Everything You Need to Know About NRI Taxation

Navigating the understanding of Non-Resident Indian (NRI) taxation can be a daunting task. In this blog, we delve deep into the world of NRI taxation, shedding light on key concepts, rules, and strategies to help NRIs make informed financial decisions and ensure compliance with India's tax laws.

Who is a Non-Resident in India?

A Non-Resident Indian (NRI) refers to an individual of Indian origin who resides outside of India. In terms of taxation, the Income Tax Act of 1961 outlines distinct tax regulations for Indian residents and NRIs.

The Act establishes criteria to determine an individual's residence status for tax purposes, with those of Indian origin being considered residents if they live in India for a specified period. Essentially, the Act offers specific guidelines to differentiate between residents and NRIs for taxation matters.

What is an NRI Tax?

"NRI tax" refers to the tax implications and obligations that apply to Non-Resident Indians (NRIs) regarding their income, investments, and financial assets in India. NRIs are individuals of Indian origin or Indian citizens who live abroad for employment, business, or other purposes. The taxation of NRIs is governed by the Income Tax Act of India.

Income Tax for NRIs

Understanding the tax obligations of an NRI (Non-Resident Indian) in India is crucial and is determined by specific criteria set out in the Foreign Exchange Management Act (FEMA). To be classified as an NRI, an individual of Indian origin must have spent a certain number of days abroad, maintaining a significant period of absence from India.

Typically, income earned by an NRI outside of India isn't subject to taxation within the country. However, when an NRI generates income in India, such as through capital gains from investments in shares, mutual funds, rental income from properties, or term deposits, it becomes taxable. The threshold for taxation is defined in the Income Tax Act, and if the income surpasses this basic exemption limit, the NRI is obligated to file a tax return.

Now, when we focus on the taxation of NRIs for income sourced in India, Tax Deducted at Source (TDS) is a significant factor. TDS is applied at the highest rates to interest earned on capital gains from term deposits, shares, and mutual funds. In many cases, the TDS deducted covers the tax liability entirely, alleviating the need for tax return filing.

However, there's a situation to consider. If the total TDS deducted exceeds the NRI's basic tax liability, it creates an opportunity for the NRI to file a tax return. Doing so enables them to claim a tax refund, effectively rectifying any overpayment.

NRI Tax Slab and Rates

As per the announcement of the finance minister Nirmala Seetharam in Union Budget 2023, the income tax rebate has been thresholded to Rs. 7 lakh from the previous limit of Rs. 5 lakh in the new tax regime. Additionally, there have been adjustments in the tax slabs, and the surcharge rate on income exceeding Rs. 5 crores has been reduced from 37% to 25%.

These are the revised income tax slabs for the default tax regime for the fiscal year 2023-24 in India, indicating the applicable tax rates for different income ranges.

Taxation Rules for NRI

For NRIs, income tax in India is primarily determined by the nature of their income, without any gender or age distinctions. Tax Deducted at Source (TDS) applies to all NRI incomes, irrespective of a threshold value. There are generally no nominal deductions for investment income unless specific situations apply.

NRIs typically don't need to file tax returns if their income falls under Section 115G of the Income Tax Act. Special provisions for NRIs are defined under various sections of the Act:

• Computation of Tax (Section 115D): No deductions are allowed for investment income of NRIs. Deductions may be available for other income under Chapter VI-A, depending on its composition.
• Tax on Investment and Long-Term Capital Gains (Section 115E): Tax rates for NRIs differ based on the nature of income. Income from certain sources is taxed at 20%, while long-term capital gains are taxed at 10%. The remaining income may be eligible for deductions.
• Non-Chargeable Capital Gains (Section 115F): Exceptions where capital gains from foreign exchange assets are not taxed include reinvestment within 6 months or conversion into money within 3 years.
• Non-Filing of Returns (Section 115G): NRIs need not file returns if their income is solely from investment and long-term capital gains, and TDS has been deducted.
• Benefits upon Becoming a Resident (Section 115H): If an NRI becomes a resident, the return of income from foreign exchange assets should be declared to maintain taxation provisions until conversion into money.
• Non-Application of Provisions (Section 115I): NRIs can opt to have their income considered as investment or capital gains. If not chosen, all income from Indian sources is taxable.

These rules are subject to change by the Central Government and the Income Tax Department of India.

Tax Exemptions for NRI

The following tax exemptions exemplify the privileges enjoyed by Non-Resident Indians (NRIs). These exemptions encompass various aspects such as income earned abroad, investments, and specific financial transactions, showcasing the preferential tax treatment that NRIs receive, making it an attractive status for those residing outside India.

Interest earned on NRE/FCNR Accounts: Interest income generated from Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is tax-exempt for NRIs (Non-Resident Indians).

Interest earned on Government Savings Certificates and Notified Bonds: Interest income from government-issued savings certificates and specified bonds is exempt from income tax.

Dividends from Domestic Indian Companies: Dividends received from shares of domestic Indian companies are tax-free in the hands of the recipient.

Long-Term Capital Gains from Listed Equity Shares and Equity-Oriented Mutual Funds: Gains from the sale of listed equity shares and equity-oriented mutual funds held for more than one year are exempt from capital gains tax.

