Income Tax for NRIs: Key Points to Consider

Non-Resident Indians (NRIs) play a significant role in the Indian economy through their investments, remittances, and property holdings. However, one of the challenges NRIs face is understanding their income tax obligations in India. As an NRI, you are subject to specific tax rules, which differ from those applicable to residents.

In this blog, we will explore the essential aspects of Income tax for NRIs, ensuring that you have a clear understanding of how taxation works for non-residents.

Who is Considered an NRI for Tax Purposes?

To determine your income tax liability in India, the first step is to identify your residential status. According to the Indian Income Tax Act, a person’s residency is based on the number of days spent in India during a financial year:

• You are considered an NRI if you have stayed in India for less than 182 days in a financial year.
• Alternatively, you may also be classified as an NRI if you have spent 60 days or more in the financial year and 365 days or more in the last four years.

If you meet these criteria, you qualify as an NRI and are only liable to pay tax on income earned in India, not on global income.

What Type of Income is Taxable for NRIs?

NRIs are taxed only on the income that arises or is accrued in India. This includes:

1. Income from Salary

If you are an NRI working outside India but receive a salary in India, that income is taxable in India. Similarly, if you render services in India while living abroad, your salary earned during that time is taxable.

2. Income from House Property

If you own property in India and earn rental income from it, that income is subject to Indian income tax laws. The rental income is taxed after allowing standard deductions such as maintenance costs, home loan interest (under Section 24), and property tax.

3. Income from Capital Gains

Any profits or gains made from the sale of property, shares, mutual funds, or other capital assets in India are taxable. For example:

• Short-term capital gains from the sale of shares are taxed at 15%.
• Long-term capital gains from the sale of property or assets held for more than two years are taxed at 20% with indexation benefits.

4. Income from Investments

Interest earned on savings accounts, fixed deposits, or bonds in India is subject to tax. For instance, interest from NRO (Non-Resident Ordinary) accounts is taxable, while interest from NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is tax-free.

5. Income from Business

If you run a business in India or have a share in a partnership firm, the income generated from these business activities is taxable in India.

Exemptions and Deductions Available for NRIs

NRIs can take advantage of several tax exemptions and deductions to lower their taxable income. However, the range of available deductions is narrower compared to resident Indians.

1. Section 80C

NRIs can claim deductions under Section 80C, up to a maximum limit of ₹1.5 lakh per financial year. Investments eligible under this section include:

• Life insurance premiums
• Principal repayment on a home loan
• Investment in Public Provident Fund (PPF)
• National Savings Certificate (NSC)

2. Section 80D

Health insurance premiums paid for self, spouse, or dependent children are deductible under Section 80D. The deduction limit is ₹25,000 for policies covering individuals below 60 years and ₹50,000 for policies covering senior citizens.

3. Section 24

NRIs can claim deductions on the interest paid on a home loan for a property in India. For a self-occupied property, the maximum deduction allowed is ₹2 lakh per year.

4. Section 80G

Donations made to specified charitable institutions or relief funds in India can be deducted under Section 80G.

Tax Filing Requirements for NRIs

NRIs are required to file an income tax return (ITR) in India if their income exceeds the basic exemption limit of ₹2.5 lakh in a financial year. Filing an ITR is crucial, even if you have already paid tax via Tax Deducted at Source (TDS), as it allows you to claim refunds or deductions you may be eligible for.

Double Taxation and DTAA Benefits

One of the significant concerns for NRIs is the risk of double taxation—where income is taxed both in India and in the country of residence. To address this issue, India has signed Double Taxation Avoidance Agreements (DTAAs) with several countries. Under a DTAA, NRIs can either claim a tax credit or receive an exemption on income that has already been taxed in India or the country of residence.

For example, if you earn interest on deposits in India and it is taxed, you may be able to claim a tax credit in your resident country, depending on the terms of the DTAA.

TDS for NRIs

For most income types, such as rent, dividends, or interest, tax is deducted at source (TDS) before the income is credited to the NRI’s account. The rates of TDS are different for various forms of income:

• TDS on rent paid to NRIs is typically 30%.
• TDS on short-term capital gains from shares is 15%.
• TDS on interest from NRO accounts is 30%.

NRIs should ensure they file their tax returns accurately, as excess TDS can be claimed back as a refund by filing an ITR.

Special Investment Accounts for NRIs

The Indian government allows NRIs to open specific types of bank accounts that come with tax benefits:

1. NRE Account

An NRE (Non-Resident External) account allows NRIs to repatriate funds earned abroad to India without any taxation on interest. The principal and interest amounts are fully repatriable.

2. NRO Account

NRIs can open an NRO (Non-Resident Ordinary) account to manage income earned in India, such as rent, dividends, or pension. Interest earned on this account is subject to tax at 30%, and the principal is partially repatriable.

3. FCNR Account

The FCNR (Foreign Currency Non-Resident) account is a term deposit account in foreign currency. Interest earned on this account is tax-free, and there is no exchange rate risk since the deposit is held in a foreign currency.

Conclusion

Understanding income tax laws is essential for NRIs to effectively manage their income, investments, and tax obligations in India. While NRIs are subject to taxes on income earned in India, there are numerous deductions, exemptions, and benefits—such as the DTAA—that can minimize the tax burden. Ensuring compliance with Indian tax laws while optimizing tax savings is a balancing act that requires careful planning.