Taxation Guidelines for Non-Resident Indians (NRIs) in India

Key Takeaways:

1. Determining residency status is crucial for NRIs, as it impacts their tax obligations in India.
2. NRIs are required to file tax returns if their total annual income exceeds the basic exemption limit.
3. NRIs can use ITR 2 if they do not have any income from business and profession. If they do, they will have to use ITR 3.
4. Advance tax must be paid by NRIs if their tax liability exceeds Rs.10,000 in a financial year.
5. NRIs can opt for the old tax regime or the new regime with a lower tax rate, with specific exemptions and deductions available under each regime.
6. Understanding tax residency and Double Taxation Avoidance Agreement (DTAA) relief is important for NRIs with foreign income.

Taxation for Non-Resident Indians (NRIs) in India

Residency Status

Determining the residency status for taxation purposes is the first step in understanding the taxation that NRIs are subjected to in India. According to Section 6 (of Income Tax Act, 1961), an individual is considered a non-resident in the financial year if they do not satisfy both of the following conditions:

1. If they are in India for 182 days or more during the previous year, or
2. If they are in India for 60 days or more in the previous year and 365 days or more in four years immediately preceding the previous year.

For a person of Indian origin (PIO) who visits India during the year, or an Indian citizen who leaves the country in any previous year as a crew member or for employment, 60 days is substituted with 182 days. Additionally, as per the Finance Act, 2020, the period of 60 days is substituted with 120 days if an Indian citizen or a PIO whose total income, other than income from foreign sources, exceeds Rs.15 lakh in the previous year. Furthermore, according to a new Section 6(1A) (of Income Tax Act, 1961) in the Finance Act, 2020, an Indian citizen with a total Income of more than Rs.15 lakh (other than income from foreign sources) shall be deemed to be a resident if he is not liable to pay tax in any other country.

Taxable Income

The taxable income for NRIs includes:

1. Any salary received or salary for service provided in India.
2. Income from residential property in India (whether rented or vacant).
3. Any capital gains resulting from the transfer of property or assets in India.
4. Income from deposits like fixed deposits or interest on bank savings account in India.
5. Interest on NRO (non-resident ordinary) accounts. However, the interest on NRE (non-resident external) and FCNR (foreign currency non-resident) accounts will be tax-free.

Filing Tax Returns

NRIs are required to file tax returns if their total annual income is above the basic exemption limit of Rs.2.5 lakh. The last date for filing returns is 31 July of the relevant assessment year, but if an NRI is a working partner in a firm whose accounts need to be audited, then the due date is 30 September. NRIs are exempt from filing returns if their total income in the previous year consisted only of investment income or income by way of long-term capital gains, or both, and the tax deductible at source (TDS) under the provisions of Chapter XVII-B has been deducted from such income. However, if an NRI is investing in equity or mutual funds and there is TDS on gains, then for claiming a refund, they will need to file the returns.

ITR Forms

NRIs can use ITR 2 if they do not have any income from business and profession. If they do, they will have to use ITR 3.

Advance Tax

If an NRI’s tax liability exceeds Rs.10,000 in a financial year, they will have to pay advance tax. If they don’t do so, interest will be levied under Sections 234B (of Income Tax Act, 1961) and 234C.

Exemptions and Deductions

Under Section 115BAC (of Income Tax Act, 1961), NRIs can opt for the old tax regime or the new regime with a lower tax rate. Under the former, they can avail of exemptions such as Section 80C (of Income Tax Act, 1961) up to Rs.1.5 lakh, Section 80D (of Income Tax Act, 1961) (premium on medical insurance), Section 80E (of Income Tax Act, 1961) (interest on education loan), Section 80G (of Income Tax Act, 1961) (eligible donations), and Section 80TTA (of Income Tax Act, 1961) (interest on savings bank account). However, NRIs are not allowed any investment in certain schemes and are not eligible for certain exemptions.

Tax Paid Abroad

An NRI’s foreign income is generally not taxable in India. However, in some cases, where a person is resident in two or more countries, tax residency has to be established and DTAA (Double Taxation Avoidance Agreement) relief can be claimed if foreign income is being declared due to tax residency in India. Only a resident needs to offer his foreign income to tax and can set it off if tax has been paid abroad.

In conclusion, NRIs are subject to specific tax regulations in India, and understanding their residency status, taxable income, deductions, exemptions, and ITR forms is crucial for compliance with Indian tax laws.

FAQ

Q1: What is the basic exemption limit for NRIs to file tax returns in India?A1: NRIs are required to file tax returns if their total annual income exceeds the basic exemption limit of Rs.2.5 lakh.

Q2: Which ITR form should NRIs use if they have income from business and profession?

A2: NRIs should use ITR 3 if they have income from business and profession.

Q3: When should NRIs pay advance tax in India?

A3: NRIs must pay advance tax if their tax liability exceeds Rs.10,000 in a financial year.

Q4: Can NRIs claim exemptions and deductions under the new tax regime in India?

A4: Yes, NRIs can claim specific exemptions and deductions under the new tax regime, including Section 80C (of Income Tax Act, 1961), Section 80D (of Income Tax Act, 1961), Section 80E (of Income Tax Act, 1961), Section 80G (of Income Tax Act, 1961), and Section 80TTA (of Income Tax Act, 1961).