.
Table of Contents
Understanding NRI Status for Income Tax
Understanding the NRI status is essential in complying with the provisions of Income Tax Act of India and discharging related tax liabilities. NRI status is determined by provisions of residential status of India.
An NRI or Non-Resident Indian, is a person of Indian origin or nationality who has spent a major portion of the year outside India for work, residence, or any other reason that indicates an intention to stay abroad for an extended period. Basically, an NRI is an Indian citizen who spends more time in another country for education, work, or residence.
The Indian Income Tax Act divides individuals into three categories: residents, non-residents (NR), and not ordinarily resident (NOR). An individual’s residency status is determined by their physical presence in India during the current financial year and previous years. The basic criteria for determining the NRI status are:
Stay in India for less than 182 days during the financial year.
Stay in India for less than 60 days during the financial year and less than 365 days in the 4 previous preceding financial years.
Meeting any of the above criteria qualifies a person as a Non-Resident
Indian for tax purposes.
Basic Exemption Limit under Income Tax for NRI
Knowing the basic exemption limit is very important for an NRI so as to discharge the tax obligations effectively in India.
The basic exemption limit is the level of income at which an individual is not required to pay any income tax. For NRIs, the basic exemption limit is very crucial since it determines their tax liabilities in India based on the income earned or accrued in India.
The basic exemption limit is INR 2,50,000 under both old and new tax regime, after which the slab rate becomes applicable based on the income range. Following are the slab rates under old and new tax regime:
The new tax regime offers lower slab rates, while it also eliminates the maximum deductions and exemptions as compared to the old tax regime. Under the old tax regime, several deductions and benefits under Chapter VIA were available to NRIs which would have significantly reduced their taxable income:
Section 80C: It allows for the deduction of up to INR 1,50,000 for investments made in the specified instruments like life insurance, Public Provident Fund (PPF), and Equity Linked Tax Saving Scheme (ELSS)
Section 80D: A deduction of up to INR 25,000 (INR 50,000 for senior citizens) is allowed on health insurance premiums for self and family members, including parents.
Section 80E: The interest paid on education loans obtained for higher education can be claimed as a deduction, up to a maximum of 8 years or until the payment of interest, whichever is earlier.
Section 80G: Donations made to certain charitable institutions are allowed as a deduction up to 50% or 100% subject to certain conditions.
While the basic exemption limit is the same under both the tax regimes, the benefits of deductions and exemptions are much higher in the old tax regime for NRIs.
Filing Income Tax Returns for NRIs
Filing an Income Tax Return (ITR) in India is one of the most important requirements for NRIs making investment or earnings in India. Presenting below a simplified process, making compliance for NRIs more accessible and manageable around the world:
Before commencing the tax filing process, it is important to understand the NRI status under the Indian Income Tax Act. A person’s residency status in India is determined by the physical presence during the relevant financial year. The determination of residence status is outlined in the Act in detail, which affects the taxability of an individual's income in India.
Only the income earned or received in India by an NRI is taxable in India. Examples include: salary received in India, income from house property located in India, capital gains from Indian assets, and interest income from fixed or savings accounts maintained with Indian banks. Getting the knowledge of the scope of total income is the initial step towards tax compliance.
The NRIs often question the conditions which necessitates the return filing in India. The requirement for filing the ITR for NRIs is based on the following criteria:
The total income in India exceeds the basic exemption limit during the financial year.
To claim a refund for the taxes paid in excess.
To carry forward the losses under any heads of income.
Filing an ITR not only fulfills legal requirements but also facilitates a financial record which could serve as a proof for loan applications, visa processes, and other financial obligations.
The process for filing ITR for NRIs is not significantly different from that of the resident Indians. Even NRIs can file their ITRs online. The simple process for filing ITR is as follows:
Collecting documents: Before commencing the ITR filing process, the NRI should accumulate all the necessary documents such as details of income earned in India, TDS certificates, bank statements, and proof of investments made in India.
Selecting the ITR form: Based on the nature and sources of income, the ITR form should be selected. Usually, form ITR-2 is applicable for NRIs, but it is better to cross-verify the type of form based on the nature of income.
