NRI Tax in India
Taxes are something that people can never get away from – regardless of their status. Even if you are an NRI, you will have to provide your share of taxes so that the country can function properly.
The NRI tax in India may be rather confusing, particularly if you are only getting used to it. If you are earning income in another country, you need to be familiar with all the taxes so that you can avoid underpaying – or overpaying. This article will guide into everything you should know about the NRI income tax.
What Is an NRI?
An NRI (non-resident Indian), also known as an “overseas Indian” or “person of Indian origin,” is a person that has been born in India, but lives outside the actual Republic of India. These people have Indian ethnicity but left their birthplace in order to live abroad on an NRI visa. The purpose of their moving may vary, as they may move for relationship purposes (marriage), or NRI investment purposes (business).
Technically speaking, the “non-resident” term refers to the tax status of someone who has left India for a specified amount of time, and has foregone their status as “resident of India.”
For someone to be a resident of India, they will have to remain in India for at least 182 days of the financial year – the rest of the time being spent abroad. One more option would be to spend 365 days over 4 consecutive years in India – with at least 60 days in the country during each financial year.
According to the Income Tax Act of 1961, if a person of Indian residency fails to meet the criteria, they will be regarded as an NRI and will have to pay income taxes the way that an NRI does.
Do NRIs Pay Taxes in India?
An Indian working overseas may still have to pay the NRI tax in India, depending on the source of the income. Granted, these taxes are relatively different from residential taxes – and will depend on the source and size of the income as well. If the income is generated in India, they will have to pay more taxes compared to the income that was generated overseas.
The income of an NRI is taxable if:
- The non-resident has received or earned income from India.
- The non-resident has sold any investments and assets in India.
- The TDS u/s 195 was previously deducted from his income. The TDS will be seen on the Form 26AS.
Each NRI may have to pay different fees for India, depending on their year’s residential status. In order to determine exactly how much to pay, you will have to establish your exact residential status as an NRI.
If the income has been earned outside of India, then it will be taxed by the country where the salary originated. Income that has nothing to do with India will not be taxed in India. The interest that is earned on FCNR and NRE accounts are also tax-free. On the other hand, interest earned on an NRO account is taxed for NRIs.
How to Determine Your Residential Status as an NRI
As mentioned, in order to determine exactly how much you have to pay on your taxes, you will first have to determine your residential status. In this case, you will become a non-resident Indian if you fail to meet the criteria of being a resident.
Every financial year, you are considered to be an Indian resident if you:
- Are in India for at least six months every financial year (182 days, to be more precise).
- You have lived at least two months (60 days) in each financial year, over four consecutive years, and have also lived for at least 365 days in India during those same years.
If you have Indian citizenship and are working abroad or have become a crew member of an Indian ship, only the first option will apply to you. The same thing applies to a person of Indian origin that has returned to India on a visit; the second option will not apply to them.
If you do not meet any of the conditions above, you are automatically deemed as an NRI.
NRI Taxable Income
Your income becomes taxable in India if you personally receive your salary in India, or someone receives it on your behalf. As a result, if you have the status on a non-resident Indian, every salary that goes directly in your Indian account will be subjected to the Indian tax laws.
Each income may be taxed differently, depending on its origin. If you are an NRI, these are the types of income that may become taxable.
Income from Salary
The income from salary will be considered to be from India if your services are also provided there. For example, you may be outside of India, and may be an NRI – but if you get paid for a service that has been conducted in India, you will be taxed for it – regardless of where you receive the income.
If your employer is the Government of India and you have Indian citizenship, you will also have to pay taxes. Only diplomats and ambassadors are exempt from this tax.
Income from House Property
Those who decide to live abroad and do not want to sell their home will often offer their own place for renting – in hopes that they can generate some extra income as they are trying to make a living overseas.
An NRI is allowed to claim a 30% deduction on the house, deduct the property taxes, and reap benefits from a deduction in interest – provided they have an NRI home loan. The same NRI is permitted a principal repayment deduction under Section 80C of the Income Tax Act. The income from house property will be taxed at a slab rate, as it is applicable.
Rental Payments to an NRI
A tenant that is paying rent to someone that is an NRI will have to remember to deduct 30% TDS. The income may be received in an Indian account, or it can go into the account that the NRI is currently living in.
