The Indian Economy majorly depends upon the tax collection for its citizens. This includes the NRIs non-Residential Indians as well, working and earning abroad. There is a lot of difference in the rules and regulation as applied on NRIs compared to the residing citizens. The NRI taxes like normal Indian taxes also include and cover all aspects of income, wealth and property tax for NRIs. Here are some insights into the NRI taxation system under the Income Tax Act, 1961;
WHO IS AN INDIAN CITIZEN?
You will be considered as an Indian citizen under the following circumstances:
1. If during one financial year you are in India for at least six months or 182 days precisely
2. Have lived one whole year i.e. 365 days in the last 4 years and were in India for a minimum of 60 days (2 months) for the year in the previous year.
If you are an Indian ship crew member or Indian citizen working abroad, then only the first condition holds good. On similar grounds, a person of Indian origin will also be ruled under the same condition if he/she is on a visit to India.
If none of the above is your case, you are an NRI.
TAX IMPLICATIONS FOR NRI
If you are an NRI, your salary becomes taxable if
1. You receive your salary in India
2. Someone on your behalf receives your salary in India
So, if any of the above is your case, you will be taxed as per the Indian Tax Laws. The slab rate is applicable as per your category.
Following are the components taxable under the Indian Tax Laws:
A. Salary Income
If your income is generated against any services rendered in India irrespective of where you receive it, the same shall be taxed as per Indian laws. Also, if you are a Government of India employee, serving outside India, then also your income is taxable as per Indian Tax laws.
Note: Only Diplomats and Ambassadors’ income is exempted from tax.
B. Income from Rental property or House property
Income coming from the rent of a property in India is taxable for NRIs in the same manner as it would be for a resident Indian. This is irrespective of the fact that the property is rented out or not. In case of a home loan, the NRIs are allowed a 30% standard deduction under the Deduct property taxes and enjoy the benefit of interest deduction.
Apart from this, following deductions and charges can also be claimed:
1. Principal repayment
2. Stamp duty and registration charges
The income from such house property will be taxed at rates as applicable.
C. Rental Payment to NRI
Any/Every tenant paying rent to an NRI must make sure to deduct TDS at the rate of 30% before paying it. The NRI can receive the rent in an Indian account or account in the country he/she is living in.
Note: A Form 15CA is required to be filled and submitted online to the Income Tax Department. This is a remittance form.
D. Income from other sources
Interest from FD (Fixed Deposits), savings account and NRO account is fully taxable as per Indian Taxation Laws. FCNR and NRE account interest is tax-free.
E. Business or Professional income
The income earned from an establishment or business in India will be fully taxable as per Indian Taxation laws for the NRI.
F. Capital Gains Income
Capital gain on the asset situated in India involving its transfer or sale will be fully taxable as per Indian Taxation laws. The capital gains on Indian investments like securities, shares etc. would also be taxed.
If you happen to sell a property which makes a long-term capital gain, the buyer holds right to deduct 20% TDS. You can claim exemption on such gains by re-investing in property or by buying bonds (for capital gains) as per Section 54EC.
G. Special provisions on investment income
An NRI is taxed at the rate of 20% while investing in an Indian asset. In case, that income is the only income that NRI has gained in a particular financial year and also the TDS has been deducted, then in that case, filing an ITR (Income Tax Return) will not be required on the NRIs behalf.
Investments qualifying for special treatment are:
1. Shares in a private or public company in India
2. Debentures issued by a publicly-listed Indian company
3. Bank deposits
4. Public company deposits
5. Central government securities
6. Assets certified in the official gazette by the central government
Note: The investment income is not eligible for tax deduction under section 80.
AVOIDING DOUBLE TAXATION
Many times NRIs are taxed doubly on the same income once in India and then by the country they reside in. this can be avoided through DTAA which is Double Tax Avoidance agreement between two countries.
There are two ways under which you can claim the relief-
1. Exemption Method- the NRIs are taxed only in one country and exempted in other
2. Tax Credit Method- the NRIs once taxed in both countries can claim the tax relief in the residence country.
EXEMPTIONS AND DEDUCTIONS FOR NRIS
Like Indian residents, NRIs can also claim various exemptions and deductions from the overall income.
A. Section 80C deductions
Like Indian residents, most deductions available under section 80C are also applicable to NRIs. A maximum deduction of up to Rs. 1.5 Lacs is allowed to NRIs as well.