Filing ITR online: The ITR form should be filed online on the income tax portal, if already a registered user. If not, the NRI should first register on the income tax portal to begin with the ITR filing process.
Verifying the ITR: Upon successful completion of the filing process, the NRI should also complete the ITR verification process. Verification can be done either through the online e-Verification of ITR facility or through offline.
NRIs are eligible to claim various exemptions and deductions under Section 80 of the Income Tax Act. These can help NRIs to reduce the taxable income in India to a greater extent. Understanding the provisions related to deductions and exemptions can help save maximum taxes.
The most common mistakes committed by NRIs include: underreporting of income, misinterpretation of tax implications related to investments, and failing to file the ITR within the due date. An NRI should be proactive and take necessary steps to avoid the common mistakes.
Seeking professional help can provide a customized solution and peace of mind. Tax experts can help to overcome complexities involved in NRI taxation.
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Special Provisions for Investment Income of NRIs
Among several provisions in Income Tax Act for NRI, one provision is an exception is Section 115E. It is because it has a direct impact on the investment income of NRIs. Section 115E is very important for NRIs since it regulates the investment income of NRIs and provides special provisions for various types of income.
A special provision for the investment income of NRIs is provided through Section 115E. The investment income comprises the income from foreign exchange assets and long-term capital gains. Section 115E encourages NRIs to invest in India by offering them a special provision treatment.
The special provision is applicable only to NRIs earning incomes from specified asset types. The income from specified assets include: shares in Indian companies, debentures issued by public companies, deposits with banks and public companies, and such other assets acquired in foreign currency as specified by the Central Government.
The investment income from specified assets is taxable at a concessional rate of tax of 20% under Section 115E. The special rate is significantly beneficial as compared to the tax rates as per slab of income. Moreover, the benefit of the basic exemption limit is not available under special tax rate, that is, the investment income becomes taxable from the first rupee itself.
Under Section 115E, a special rate is also applicable for the long-term capital gains arising from the transfer of the foreign exchange assets. Such capital gains are taxable at a flat rate of 10% without any benefit of the indexation. This concessional rate is offered to encourage long-term investment in India by NRIs.
NRIs can choose between special provision under Section 115E vs regular provision under the Income tax Act. This option facilitates NRIs to select from the most advantageous tax treatments based on the specific conditions. The choice between special provisions and regular provisions is more useful when the NRIs total income includes other types of income taxable at different tax rates.
Advance Tax Applicability on NRIs
NRIs frequently question whether they should comply with the provisions of advance tax payments in India. The answer is simple in a few instances, it varies depending on the NRIs income sources and liabilities in India. Here is what every NRI should know about advance taxes:
The advance tax regulation for NRIs is the same as resident individuals. If the tax liability of NRI exceeds INR 10,000 in a financial year, the advance tax must be paid. This is applicable to the income accrued or earned in India. Examples of such income include: rental income from property located in India, capital gains from sale of assets in India, interest from deposits, and income from services rendered in India.
The advance tax calculation involves estimating the total income for the financial year, calculating the tax liability on the total income, and subtracting any TDS already deducted by banks or tenants. If the tax liability remaining after the said adjustment exceeds INR 10,000, the same must be paid as an advance tax installment throughout the relevant financial year.
The advance tax payment schedule for all the taxpayers including NRIs is divided into 4 installments, which are as follows:
Any failure to pay advance tax or delay in the payment of the same can lead to interest and penal consequences under Sections 234B and 234C of the Income Tax Act.
NRIs may not be liable to pay advance tax if their total income tax liability is less than INR 10,000 or if the TDS deducted on their Indian income is sufficient. NRIs should also consider the benefits of Double Taxation Avoidance Agreements (DTAA) between India and the country of their residence. DTAA may provide relief from potential double taxation on the same income.
Tax Implications for NRIs: Understanding the Impact of Remittances, Gifts, and More
Knowing the impact on income tax of remittances, gifts, inheritance and foreign assets is essential for complying with the tax liabilities.
Remittances made by NRIs in India are generally not liable to tax in the hands of the recipient. If the amount remitted exceeds INR 7 Lakh in a financial year under the Liberalized Remittance Scheme (LRS), a 5% Tax will be Collected at Source (TCS). The exception to this exists when the money is remitted for educational purposes through a loan obtained from a financial institution, wherein the tax rate is 0.5%.
