Income Tax for NRIs: Taxable Income & Deductions

The Indian Income Tax Act of 1961 also applies to anyone generating income outside their own country besides residents. The income tax regulations and benefits available to them differ significantly from those available to resident Indians.

Who is a Non- Resident?

“Non-Resident” is a person who has not been residing in India for a specified period of time. The Residential Status of an individual in a given year determines whether the individual is Resident or Non-Resident for the year.

How do I determine my Residential Status?

Residential status of an individual is determined on the basis of the number of days an individual has physically stayed in India. Residential status has nothing to do with the nationality or domicile of an individual. It may also happen that an Indian, who is citizen of India, may be a non-resident for Income Tax purposes in a particular year and an American citizen may be resident in India for Income Tax purposes in a particular year.

Types of Non-Resident

Under Income Tax Act 1961, non-resident is broadly classified under the following three heads:

• Non-Resident Indian/Person of Indian Origin
• Foreign Company
• Other Non-Resident Person

Salient Features

• Residential status is to be determined for each previous year i.e. the financial year under consideration. Residential status of assessment year is not relevant. Also you may be a resident in a previous year and non-resident in another. Hence it has to be determined for each previous year.
• It is very much possible to have dual residential status in a previous year, i.e. you may be a resident in India in the previous year and also resident in some other country say United States. It may happen because of different set of rules laid down by countries for determination of Residential status.

Who is Non Resident Indian

“Non-Resident Indian (NRI)” is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India. In India Non-Resident Indian is mainly governed by two Acts-

• Income Tax Act, 1961 &
• Foreign Exchange and Management Act, 1999(FEMA).

The term “Non-Resident Indian” is defined differently under both the Acts, however one needs to understand that for the purposes of Income-tax, the FEMA Act holds no relevance and you just need to confirm to the provisions of Income tax Act 1961.

Person of Indian origin (PIO) - A person is said to be of Indian origin if he, or any of his parents or any of his grandparents were born in undivided India.

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How to determine Residential Status

So as defined above, “a non-resident is a person who is not resident in India”, therefore we need to understand who is considered as Resident in India.

You are considered as “Resident in India” for a financial year

• If you were in India for a period of 182 days or more during the Financial year; OR
• If you have stayed in India for 60 days in the financial year and for a total of 365 days in the preceding 4 years.

There are certain exceptions to the above condition of 60 Days:

• If you are an Indian citizen who has left India in the Financial year as a crew member of an Indian ship or for the purposes of employment abroad; or
• If you are a PIO or a citizen of India who comes on a visit to India;

Then the second condition of 60 Days and 365 days will not apply to you, which means that in the above situations you will be considered resident in India if and only if you were present in India in the relevant financial year for a period of 182 days or more.

Therefore, you are a Non-Resident if you do not fulfil any of the above conditions.

Do NRI’s have to pay taxes in India for income earned abroad?

The answer is YES. After you have determined your residential status, the next step is to identify income taxable in India as per your residential status.

Simply put,

• For Resident Individuals: Your Global income is taxable in India i.e. income earned whether in India or outside India is taxable in India.
• For Non-Resident Indians: Only income earned or accrued in India or deemed to be so is taxable in India. Therefore, your income from any country besides India is not taxable in India.

What is Income Earned or Accrued in India?

India follows “source rule” basis of taxation, i.e. all the income which accrue or arises from or through a source in India is taxable in India. Therefore, identifying the source of Income is of utmost importance. If it is established that the income has its source in India, whether direct or indirect, such income would become taxable in India. List of such incomes are:

• Any salary received in India
• Any salary received for services rendered in India
• Rental income (if any) received from a property situated in India
• Capital gain (if any) arising on account of transfer of property or asset in India
• Any income from deposits in India such as interest on fixed deposits
• Any interest received on savings bank account, etc.

Which Income are Taxable for NRI in India

Income from Salary: Your salary income will be taxed in India under two situations.

Situation A: If it is received in India- If you are an NRI and you have received any salary in India directly into an Indian Account or somebody else has received it in your behalf in India, then such salary income would become taxable in India.

Situation B: If it is earned in India- Your income is said to be earned in India if it is earned for services rendered in India. Therefore, if you are a NRI and your salary earned is for the services rendered in India, it shall be taxed in India.

You will be taxed at the slab rate to which your income belongs to.

Any Income from a property which is situated in India either rented or lying vacant is taxable income for an NRI. The calculation of such income shall be in the same manner as for a resident.

