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NRI taxation: How NRI’s are taxed in India?

Prabhat Nigam

| Updated: Aug 04, 2022 | Category: Taxation

NRI taxation

Tax collection is crucial for the governments to run the economy of their nations, especially in those countries where the governments do not have enough resources to sustain the economy without collecting taxes. Indian tax jurisprudence centres on the principle of ‘residency’ and not ‘citizenship’ of the individual for the collection of taxes. Therefore, apart from the taxation of residents in India, NRIs are also taxed if their income sources originate from India. This piece of writing discusses the definition, deductions, exemptions and returns regarding NRI taxation.    

What is meant by NRI taxation?   

Non-Resident Indians are required to pay income tax in India if the income earned by them falls under the scope of the Income Tax Act of 1961[1]. The types of taxes, the amount of taxes that NRIs are liable to pay and how they should be dealt with all fall within the ambit of NRI taxation. NRI taxation covers the aspects of Income tax, wealth tax, property tax etc.  

Aspects of NRI taxation in India    

Income tax on NRIs income

Before we move forward, let us first determine who an NRI is. As per the definition laid down in the Foreign Exchange Management Act, 1999, a citizen of India who is resident outside India for a specific period of time and has been absent from India for a specific period is called an NRI (Non-Resident Indian).

Any income earned by a Non-Resident Indian from a source not present in India is not liable to be taxed. However, if an NRI earns income in India through capital gains from the sources such as mutual funds, property rent, investments in mutual shares and term deposits, and such income exceeds the basic exemption limit defined in the Income Tax Act, the NRI becomes liable to file tax returns.

On the income earned by the NRIs through the sources based in India, TDS is levied at the highest rate on the income earned through capital gains from mutual funds, term deposits and shares. Often, the TDS deduction negates the need for filing tax returns. On the other hand, it may also happen that the total TDS exceeds the tax liability of the NRI. This makes filing tax returns the only way to claim tax refunds.      

Income Tax Rules for NRIs

Income tax rules significantly differ from the rules that are applicable to Indian residents. Some of the important rules applicable to the NRIs are as follows:

  1. Tax slabs for the NRIs are based only on income and not on the basis of gender, age etc.
  2. TDS is levied on all the incomes earned by the NRIs irrespective of any threshold value.
  3. A little tax deduction is not applicable on the investment income except under specific situations.
  4. Filing tax returns is not mandatory for NRIs if their income is subject to clause 115G of the Income Tax Act.

Special provisions under Income Tax Rules for the NRIs:

1.     Computation of total income of NRIs (115D):

  • No deduction will be computed on the investment income of an NRI.
  • In case the assessee is an NRI, then no deduction is allowed on the Gross Total Income from investment and LTCG.
  • Additionally, suppose the assessee is an NRI and the income from investment and LTCG form only a part of the total gross income. In that case, such income shall be reduced, and the remaining amount becomes eligible for availing deductions under Chapter VI-A.  

2.     Tax on income from investment and LTCG (115E): where the total income of an NRI comprises:

  • Income from investments or LTCG of an asset other than shares in an Indian company, debentures issued by or deposits with a non-private Indian company, assets specified by the Central Government, any security of the Central Government or any asset specified by the Central Government.
    • Income made from LTCG

In the above cases, the tax payable by an NRI will be an aggregate of:

  • Income tax which shall be calculated at the rate of 20% on the investment income mentioned above  in 2.1
  • Income tax which shall be calculated at the rate of 10% on the LTCG made on the income mentioned above in 2.2

3.     Non-chargeable capital gains on transfer of forex assets in some instances (115F): This provision comprises the exceptions where the transfer of forex assets will not be taxed.

  • Suppose an NRI has invested part of the proceeds of capital gains incurred from the transfer of a forex asset into assets that have been specified by the Central Government within a period of 6 months, and the cost of buying the new asset is equivalent to the cost of the previous asset. In that case, capital gains will not be charged.
  • In case a forex asset is transferred or converted into money within 3 years from the date of acquiring such asset, the capital gains that were not charged from the transfer of the asset on the basis of the cost of the new asset will be a chargeable income.

4.     Non-filing of tax returns of income in specific cases (115G):  Tax returns are not required to be filed in the following cases by an NRI:

  • Where the total income earned during the previous year has been made through the income from LTCG and/or from investments
  • Where the TDS has already been deducted from the above-mentioned income

5.     Benefits accrued to an NRI after he/she becomes resident (115H): where an individual was an NRI in the previous year and thereafter became a resident in the subsequent year, he will be assessed differently under the tax laws. The resident is now required to declare the return of income from the investments made on forex assets. This practice will keep the income tax provisions intact until the assets are converted into money.

