Note: For the sake of simplicity and clarity, this article refers to any person residing outside India, whether an Indian citizen (example, having an Indian passport) or a foreign national of Indian origin (example, having a foreign passport), as an NRI. This may not be technically accurate, but for practical purposes, the information is of the same value.
The Non-Resident Indian (NRI) status is hugely important from a taxation perspective. Because taxation is an evolving body of rules and regulations the definition of NRI is also prone to changes. Find out whether you qualify as an NRI or not, here.
Income tax applies to both Indian residents and NRIs (whether they’re Indian citizens, PIOs, or foreign nationals). Yet, the rules of taxation and benefits for taxpayers living outside India are different from those for taxpayers who are residents of India.
NRI taxation falls under the section of Income Tax Act, 1961. After the passing of the 2020 Finance Bill, slight changes happened in the taxation system.
Here are some things to consider as an NRI filing taxes in India:
- Residential Status
- An NRI is a person who stays for less than 182 days in India for a financial year. This is only applicable to the NRIs whose Indian income is less than INR 15 lakh.
- If the person is earning more than INR 15 lakhs in India, the limit on days spent in India reduces to 120 days. Further, if the stay crosses 120 days, then the NRI has to check if the cumulative days of stay in India for the previous 4 years (with reference to current financial year) totals 365 or more. In such a case, the person is called a Resident but Not Ordinarily Resident (RNOR) and is taxed as a resident Indian.
These rules apply to all NRI who earn above INR 2.5 lakhs in India in a financial year.
Only those who earn below this limit are exempt from paying taxes.
These are the conditions under which a person is understood to be an NRI:
This varies for people living in nations like the UAE. India has a Double Tax Avoidance Agreement with the UAE. Under this rule, an NRI who lives at least 182 days in the UAE can avoid double taxation.
- Passport (whether Indian or foreign): It serves as residential proof for the IT department.
- Bank account statement: Proof of address (NRE, NRO, or savings account).
- Form 16 (if relevant): This form is a proof for TDS deduction and deposits with the relevant authorities. This is a certificate issued by an employer for their employees (relevant for people living outside India, but earning income from an Indian employer). There are two parts to it, and part B had a recent change introduced to it.
- Form 26AS – This form contains details on tax deductions, tax assessment, advances, and details about refunds during a financial year.
These documents are necessary for NRIs:
There is an option to file taxes online on the Income Tax e-portal or any private, paid online portal.
- When Does Income Become Taxable?
- Salary income: Income received from an employer registered in India gets taxed. Cases linked to services done on behalf of the government, irrespective of residence, get taxed as well.
- Property and/or rental income: If you are earning rent from a property in India, the income is taxable. Tenants need to deduct TDS at 30 percent before paying the NRI owner. NRIs can avail tax exemption to certain levels against the repayment of principal and interest expense of a home loan.
- Capital Gains – Capital gains from the transfer of capital assets, investments in shares, and securities get taxed if the same is done in India. Capital gains under section 54 or capital bonds under section 54EC get exempted. Any transfer of capital assets in India is taxable; investment in shares and security in India is also taxable.
- Other special cases: Earnings from the trading of shares and debentures with Indian companies, public or private, get taxed.
- Interest earned in NRO accounts and Indian currency NRO fixed deposits is taxed.
Income becomes taxable when it either originates in India or is received by someone else in India on the NRI’s behalf. The tax liability is decided based on the tax rate slab you fall under.
These categories of income are taxable for an NRI:
- Tax Deductions and Exemptions
- ELSS Investments: The most preferred option, it allows deductions up to INR 1.5 lakhs.
- ULIPS: Under 80C, Unit-Linked Insurance Plan (ULIPS) is subject to deduction, sold with the insurance plan.
- Education Payment: Any tuition fees for schools in India for two children.
- Life insurance premium: The premium has to be less than 10 percent of the assured sum for availing this option.
- Loan Repayment: Deduction is available against loan repayment for buying or constructing a residential property.
- Interest earned in NRE accounts, as well as from foreign currency fixed deposits.
Under section 80C, the IT department grants NRIs certain deductions and exemptions from their total income. The following deductions are granted to an NRI:
- Refunds and Alternatives to Taxes
NRIs may end up filing excess taxes. The Income Tax department will refund whatever excess amount is filed.
The refund can be issued for the filed tax return by sharing the bank account details. The details should include the bank account number and the MICR code.
If in doubt, consult a tax expert to receive expert assistance for filing taxes.
Filing tax returns for only investment earnings and long-term capital gains is not really necessary—only when some other conditions are also fulfilled, which are out of the scope of this article.
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