Income Tax for NRIs: Tax Exemptions & Deductions in India

Who is Non-Resident Indian?

NRI definition as per Income Tax Act, a Non-resident Indian (NRI) is someone who isn’t physically present in India enough to be considered a resident for tax purposes. This is determined by an individual stay in India during a financial year (182 days or more makes him a resident) or over the past four years (60 days or more in a year and 365 days or more total). There’s an exception for Indian citizens who/PIOs abroad who are only residents if they stay in India for 182 days or more in a year.

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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 a Resident in India.

You are considered a “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 fulfill any of the above conditions.

Resident but Not Ordinarily Resident (RNOR)

Individuals are considered RNOR upon meeting the following conditions -

• If you have been a non-resident in India for 9 years out of 10 years preceding the previous year.
• If you have stayed in India for 729 days or less in the 7 years preceding the previous year.

Any Indian citizen or PIO visiting India can be called an RNOR as per the conditions -

• Total income apart from foreign income is more than 15 lakh.
• The individual has stayed in India for more than 120 days but less than 182 days in the previous year.
• An individual has stayed in India for 365 days or more in the 4 years preceding the previous year.

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Do NRI Have to File Income Tax Returns in India?

Yes, an NRI has to file an income tax return in India on income earned in India. NRIs have to pay tax on income that accrues or arises in India. NRIs also need to pay tax on income that is deemed to accrue or arise in India. Money received or deemed to be received in India is taxable. It's essential for NRIs to comply with tax regulations in India, and seeking assistance from tax experts can certainly simplify the process.

NRIs are taxed on specific incomes earned in India:

• Salary earned in India
• Any income received in India
• Revenue from the sale or rent of property in India
• Income earned outside India but received in India

Tax2win tax expert can simplify the tax filing process for NRIs and ensure compliance with relevant regulations. Whether it's understanding your tax obligations, maximizing deductions, or resolving tax-related queries, professional assistance can be invaluable. You can connect with our tax experts via call/whatsapp at 9116684449.

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What is Income Earned or Accrued in India?

India follows the “source rule” basis of taxation, i.e., all the income that accrues 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. A 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 the savings bank account, etc.

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How are NRI taxed?

If the annual income exceeds the basic exemption limit of Rs. 2.5 lakh, it's mandatory to file tax returns, whether you're an NRI (Non-Resident Indian) or a resident. Typically, the deadline for filing returns is July 31 of the relevant assessment year.

Further, for the following income, NRI is taxed in India:-

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Income from Salary for NRI:

Your NRI 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 on 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 an 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.

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Income from House Property:

Any income from a property situated in India, either rented or lying vacant, is taxable income for an NRI.

• 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 the loan as a deduction under section 80C. Also, stamp duty and registration charges paid on the 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-resident's 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.

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 a non-resident is required to submit Form 15CA/15CB online to the Income tax department.

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Income from Other Sources:

Indian-sourced income in the form of interest on fixed deposits and savings accounts that are held in Indian bank accounts is taxable in India. Interest received on NRE and FCNR accounts is tax-free, whereas interest received on NRO accounts is fully taxable.

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Income from Capital Gains:

Any capital gain arising on the transfer of capital assets situated in India shall be taxable in India. Capital Gains on investments in shares and securities shall also be taxable in India.

If you sell a capital asset, a house property, then
A. TDS of 20 percent is applicable on Long-term capital gains.
B. TDS of 30 percent 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-residents 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 the sale of a house property. The long-term capital gain can be invested under:

NOTE:

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.

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Rental Payments to an NRI

• A tenant paying rent to an NRI owner is required to deduct TDS at 30% while making the payment, whether to an Indian account or to an NRI account.
• The TDS deductor has to submit Form 15CA prepared and submit it online to the Income Tax Department.
• In some cases, the tenant is also required to furnish Form 15CB, which is a CA-certified form. Form- 15CB is not required in cases where the remittance is less than Rs.5,00,000 in a year and if the AO orders a lower deduction of TDS or if the transaction falls under Rule 37BB of the Income Tax Act.

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Do NRIs income earned abroad taxable in India?

No, in the case of non-resident income that accrues or arises outside India would not be taxable in India. Only income earned or received in India or income deemed to be earned in India is taxable for NRIs in India. This might include income from assets or investments in India, salary received for services rendered in India, income from a business set up in India, or capital gains on assets in India.