An NRI, like resident is allowed

• A standard deduction of 30%,
• To deduct property taxes,
• To take benefit of interest deduction if there is a home loan, and
• To claim principal repayment of loan as deduction under section 80C. Also stamp duty and registration charges paid on purchase of a property can also be claimed under section 80C.

It is important to note that even if the income is received directly into the non-residents account outside India or in his NRE account, still the income would be liable to tax in India as the source of income i.e. the property is situated in India.

Read our blog- Tax Implications on House Property to know more.

NOTE: Where a resident is required to pay rental to a Non-Resident Indian, a TDS at the rate of 30% is required to be deducted before transferring the money to the Non-resident’s account. A person making any payment to Non-resident is required to submit Form 15CA/15CB online to the Income tax department.

Income from Other Sources: Indian sourced income in the form of interest on fixed deposits and saving accounts is taxable in India. Interest received on NRE and FCNR account is tax free, whereas interest received on NRO account is fully taxable.

Income from Capital Gains: Any capital gain arising on transfer of capital asset situated in India shall be taxable in India. Capital Gains on investments in India in shares, securities shall also be taxable in India.

If you sell a capital asset being a house property, then
A. TDS of 20 per cent is applicable on Long-term capital gains.
B. TDS of 30 per cent is applicable on Short-term capital gains.

The buyer even if he is an individual is responsible for deducting tax at source and paying it to the Government. Since the onus of deducting tax on payments made to non-resident is on the buyer, he must get a Tax Deduction Account number (TAN) and issue a TDS certificate for the same.

Like residents, even Non-Resident Indians are allowed to claim exemptions under section 54, section 54EC and section 54F on long-term capital gains from sale of a house property. The long-term capital gain can be invested under:

• Relevant proofs should be shown to the buyer so that no TDS is deducted by him.
• In case, the buyer deducts TDS, the benefit of these exemptions can be availed at the time of return filing by NRI and refunds of such TDS can be claimed.

Specific Provisions related to Investment Income of NRI

As an NRI you can avail of a special provision related to investment income. An NRI is taxed at 20% when he invests in certain assets in India. All the more, he/she is not required to file an income tax return if his/her income comprises only special investment income and TDS on the same has been deducted.

What are the investments that qualify for special treatment?

The income derived from the following assets in India acquired in foreign currency shall qualify for special treatment:

• Shares in Indian Companies(Public or Private company)
• Debentures, only issued by a publicly-listed Indian company (not private)
• Deposits with banks and public companies
• Any security of the Central Government

No deduction under Section 80 will be allowed while calculating investment income.

Special provision related to long-term capital gains

On long term capital gain arising from the transfer or sale of these assets, no benefit of indexation and deduction under Section 80 is allowed.

But you can still save your taxes, by availing exemptions on the gains earned under Section 115F. Under this, you are required to reinvest the net consideration received within the period of six months from the date of sale of the original asset, into the following assets:

• Shares in an Indian company
• Debentures of an Indian public company
• Deposits with banks and Indian public companies
• Central Government securities
• NSC VI and VII issues

The entire capital gain would be exempt if the whole of the net consideration is re-invested. However, if the cost of new asset is less than the consideration, then the capital gain will be exempt proportionately, i.e.

	         Total Capital Gain  X         Cost of New Asset  
                           -----------------------------
                              Total net consideration		

Exemption=

NOTE: The exemption will be withdrawn if the new asset purchased is transferred or converted into money within a period of 3 years from the date of purchase.
The NRI can at any time withdraw from the special provision and in such a case the investment income and LTCG will be charged to tax under the usual provisions of the Income Tax Act.

Deductions Available to NRI

Of the total deductions available to a resident individual, few are not available to non-resident individuals. A brief list of deductions available or not to Non-Residents is shown below:

A. Deduction under Section 80C:

The maximum deduction allowed under the section is Rs.1,50,000. The deductions allowed to NRIs under the section are:

• Life Insurance Premium Payments-

  Deduction is available where the policy has been purchased in NRI’s name or in the name of his/her spouse or any child’s name (regardless of their dependencies and age). The premium must be less than 10% of the sum assured.

• Tuition Fee Payment-

  NRI can claim a deduction of tuition fees paid to any school, college or any universities situated in India for the purpose of full-time education of their children.

• Principal repayment of home loans-

  Like Residents, NRIs can also claim a deduction for principal repayment of house property loans borrowed for the purposes of constructing or purchasing a residential house property. Other expenses such as stamp duty charges, registration fees and others incurred for the purposes of acquiring such property also qualify for deduction under the section.