When NRIs receive gifts from relatives, it is not taxable, irrespective of the amount received. However, gifts received from non-relatives in excess of INR 50,000 in a financial year are taxable. Relatives include: parents, siblings, lineal ascendants or descendants, among others. Additionally, property received as a gift or inheritance is not liable to tax, but any income generated from such property is taxable. For example: rental income from such property.
In India, the wealth received as inheritance is not taxable. Thus, NRIs are not required to pay tax on wealth received as inheritance. However, any income received from inherited assets is liable to tax. For example: interest income from inherited savings or rental income from property is liable to tax. Furthermore, if the inherited property is sold, the capital gains tax will also apply which will be computed based on the period of holding and the type of asset.
While filing the Indian ITR, the NRIs must report their foreign assets and income irrespective of the tax status in India. The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) mandates the disclosure of overseas assets so as to ensure transparency and compliance. Failure to disclose these assets can lead to significant penalties.
The monetary limits and tax rates are as below:
Remittances: Liable to TCS at the rate of 5%, if the amount exceeds INR 7 Lakh per financial year under the Liberalized Remittance Scheme (LRS).
Gifts: Liable to tax when received from non-relatives in excess of INR 50,000 in a financial year.
Inheritance: Not liable to tax upon receiving the inherited assets. However, liable to tax when income is generated from such inherited assets and capital gains in case of sale of such assets.
Foreign Assets: Reporting of foreign assets is mandatorily required otherwise liable to penal consequences.
FAQs
Q1. How is the NRI status checked for Income Tax purposes in India?
In India, an individual is considered as an NRI for income tax purposes if they have not resided in India for 182 days or more in the relevant financial year or have not been in India for 365 days or more in the previous 4 years and 60 days in the financial year.
Q2. Whether income earned outside India is taxable for NRIs?
No. NRIs are only subject to tax for the incomes earned or accrued in India. Thus, income earned outside India is not liable to tax for NRIs.
Q3. What types of income are chargeable to tax in India for NRI?
NRIs are subject to tax for the following types of income in India: rental income from property located in India, capital gains from transfer of a capital asset, income from fixed deposits or interest on savings bank accounts in India, and any salary received in India or for services provided in India.
Q4. Are deductions under Section 80C of the Income Tax Act allowed to NRIs?
Yes. NRIs can claim deduction under Section 80C for specific investments like life insurance premiums, children’s tuition fees, principal repayments on home loans, and certain mutual funds. The overall limit of Section 80C of INR 1,50,000 is applicable in this case as well.
Q5. Are NRIs required to furnish the ITR in India?
Yes. NRIs are required to file the Income Tax Return (ITR) in India under the following instances:
Total income in India exceeds the basic exemption limit during the financial year.
For claiming a refund for the taxes paid in excess.
For carrying forward the losses under any heads of income.
Q6. What is the due date for filing ITR for NRIs?
The due date for filing ITR for NRIs is usually the same for resident Indians, which is 31st July of the assessment year, unless extended by the Income Tax Department.
Q7. How can NRIs file their ITR in India?
NRIs can file their ITR in India through the online portal of the Income Tax Department, that is, https://www.incometax.gov.in/iec/foportal/. The ITR form type should be selected correctly based on the nature of income to proceed with the filing.
Q8. Explain the Double Taxation Avoidance Agreement (DTAA).
The Double Taxation Avoidance Agreement (DTAA) is an agreement between the two countries which aims to prevent taxation of the same income double times in two different countries. India is having DTAAs with multiple countries which provides reliefs to the NRIs from double taxation through exemptions or tax credits.
Q9. Can NRIs invest in India? What are the tax implications?
Yes, NRIs can invest in Indian shares, securities, and property. The income from such investments like dividends, interest, and capital gains are subject to taxation in India.
Q10. How can NRIs avoid TDS on their Indian income?
NRIs can furnish Form 15CA/15CB to the payer or make an application for the Lower Deduction Certificate if they believe the TDS rate is higher than their actual liability in order to avoid or reduce TDS on their Indian earnings.
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