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Which special provision is related to the 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.

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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
• Other Central Government assets as specified under the official gazette.

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

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Which special provision is related to long-term capital gains?

On long-term capital gain arising from the transfer or sale of these foreign 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 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 the 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       

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.

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Tax deductions available for 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:

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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-

The 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 university situated in India for the purpose of the 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 5 years. Premium paid towards own, spouse, and children are eligible for deduction.

Equity Linked Tax Saving Scheme (ELSS)-

ELSS investments qualify for tax deductions under Section 80C of the Income Tax Act, allowing investors to claim deductions of up to Rs 1.5 lakh in a financial year. This makes ELSS a popular choice for individuals looking to save on taxes while investing in equities.ELSS funds come with a mandatory lock-in period of three years.

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Deduction under Section 80D:

NRIs can claim a deduction for premiums paid for health insurance for themselves and their family or parents in India.

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

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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.

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Deduction under Section 80G:

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

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NRI income tax slab rates 2024-25: Choose your tax regime

Unlike residents for whose 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:

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Revised Income Tax Slabs for the New Tax Regime

• Up to Rs.3 lakh - 0% (Nil)
• Rs. 3 lakh to Rs. 6 lakh - 5%
• Rs. 6 lakh to Rs. 9 lakh - 10%
• Rs. 9 lakh to Rs. 12 lakh - 15%
• Rs. 12 lakh to Rs. 15 lakh - 20%
• Above Rs. 15 lakh - 30%

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.
• The surcharge Rate is 15% of income tax payable on total income exceeding Rs 1crore but up to Rs 2crore.
• The surcharge Rate is 25% of income tax payable on total income exceeding Rs 2crore but up to Rs 5crore.
• The 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.

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Rebate u/s 87A

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

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What is Form 27Q - TDS on Sale of Property by NRI

Form 27Q is a statement that outlines the Tax Deducted at Source (TDS) on payments excluding salary made to Non-Resident Indians (NRIs) and foreigners. It must be submitted quarterly before the due date.

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Which Form is Applicable on the Sale of Property Below Rs.50 lakhs.?

Buyers are required to deduct TDS when the sale value amounts to Rs 50 lakh or above. According to Section 194-IA of the income tax law, property buyers in India must withhold tax at source (TDS) if the property value exceeds Rs 50 lakh. However, TDS is not applicable on property transactions valued below Rs 50 lakh.

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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 with respect to such gains.

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How are you taxed when you are a Resident individual on a temporary foreign assignment?

The unprecedented increase in cross-border movement of employees due to the globalized economy has provided Indian professionals with exciting opportunities for overseas assignments. However, it's crucial to consider certain tax aspects before accepting an overseas assignment.

An individual is considered to be a Resident of India if he/she is:

• physically present in India for 182 days or more in that tax year; OR
• physically present in India for 60 days in that tax year and 365 days or more in the preceding four tax years. However, if an Indian citizen leaves India during the previous year for the purpose of employment outside India or as a member of the crew of Indian ship, the period of '60 days' is extended to '182 days'.

Let's understand with example, Ramesh, who is embarking on his first overseas assignment to the UK for a period of two years. Ramesh departs from India on 1st September 2008. Prior to this assignment, Ramesh has been residing in India and dutifully filing his Indian tax returns.

Given Ramesh's situation, if he has been physically present in India for less than 182 days during the tax year 2008-2009 (i.e., from 1st April 2008 to 31st March 2009), he should qualify as a non-resident in India. Consequently, only income received or deemed to be received in India and income sourced within India would be subject to taxation in India for Ramesh.

This means that the salary and allowances Ramesh receives during his overseas assignment in the UK would not be subject to Indian taxation unless they are directly received or sourced in India.

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How are you taxed when you are a Resident individual recently moved abroad?

Resident individuals who recently moved to abroad will pay tax on income that is earned, received, or deemed to be received in India . This includes Income from salaries or wages, house property, capital gains on transfer of assets situated in India, business or profession controlled or set up in India or any other source in India. The tax rates applicable to these individuals who moved to abroad on income sourced in India are different from those applicable to residents. These individuals earning income in India generally need to file an income tax return if their total income in India exceeds the basic exemption limit. The due date and forms for filing the return may vary based on the nature and quantum of income.