• Unit Linked Insurance Plan (ULIP)-

  Investment in ULIPs is also allowed as a deduction to NRI’. Investment in ULIPs offers twin benefits of insurance and investment under a single integrated plan. The lock-in period is of 5 years. Premium paid towards own, spouse and children is eligible for deduction.

• Equity Linked Tax Saving Scheme (ELSS)-

Deduction under Section 80D:

NRIs can claim deduction for premium paid for health insurance of themselves and family or parents in India.

The three possible situations and tax benefits for each is shown below:

Deduction under Section 80E:

Section 80E allows NRIs to claim a deduction of interest paid on an education loan. This loan may have been taken for higher education for the NRI, or NRI's spouse or children or for a student for whom the NRI is a legal guardian. There is no limit on the amount which can be claimed as a deduction under this section. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier. No deduction is allowed on the principal repayment of the loan.

Deduction under Section 80G:

If eligible donations have been made as per section 80G of the income tax act, deduction is allowed to NRIs.

NRI is taxed at which income tax slab rate

Tax Slabs of NRI for AY 2022-23:

Unlike residents for who tax rates are classified on the basis of age, no such classification is available for Non-Residents.

Hence, for Non Residents whether aged
Below 60 Years
Above 60 - 80 Years and
Above 80 Years
All are taxed uniformly.

The tax slab rates for Non-resident Individuals are:

Surcharge Rates for NRI's :

• Surcharge Rate is 10% of income tax payable on total income exceeding Rs 50 lakhs but up to Rs 1crore.
• Surcharge Rate is 15% of income tax payable on total income exceeding Rs 1crore but up to Rs 2crore.
• Surcharge Rate is 25% of income tax payable on total income exceeding Rs 2crore but up to Rs 5crore.
• Surcharge Rate is 37% of income tax payable on total income exceeding Rs 5crore.
• The surcharge is subject to marginal relief and is applicable to the income of an NRI as well.

Rebate u/s 87A:

• The rebate under section 87A of a maximum of Rs.12,500 is not allowed to a Non-resident.

Benefits of basic exemption limit:

• As a Non-resident, you still get the benefit of the basic exemption limit of Rs. 2,50,000 from your total income. However,
• If your total income in India consists of only short term capital gains or long-term capital gains, then the benefit of the basic exemption limit is not available in respect of such gains.

Calculate your tax liability using our Income Tax Calculator.

When is an NRI required to file his Income Tax Return?

NRIs are required to file a return of income if they have taxable income in India.

In the following situations an NRI is required to file Income Tax Return in India:

• If your Gross Total Income before allowing any deductions under section 80 is more than Rs.2,50,000.
• If you are seeking a refund from the department.
• If you want to have the benefit of carrying forward of losses

Due Date for filing Income Tax Return

For Non-Resident Individuals, 31st July of the assessment year is the due date for filing a return of income tax in India.

But if the NRI is a working partner of a firm whose accounts are required to be audited then the due date becomes 30th September.

Whether an NRI is required to pay Advance Tax?

Yes. Even Non-Resident Indians come under the ambit of Advance tax. Advance tax is paid in the financial year/previous year on the basis of estimated tax liability for the year. If the tax liability is higher than Rs.10,000 then the assessee is required to pay his advance tax liability in four instalments as mentioned in the Act.

In case of failure to pay advance tax on the specified due dates or on payment of less advance tax than the actual tax liability, interest under Section 234B & Section 234C is levied on the taxpayer.

The due dates and the amount payable of advance tax are:

To know more about Advance tax- Read our blog Advance Tax-What?Why?When?

Which ITR form is applicable on the NRI assessee?

"Till AY 2017-18 Non-Resident Individual (NRI) Assessee could file ITR 1 for their incomes earned or accrued in India. From the FY 2018-19 and 2019-20 amendment has been made in the eligibility to file form ITR 1. Now, ITR 1 can only be filed by Resident Individuals and is not available for non ordinarily residents.

Which means a Non Resident Individual (NRI) has an option to file either of these two ITR forms ITR 2 or

• ITR 3

ITR 2 can be filed in case the NRI is having income other than income from Business and profession. Such other income can include income from rent received in India, interest income received, capital gains arising from share trading or sale of property located in India etc

ITR 3 is required to be filed in case NRI is receiving any income in India from Business or Professional activity being carried out in India.