Income from Business and Profession
Business can be conducted while overseas, particularly with today’s social technology. If you are an NRI, but you have a business that is controlled or set up in India, then you will be subjected to taxes for it. How much you pay will depend on the size and productivity of your business.
Income from Capital Gains
All of the capital gains that originated on a transfer of capital asset will be subjected to taxes – provided the asset or transaction was situated in India. The capital gains that originate from shares and securities will not be exempt from taxes.
Income from Special Provision Investments
If an NRI invests in particular Indian assets, he or she will be taxed 20% for it. If this income from the special investment is the only source of income that the NRI received during the financial year – with the TDS deducted – then the NRI does not have to file any tax returns for their income.
Income from Other Sources
Any income that comes from savings accounts or fixed deposits that are set in India will be subjected to taxes. Certain accounts such as the FCNR and the NRE are tax-free but the other ones are taxable if you are an NRI.
Tax Deductions for NRIs
Just like Indian residents, the NRIs are also allowed certain deductions and exemptions from taxes. You may go for interest deductions on an NRI personal loan, or you may be eligible for deductions of interest on an NRI car loan. You will just have to be familiar with the Income Tax Act, to see whether you are allowed these deductions or not.
Deductions under Section 80C
Most of the deductions that are found in Section 80C are also applicable to the NRI. Some exceptions may occur, which is why you may want to review your status and see whether you are allowed these deductions or not.
From the deductions that are situated under Section 80C, those that apply to NRI are the following:
Life Insurance Premium Payments
The insurance policy has to be in the name of the NRI – or, if applicable, in the name of the spouse/children. For it to be deducted, the premium will have to be less than 10% of the sum that was assured.
Child Tuition Fee Payments
The tuition fees for any form of full-time child education (school, university, college) that is situated in India will receive deductions. This will also apply in the event that the NRI opts for education loans.
Principal Loan Repayments from Buying a House
NRIs are allowed for deduction when repaying a home loan (no matter if you are buying or planning to construct the home). The deduction is also allowed for registration fees, stamp duty, and other expenses necessary to transfer the property into the possession of the NRI.
ULIPS (Unit Linked Insurance Plan)
ULIPS is typically sold with deductible life insurance cover under Section 80C. This includes the contribution to the insurance plans that are linked through a mutual fund.
ELSS is becoming a very popular option recently, as it allows you to claim deduction under Section 80C, offering EEE (Exempt-Exempt-Exempt) benefits. It offers an excellent opportunity to taxpayers since the earnings will come directly from the funds invested in the equity market.
Other Deductions to Consider
The deductions under Section 80C are generally the main ones that an NRI could go for. At the same time, there are other sections from the Income Tax Act that may come to their benefit and will allow them to claim from various deductions.
Deduction from NRI House Property Income
An NRI may claim the deductions that were made available for residents from the income derived from house property – if the house resides in India. It also allows for interest home loan deduction, as well as payment of property tax.
Deduction Under Section 80D
An NRI will be allowed to claim a deduction for premium-paid health insurance. The deduction is only available for sums up to Rs 30,000 (which went up to Rs 5,000 after April 1st, 2018) for senior citizens and Rs 25,000 for insurance (self, spouse, children, and parents.
Deduction under Section 80E
Based on this section, an NRI may claim deduction on the interest paid for an education loan. The loan can be taken for higher education which the NRI will go through, but it will also apply to the spouse or children undergoing higher education. The condition is that the NRI needs to be a legal guardian. The deduction is valid for no more than 8 years, and there is no limit on the amount that you may claim a deduction.
Deduction under Section 80G
Under Section 80G, an NRI may be allowed to claim a deduction for a donation given to a social cause. You will, however, have to check whether a particular donation is eligible under this section of the Income Tax Act.
Deduction under Section 80TTA
An NRI may claim an income deduction from the interest that has been building up in a savings account. The limit is Rs 10,000 – like with resident Indians. This is only permitted for savings accounts (not time deposits) that are linked with a bank, a post office, or a co-operative society.
Deductions for Differently-Abled Individuals
People with disabilities may also be given deductions, provided that they are working under the right sections. These deductions include:
Deduction under Section 80DD
The deductions under this section are given for the maintenance (medical treatment included) for a person that is handicapped dependent. These deductions, however, are not given to the NRI under this section.
