When it comes to taxation, the rules can get complex, especially for Non-Resident Indians (NRIs). As an NRI, understanding the income tax regulations that apply to you is crucial for both compliance and optimizing your tax liability. In this blog, we’ll unravel the essentials of income tax for NRIs, covering the key aspects and guidelines you need to know to manage your finances effectively.
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Residential Status
The first step in understanding your tax obligations as an NRI is to determine your residential status. The Indian Income Tax Act classifies individuals into three categories: Resident, Non-Resident, and Resident but Not Ordinarily Resident. NRIs typically fall under the Non-Resident category, which means they are subject to different tax rules than Indian residents.
However, it is important to determine the residential status for tax purposes in India, which depends on the physical presence of an individual in the country.
The rules are as follows:
Resident
An individual is considered a resident if they are in India for either of the following periods:
- at least 182 days in a financial year (April to March) or
- 60 days in the financial year and a total of more than 365 days in the four preceding years combined.
However, in case an individual has left India for employment or as a member of the crew of an Indian ship, the 2nd condition of 60 days and 365 days in the previous 4 years does not apply. He will be considered as resident only if he is in India for more than 182 days in the financial year.
Also, the second criteria has been modified by the Finance Act of 2020 to take into account visits from Indian residents who are living abroad, earning more than Rs. 15 lakh per year in income (other than income from foreign sources), and staying 120 days (instead of 60 days).
Residents are further classified as Resident and Ordinarily Resident and Resident – Not ordinarily resident. This determination has an implication on the incomes that will be considered taxable in India.
Resident but Not Ordinarily Resident (RNOR)
A person is considered as Resident but Not Ordinarily Resident, if he as satisfied either of the condition of being resident, but has not been resident (not satisfied the conditions of being a resident) for 9 out of 10 previous years and has been in India for 729 days or less during the last 7 financial years.
Resident and Ordinarily Resident (R&OR)
If an individual is considered as resident for and is not considered as Not Ordinarily resident based on above mentioned conditions, he would be considered as Resident and Ordinarily resident
Non-Resident (NRI)
If an individual doesn’t meet the criteria for resident status, they are treated as an NRI.
Please note that the NRI category used commonly and NRI for Income tax purposes may be different.
Deemed residency (introduced by the Finance Act 2020)
‘Deemed residence’ was introduced in the Finance Act, 2020. In accordance with this, Indian citizens who earn more than Rs 15 lakh, other than from foreign sources, are regarded as residents of India if they are not required to pay taxes in any other nation.
With effect from the 2020–21 fiscal year, they will be classed as RNOR. The purpose of this amendment is to tax the income of Indian people who are not subject to taxation in any country.
Taxable Income for NRIs
As an NRI, you are liable to pay tax in India on certain types of income, such as:
Income Earned or Received in India
Any income earned or received in India, including salary, rent, capital gains, or interest, is subject to taxation in India.
Income from Specific Sources
NRIs may have income from Indian sources, like rental income, dividends from Indian companies, or gains from the sale of assets in India. Such income is taxable in India.
Business Income
If you operate a business in India or have a source of income related to a business here, it may be taxable in India.
Income from house property
Income from a property that is situated in India is taxable in the hands of an NRI. The calculation of such income shall be in the same manner as applicable to a resident.
Exemptions and Deductions
NRIs can benefit from various exemptions and deductions under the Income Tax Act, such as deductions for certain investments, like life insurance premiums, Provident Fund contributions, and contributions to specific schemes like the National Pension System (NPS). These deductions can help reduce your taxable income.
Filing Income Tax Returns
NRIs are required to file income tax returns in India if their taxable income exceeds the specified threshold limit (currently Rs. 2.5 Lakhs in the old regime and Rs. 3 Lakh in the new regime). Filing returns is crucial to claim any tax refunds and avoid penalties for non-compliance.
Taxation of NRI Investments
Taxation on investments by NRIs in India varies depending on the type of investment:
Fixed Deposits: Interest income from NRI Fixed Deposits is taxable in India. TDS (Tax Deducted at Source) is applicable, and the rate may vary based on DTAA agreements.
Mutual Funds: Capital gains from the sale of equity mutual funds are subject to a 15% tax in case of short term and 10% (over and above gains of Rs. 1 Lakh) on long term capital gains . Debt mutual funds have a different tax structure, with short-term and long-term capital gains taxed at varying rates as per the applicable tax slab for the individual.
Stock Market Investments: NRIs can invest in Indian stocks, and capital gains tax rates apply based on the holding period. Short-term gains (less than 1 year) are taxed at 15%, while long-term gains are taxed at 10% without indexation (over and above gains of Rs. 1 Lakhs).
Double Taxation Avoidance Agreements (DTAA)
India has signed DTAA agreements with several countries to prevent double taxation of income. NRIs can take advantage of these agreements to reduce their tax liability in both India and their country of residence. It’s essential to understand the provisions of the DTAA between India and your resident country.
Conclusion
Navigating the income tax regulations as an NRI can be challenging, but with the right knowledge and guidance, you can ensure compliance and optimize your tax liability. Staying informed about the latest updates in tax laws and seeking professional advice when needed is essential for managing your finances effectively.
At 1 Finance, we are committed to providing you with comprehensive information on tax planning as a part of holistic financial planning. Stay tuned for more insights on taxation, investments, and financial planning to secure your financial future.
Remember, being aware of the tax rules for NRIs is not just about minimizing your tax liability but also about making informed financial decisions that align with your long-term goals. If you have specific questions or need assistance with NRI taxation, don’t hesitate to reach out to us.