B. Deductions allowed to NRIs under 80C are:
1. Premium payment of Life insurance: A premium amounting to less than 10% of the sum assured can be claimed for deduction. The insurance policy must be in the name of NRI or Spouse or Child.
2. Payment of Tuition Fee of children: For any educational institution including university, college, and school, located anywhere in India, the tuition fees payment is eligible to tax deduction.
3. House loan principal repayment: Repayment of principal loan amount taken to buy or construct a residential property is eligible for tax deductions. The registration fee, stamp duty, and other transfer expenses are also eligible for deductions.
4. U-LIPS: The Unit-Linked Insurance Plans sold with life cover is eligible for deduction.
5. ELSS investments: ELSS falls under the Triple E category of instruments offering Exempt-Exempt-Exempt status to the investments. A maximum of Rs. 1.5 lacs invested through ELSS are tax exempted.
C. OTHER DEDUCTIONS
Following are the deductions allowed other than under section 80C;
1. Income from house property: NRIs are also eligible for the same deductions available to residents on purchasing a house property in India. Interest on home loan deduction and property tax is allowed.
2. Section 80D: NRIs are entitled to a deduction on health insurance premium payment of up to Rs. 50000 in case of senior citizens and Rs. 25000 in other (self/spouse/dependent children). Also, deductions can be claimed on health insurance premium payment of parents residing in India up to Rs. 50000 if parents are senior citizens and Rs. 25000 if not.
3. Section 80E: Under this section, the NRI is eligible for claiming a deduction on interest paid in case of an education load which can be for NRI, spouse, children or a student of whom the NRI is a guardian.
4. Section 80G: Deductions can be claimed for donations for social causes.
5. Section 80TTA: NRI is also eligible for deductions on interest earned on a savings bank account for a maximum of Rs. 10,000 like residents. The savings account can be with banks, post office or co-operative society.
D. Exemption for an NRI on Sale of Property
The long-term capital gains are earned when a property is held for more than three years, are taxed at 20%. Also, the LTCG as earned by NRIs is subject to 20% TDS as well.
Under the sections 54,54EC and 54F, the NRIs are allowed to claim exemptions on the LTCG. Section 54 takes care of LTCG on house property while 54F is for LTCG on any asset other than the house.
Under Section 54EC, you are allowed to invest your LTCG into government bonds up to Rs. 50 lacs. These bonds are issued by NHAI and REC; National Highway Authority of India and Rural Electrification Corporation respectively.
You are allowed a time of 6 months after the sale to invest the capital gain. Once invested, it cannot be redeemed before 3 years and only be sold after 5 years.
FAQs IN NRI INCOME TAX
Q1. Who is an NRI?
A person who is not an Indian resident is called an NRI. You are considered to be a resident if:
1. You stay in India for more than 182 days in one financial year
2. 2 months or more plus 365 days in four years immediately preceding the previous years.
If none of the above is your case, you are an NRI.
Q2. What if I have a rental property earning rental income in India and I reside in Australia. My employment is also in Australia and receives my salary here only?
Being an NRI, the only income which comes to you from India will be taxed. Since your job is in Australia and you receive your salary there only, your income will not be taxed. Only the rental income you receive from your Indian property will be taxed as per Indian Taxation Laws.
Q3. What does DTAA do? If an NRI receives income in India, will it be taxed in the residence country as well?
DTAA stands for Double Tax Avoidance Agreement. As the name suggests, this agreement has been made to relieve the NRI of double taxation in India as well as in their country of residence. The NRI can be relieved in 2 ways- either by being exempted of taxation in one country or by claiming tax-relief if taxed twice.
Q4. What is the return of income rule for NRIs?
An NRI like any Indian taxpayer must file the return of income if the gross total income is more than Rs. 2.5 lacs in a given financial year. 31st July is the last date for filing the return of an assessment year.
Q5. What if my gross total income is Rs.2.9 lacs and in 70 years old NRI?
Even if you fall under the senior citizen category but the raised limit of up to Rs. 3 lacs for senior citizens and Rs. 5 lacs for super senior citizens is only for resident Indians. Being an NRI, you will have to file your returns.
Q6. I am an NRI and have recently sold my house/flat in India. Do I need to pay capital gains tax?
Yes, you need to pay the capital gains tax upon the sale you have made in India. Also, the buyer would make a 20% TDS deduction for the same.