6.     Income tax provisions not applicable in NRI taxation (115I): This provision allows the NRI to choose whether they want their income to be considered from capital gains or investment. If the NRI does not opt out, their income from all sources shall be liable for taxation.           

Tax exemptions for NRIs

The following types of incomes are exempted from taxation for the NRIs:

1.     Income earned by NRIs through FCNR/NRE accounts.

2.     NRIs earn interest through government-notified bonds and government-issued savings certificates.

3.     Dividends are made through shares of domestic Indian companies.

4.     LTCG is made from equity-oriented mutual funds and listed equity shares.

5.     Capital gains can be exempted for the NRIs under the following conditions:

5.1 S.54: Where a property has been held for more than 3 years and then sold, and the proceeds or part of that are used to purchase another property or deposit the same in a PSU or other banks as per the Capital Gains Account Scheme, 1988.

5.2  S.54F: Where a property other than a house has been sold and capital gains are incurred, this exemption can be claimed on the construction or purchase of a new house in proportion to the proceeds spent on the new asset.

5.3 S. 54EC: Where the LTCG has been invested in bonds where redemption value can be claimed after 3 years and, they cannot be sold before such period. As per the 2014 budget, a maximum of Rupees 50 lakhs can be invested in a financial year.        

It must be remembered that the above exemptions are subject to the legislation prevalent at that time.

Tax deductions for NRIs

NRI taxation is stricter compared to the Indian residents. Following are the tax deductions that the NRIs can avail themselves:

1.    Deduction for NRIs under s. 80C:

1.1  Premium payment for life insurance- the premium to be paid must not be less than 10% of the assured, and the insured person should be either the NRI, spouse or offspring.

  1. For tuition fee payment- fee paid to any institution for the full-time education of any of the two children.
    1. Principal payment of the loan for the purchase of house property- principal payment of EMI for a loan taken for the purchase of house property along with stamp duty, registration fee and other expenses incurred in the transfer of property to an NRI shall be allowed for deductions.
    1. Deduction from House Property income: the maximum deduction claimed can be up to INR 2,00,000 for the interest paid on the home loan for a vacant house.
    1. Investments made in ULIP schemes: investments made in Unit Linked Insurance Plan for LIC Mutual Fund or ULIPs of UTI. 

2.    Deduction for NRIs under s. 80D:

  • Premiums are paid on the health insurance for the immediate family members.
    • A maximum deduction of up to INR 5000 for preventive health check-ups.

3.    Deduction for NRIs under s. 80E: deductions can be claimed for the interest paid on the education loan taken for self, children, spouse or a dependent student for an earlier period of 8 years or until the interest is paid. An important thing to be noted here is that there is no cap on the interest amount.

4.    Deduction for NRIs under s. 80G: Deductions can be claimed only when appropriate donations have been made under 80G of the Income Tax Act.

5.    Deduction for NRIs under s. 80TTA: deductions to INR 10,000 can be claimed on the interest earned from the savings bank account.

6.    LTCG made on a property held for over 36 months can be taxable, but an exemption can be availed in such cases if the proceeds earned from such sale are invested back into buying another house or specific bonds.   

Tax returns to be filed by NRIs.

As mentioned above, the taxable income of NRIs shall not include certain incomes made from investments and LTCG. These incomes have tax deducted at the source. However, if there are other sources of income apart from those mentioned before, they need to be declared and would be taxable per the prevailing tax rules.

There can be cases where the TDS levied on the income from investment and LTCG may amount to more than the applicable tax liability of the individual. In such cases, to have a tax refund or to claim exemption, filing of tax return becomes necessary.

NRIs have been provided with the option of filing their tax returns by visiting the online portal of the Income Tax Department, and it is considered the preferred way of filing tax returns.     

Conclusion 

Having gone through the various aspects of NRI taxation, it is advised that an individual first determine whether he/she is an NRI per the guidelines put forth under the FEMA, 1999. Thereafter, that NRI should take into account and apply all the above-mentioned deductions and exemptions applicable to the income earned by the NRI so that they do not end up paying an excess of income tax due on that person. An NRI should not use Form 15G and Form 15H to avoid TDS so that in case the TDS exceeds his/her tax liability, he/she would be required to file a tax return along with proof of income and investments to avail of the tax refund. An NRI should also be aware of instances of double taxation too. He/she should collect evidence of tax payment in India in order to avail of the benefits of the Double Taxation Avoidance Agreement signed between India and other nations. To get an overall picture of NRI taxation and the other compliances, you can choose the tax filing services offered by Enterslice.  

Read our Article: Double Taxation Avoidance Agreement for NRI

Prabhat Nigam

Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.

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