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How are you taxed when you are a Living in a foreign country

An NRI's income taxes in India depend on their residential status for the year according to Indian income tax rules. If you are classified as a 'resident' in India, your global income will be taxable in India. However, if your status is that of an 'NRI,' only the income earned or accrued in India will be taxable in India.

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How are you taxed when you are a NRI recently moved back to India

Returning NRIs assume RNOR (Resident, Non-Ordinary Resident) status under specific conditions:

1. Duration of NRI Status: They must have been an NRI for 9 out of the 10 financial years preceding the year of their return to India.
2. Residency Period in India: Upon their return, they must have lived in India for 2 years or less (equivalent to 729 days or less) in the last 7 financial years.

The Income Tax Department allows RNORs to retain certain exemptions available to NRIs for a period of 2 years after their return. This means that deposits held in foreign currency, which are exempt from tax for NRIs, remain exempt for returning NRIs during this 2-year transition period. However, after this transitional period ends, returning NRIs are treated as resident individuals for tax purposes.

This transitional period provides returning NRIs with some time to adjust to the tax regulations applicable to resident individuals, allowing for a smoother transition.

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How are you taxed if you are a Resident with global income

If you are a resident Indian with global income (earned or received outside), this income will be taxed in India.

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Which ITR form is applicable to the NRI assessee?

"Till AY 2017-18 Non-Resident Individual (NRI) Assessee could file ITR 1 for their income earned or accrued in India. From the FY 2018-19 and 2019-20, amendments 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-ordinary residents.

This means a non-resident Individual (NRI) has the option to file either of these two ITR forms ITR 2 or ITR 3

ITR 2 can be filed in case the NRI has 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.

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Benefits of filing Incom Tax Return in India for NRIs

The last date to file ITR for FY (2023-24) AY (2024-25) is 31st July 2024.

Filing Income Tax Return timely offers these benefits to NRIs:-

• Maintain Consistency in Tax Records
• Claim Foreign Tax Credit (FTC)
• Claim TDS/Tax Refunds
• Build Creditworthiness
• Easier Visa Application/Renewal

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Documents required for filing ITR in India for NRIs

• PAN Card
• Passport (for citizenship verification)
• Form 16 (if employed in India)
• Bank Account Details
• Property Documents (if owning in India)
• Rent Receipts (if renting out property)
• Investment Statements
• Foreign Income Details

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When is the last date for NRIs to file an income tax return in India?

Under Section 139, for Non-Resident Individuals, the 31st of 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. To file IITR as an NRI, you can connect with tax2win here.

For non-resident Indian (NRI) citizens, it's important to file annual income tax returns in India if you have taxable income such as rental income, capital gains, or business income. File on time to avoid penalties. Report all Indian income and assets accurately to stay compliant with tax laws. If you remit money abroad, use Form 15CA and Form 15CB. Check Double Taxation Avoidance Agreements (DTAA) with your country of residence to avoid double taxation.

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Do NRIs have 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 installments 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:

Want help with advance tax payment dues and filing, book online CA appointment.

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Why should NRI file an Income Tax Return in India?

• To get a tax refund of NRI TDS deducted
• Serve as an Income Tax Proof of the residential status of a person.
• To avail of loans, credit cards, and term insurance policies.
• If NRI has short-term or long-term capital gains from any investment or assets held in India.

The due date to file tax return for FY 2023-24 (AY 2024-25) is 31st July 2024, file your taxes here.

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Income Tax Rules for NRIs: Remittances, Gifts, Inheritance, and Foreign Assets

NRI taxation can be complex, especially when dealing with financial transactions and assets across borders. Here's a breakdown of the tax implications for common scenarios:

Remittances:

Tax-free: Remittances for personal use within the Liberalised Remittance Scheme (LRS) limit of USD 250,000 per year are tax-free.

TCS (Tax Collected at Source): Remittances exceeding INR 7 lakh per year attract a 5% TCS, which can be claimed as a credit against future tax liability.

Income tax: Remittances from business income, salary, or other taxable sources in India are subject to income tax based on the NRI's tax residency status and income slab.

Gifts:

Gifts from resident Indians (RIs) to NRIs: Tax-free unless exceeding INR 2 lakh (penalty applies).

Gifts from NRIs to RIs: Taxable for the receiver if exceeding INR 50,000 (added to total taxable income).

Gifts from NRIs to NRIs: Generally tax-free unless through illegal sources or exceeding USD 250,000 per year (LRS limit).