Deduction under Section 80DDB
The deduction found under this section is steered towards medical treatment and is given to the disabled person that is dependent on the medication. The documentation for the deduction requires a prescription from a specialist – and is only made available to residents.
Deduction under Section 80U
This deduction for disability applies to the taxpayer himself (herself) that suffers from a disability, as defined in this section. The deduction, however, is only provided to the resident Indians.
Deductions Not Allowed to an NRI
In certain cases, some deductions will not be allowed to an NRI. Some of the investments found under Section 80C include:
- Investments in the PP are not allowed for an NRI. Non-resident Indians may not open a new PPF account. However, they are allowed to maintain PP accounts that have been opened while they were residents.
- Deductions are not allowed with NSC investments.
- The senior citizen saving schemes do not allow for NRI deductions.
- The post office 5-year deposit scheme does not allow for NRI deductions.
How to Avoid Double Taxation
One thing that NRI fears are that they will get double taxation – meaning that they will have to pay two taxes for the same sum (one to India and one to the country that they are currently staying in). This kind of double taxation can be avoided if the NRI seeks DTAA relief between the two countries.
Simply put, under the DTAA, there are two methods for an NRI to seek relief from taxes: the tax credit method, and the exemption method. With the tax credit method, income is generally taxed in both countries – but you may claim tax relief in your current country of residence. However, with the exemption method, the NRI will be taxed in full in one country and exempted in another.
FAQs for NRI Tax in India
Despite all the explanations and guidance concerning the NRI tax in India, it can be very difficult to really understand the taxpaying process. There will always be questions regarding these taxes – questions that will always have the same answer. So, before you start asking new questions, here are some answers to common questions that might help you out.
Q: When are you considered an NRI (non-resident Indian)?
A person who was born in India but is not a resident in India is considered to be a non-resident Indian. If you do not satisfy the criteria to be a resident of India, then you are automatically referred to as a non-resident Indian (NRI).
Q: I am an NRI than has rental income from a flat in India and am employed in the US. What will I be taxed for in India?
Considering that you are an NRI, the income that you will get from India will be the only one that is taxable by India. You will be required to pay taxes for the rental income, but you will not have to pay any Indian taxes for a U.S. salary that you also receive in the United States.
Q: When should NRI file their income return in India?
Like every individual taxpayer, an NRI must file their income return when their total gross income goes over Rs 2.5 lakhs during the financial year. Furthermore, these returns have to be filed by a given date every year – which is the 31st of July.
Q: Should the taxes be deducted when the payment is being made to the NRI?
A specific payment (such as rent, technical fees, professional fees, and so on) that are made to an NRI will require tax deduction at the source – and it will be done by the individual that is making the payment. The person will have to obtain a TAN so that they can themselves deduct these taxes.
Q: I am 65 years old and am an NRI. Should I still file a return for a gross income of Rs 2.8 lakhs during my time away from India?
Resident super senior citizens and resident senior citizens are the only ones that receive the basic exemptions of Rs 5 lakhs and Rs 3 lakhs. As a result, with your NRI status, even if you are deemed a senior citizen, you will still be liable for tax return if your income from India exceeds 2.5 lakhs.
Q: Can an NRI be taxed on the income that he receives from India in his country of residence as well? What can the DTAA do for someone here?
An income that was received in India will be subjected to taxes under the Indian government. However, the country of residence for the NRI may also receive taxing rights for that income – since, after all, the individual is a resident there. Because of this, the NRI may end up paying two times the taxes for the same sum.
In an attempt of overcoming this, India has come up with the Double Taxation Avoidance Agreement (DTAA). This will help remove the double taxation by letting the taxpayer claim the credit for their foreign taxes. This is done as they are filling their income return for their home country.
Q: I am an NRI that owns a flat in India. Will I be subjected to capital gains if I sell that flat?
Yes, you will be subjected to capital gain taxes if you sell your flat in India. Furthermore, the one who purchases your flat will have to deduct the taxes based on the quantum gains that your sale makes. The tax deduction rate for such a long term asset will be 20%.
The NRI tax in India can be fairly complicated for an NRI, as you never know exactly what you are supposed to and are not supposed to pay.
Generally speaking, every profit that is related to your mother country will be subjected to taxation. If the salary is received in the U.S. from a U.S. employer, then your duty will be to the U.S. However, you should closely inspect the Income Tax Act to ensure that you are filing your taxes correctly.