To further minimize tax liability, there are specific sections and conditions under the Income Tax Act that allow for exemptions of capital gains:

1. Section 54: This section provides an exemption when a residential property held for three or more years is sold, and the proceeds (or a part of them) are used to either purchase another property or deposited in a Public Sector Undertaking (PSU) or other banks under the Capital Gains Account Scheme of 1988.
2. Section 54F: If a property other than a residential house is sold, and capital gains are realized, this section allows for an exemption. The exemption is applicable to the extent of the sale proceeds utilized for constructing or purchasing a new residential house.
3. Section 54EC: Under this section, long-term capital gains can be exempted by investing in specified bonds, such as those issued by the National Highway Authority of India and Rural Electrification Corporation. These bonds have a redemption period of three years and should not be sold before maturity. As of the 2014 budget, an individual can invest a maximum of INR 50 lakhs in a financial year to avail of this exemption.

Tax Deductions for NRI

Taxation for Non-Resident Indians (NRIs) is subject to specific rules and deductions, which are crucial to understanding their financial obligations in India. Key deductions for NRIs encompass major sections of the Income Tax Act, providing them with opportunities to optimize their tax liabilities and encourage investments in India's economy.

These deductions are designed to facilitate a smoother tax process for NRIs while promoting economic engagement and growth in the country.

a. Section 80C Deductions: NRIs can claim deductions under Section 80C for:

• Premium paid for life insurance (premium < 10% of sum assured).
• Tuition fees for up to two children's full-time education in India.
• Principal repayment on a home loan, along with stamp duty, registration fees, and related expenses for property transfer.

b. Investment in ULIPs: NRIs can invest in specific Unit Linked Insurance Plans (ULIPs) to avail tax benefits.

c. Deductions from House Property Income: NRIs can claim deductions of up to INR 2,00,000 on interest paid for vacant house property.

d. Section 80D Deductions: NRIs can avail of deductions under section 80D for health insurance premiums for immediate family members and dependents. Up to INR 5,000 for preventive health check-ups.

e. Section 80E Deductions: NRIs can deduct the full interest amount paid on education loans for self, spouse, children, or dependent students without any cap, for a maximum of 8 years or until the interest is cleared.

f. Section 80G Deductions: Deductions under Section 80G are applicable if NRIs make eligible donations according to the Income Tax Act.

g. Section 80TTA Deductions: NRIs can claim deductions of up to INR 10,000 on interest earned from savings bank accounts.

Regarding long-term capital gains from property held for over 36 months, NRIs can potentially be taxed. However, they can claim exemptions by reinvesting the sale proceeds in another house property or specific bonds. If the new bonds or property value is less than the proceeds, they can still avail partial exemptions. These tax provisions aim to facilitate tax planning and reduce the overall tax liability for NRIs.

Tax Returns for NRI

As mentioned earlier, NRIs enjoy certain exemptions on income from investments and long-term capital gains, where taxes are deducted at source (TDS). However, if an NRI has additional sources of income apart from these, they must declare and pay taxes according to the prevailing tax regulations.

In some cases, the TDS deducted from investment income and long-term capital gains may exceed the individual's actual tax liability. To claim a tax refund or seek exemptions, it becomes essential to file a tax return.

NRIs have the convenience of using the online portal provided by the Income Tax Department of India to file their tax returns. This method is highly recommended and efficient. It allows NRIs to accurately report their income, claim eligible deductions, and ensure compliance with Indian tax laws.

Filing tax returns is not only a legal requirement but also a way for NRIs to manage their tax liabilities effectively and receive any rightful refunds.

Benefits of NRI Tax

Non-resident Indians (NRIs) can unlock a range of benefits through their engagement with NRI taxation. These benefits are pivotal in ensuring financial security and legal compliance for individuals residing abroad while maintaining ties with India. In this blog, here are some of the crucial advantages that come with NRI taxation.

• Lower Tax Liability: NRIs often enjoy a lower tax liability in India compared to resident Indians, especially on income earned abroad.
• Tax Exemptions: Certain types of income, such as income from foreign sources, are often exempt from Indian taxation for NRIs.
• Tax Deductions: NRIs can claim tax deductions on eligible investments and expenses in India, such as deductions for housing loans, insurance premiums, and more.
• No Wealth Tax: NRIs are not subject to wealth tax in India, which is levied on the net wealth of resident Indians.
• Avoiding Double Taxation: NRIs can benefit from Double Taxation Avoidance Agreements (DTAA) that India has with various countries. These agreements help prevent double taxation on the same income in both the home country and India.
• NRE/NRO Accounts: NRIs can maintain NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts to manage their income and finances more efficiently.
• Capital Gains Tax: NRIs may have favorable tax rates on capital gains, depending on the type of asset and the holding period.
• Tax Credits: NRIs can claim foreign tax credits in India for taxes paid abroad, further reducing their tax liability.
• Repatriation: NRIs can repatriate both principal and interest earned on certain investments and assets held in India, subject to certain conditions and limits.
• Easier Compliance: NRIs have simplified income tax return filing procedures, making it easier to fulfill their tax obligations.