Inheritance:

Inheritance of movable assets (e.g., shares, bank deposits): No inheritance tax in India.

Inheritance of immovable assets (e.g., property): No tax on inheritance itself, but capital gains tax may apply upon sale, subject to indexation benefits.

Remittance of inheritance proceeds: Limited to USD 1 million per financial year under LRS.

Foreign Assets:

Income from foreign assets: Taxable in India if exceeding the basic exemption limit (currently INR 2.5 lakh for NRIs) and not exempt under DTAA provisions.

Capital gains from foreign assets: Generally taxable in India if accrued after becoming an NRI, unless exempt under DTAA provisions.

Reporting requirements: NRIs are required to disclose details of foreign assets in their Indian income tax returns.

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How to File Income Tax Returns as an NRI: A Step-by-Step Guide

Being an NRI (Non-Resident Indian) comes with specific tax filing requirements. Here's a step-by-step guide to help you navigate the process:

Step 1: Determine Your Residential Status

The first step is to confirm your residential status for tax purposes. You're considered an NRI if you spend less than 182 days in India during a financial year.

Step 2: Reconcile Income & Taxes with Form 26AS

Form 26AS is a crucial document that shows your tax deducted at source (TDS) on various income sources. Reconcile the information in Form 26AS with your actual income to ensure everything is accurate.

Step 3: Ascertain Taxable Income and Tax Liability

Calculate your total taxable income from all sources in India, including salary, rental income, capital gains, etc. Remember, some income might be exempt under tax treaties or specific categories.

Step 4: Claim Double Taxation Treaty Relief (DTAA)

If you have paid taxes abroad on income earned in India, you can claim relief under a Double Taxation Avoidance Agreement (DTAA) between India and your country of residence.

Step 5: Choose the Right ITR Form

NRIs typically cannot file ITR-1 anymore. Depending on your income sources, you might need to file ITR-2, ITR-3, or another applicable form.

Step 6: Gather Necessary Documents

Collect documents like Form 16 (salary income), rent receipts (rental income), capital gains statements, bank account details, and TDS certificates.

Step 7: File Your ITR Online

The Income Tax Department website (https://www.incometax.gov.in/iec/foportal/) allows online filing of ITRs. Use the relevant ITR form and upload the required documents.

Step 8: Verify Your ITR Filing

There are two ways to verify your ITR filing:

• Electronically using Aadhaar or digitally signed verification.
• Physically by sending a signed copy of the ITR-V form to the Income Tax Department.

Additional Points to Remember

• Exempt Income: Declare any exempt income like interest on NRE accounts, dividends on shares, etc., in the designated section of the ITR.
• Bank Account Details: Disclose details of your foreign bank accounts if you're claiming a tax refund.

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Double Taxation Avoidance Agreement (DTAA): A Lifeline for NRIs

A Double Taxation Avoidance Agreement (DTAA) is a treaty signed between two countries to prevent residents of one country from being taxed twice on the same income earned in the other country. This is crucial for individuals like NRIs (Non-Resident Indians) who may work abroad and earn income in their country of residence while still maintaining ties to India. Without a DTAA, they could face the double whammy of paying taxes in both countries on the same income.

A Double Taxation Avoidance Agreement (DTAA) is a treaty between two countries aimed at preventing residents from being taxed twice on the same income. This is crucial for NRIs who work abroad but maintain ties to India. Without a DTAA, they could face double taxation on their income.

Here's how a DTAA benefits NRIs:

• Tax Relief: DTAAs specify which country has primary taxing rights on various types of income. For instance, income from employment is typically taxed where the work is done, while dividends and interest may be taxed in the country of residence. This prevents NRIs from being taxed twice on the same income, reducing their overall tax burden.
• Clarity and Certainty: DTAAs provide clear rules on where income is taxed, reducing uncertainty and potential disputes with tax authorities. This helps NRIs comply with tax laws in both countries.
• Promotion of Investment and Trade: By eliminating double taxation, DTAAs encourage cross-border investment and trade, potentially creating more business opportunities and jobs for NRIs.
• Enhanced Tax Cooperation: DTAAs often include provisions for sharing tax-related information between countries, aiding in the fight against tax evasion and ensuring fair tax compliance.

NRI tax filing can be daunting, especially if you're unfamiliar with the tax rules and procedures. To overcome these challenges, rely on a professional and reliable NRI tax filing service provider who can handle your taxation matters efficiently and effectively.

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