How NRIs are taxed in India?

A non-resident Indian is not generally liable to pay tax in India, except for the income earned by him within the territory of Indian. Any income earned by the non-resident Indian outside India cannot be taxed within India. Lets discuss the tax implications on NRIs and other compliances.

Non-resident Indians are those people who have are not residing in the territorial borders of India, so much so that their duration of stay outside India is undetermined. Owing to this, the Income Tax laws of India have made certain criteria by which it can be decided as to who is a non-resident Indian and who is a resident Indian for the purpose of taxation.

Having said that, it is not necessary that a person living outside India cannot be taxed within the country. This is so because a person can be taxed in India for the income earned by him/her in India during their stay in India. Income earned abroad isn’t taxable in India but the income earned in Indian pursuant to capital gains, shares and rental income amongst others needs to be taxed within India.
Thus, it is important to understand how non-resident Indians are taxed in India.
 
WHO IS A NON-RESIDENT INDIAN?

For understanding the definition of a non-resident Indian, we need to refer to Section 6 of the Income Tax Act. In simple words, it can be said that a person not residing in India for a stipulated number of days can be termed as a non-resident.

As per the section, for a person to qualify as a non-resident, he should satisfy one of the below mentioned conditions, namely:-
  1. If the person has resided in India for a period less than 182 days in the previous year, or
  2. If the person has resided in India for a period less than 60 days during the previous year and for a period less than 365 days in the 4 years immediately preceding the relevant previous year.
In respect to an Indian citizen or a person of Indian origin (PIO), i.e. a person whose parents or grandparents are Indians, who visits Indian during the year, the period of 60 days mentioned in the second condition shall be substituted with a period of 182 days. It is a concession provided to an Indian citizen and a PIO, and the same has also been extended to those people who leave India in the relevant previous year as crew members or for the purpose of employment outside India.

However, as per the amendment brought into effect by the Finance Act 2020, which will take effect for the Assessment year 2021-22, the period of 60 days in the second condition has been substituted with a period of 120 days. The number of 120 days is available if a person of Indian origin or Indian citizen has a total income above Rs. 15 Lakh during the previous year. This amount excludes the foreign income earned by such citizen or person of Indian origin. The regulation of substitution of 60 days for 182 days shall remain in force for visiting non-resident Indians whose total income in India doesn’t exceed Ra. 15 Lakh.

The income referred above is total taxable income in India and shall exclude any exemptions availed by the non-resident Indian while computing the tax liability.

It is also worth noting that a non-resident Indian is deemed to be a resident of India if the taxable income earned by such a person in India exceeds Rs. 15 Lakhs and he is not liable to pay tax in any other jurisdiction.
 
WHAT INCOME OF AN NRI CAN BE TAXED IN INDIA?

A non-resident Indian is not generally liable to pay tax in India, except for the income earned by him within the territory of Indian. Any income earned by the non-resident Indian outside India cannot be taxed within India.

To estimate the income earned by the non-resident person in India, one must look at the mode through which the income was earned. Any income earned by a non-resident shall be treated as Indian income if the same falls in either of the below mentioned cases:-
  1. If the income is directly or indirectly received in the territorial borders of India, or
  2. If the income accrues or arises in India, or it is the presumption of law that the income has accrued or arisen in India.
The income of a non-resident can be termed as an income accruing or arising in India in the following cases, as per Section 9 of the Income Tax Act:-
  1. Income from a business running in India
  2. Income from a property, asset or any other source of Income existing in India
  3. Capital gains arising out of a transfer of a capital asset situated in India.
  4. Income arising out of any services rendered in India, termed as salaried income.
  5. Income arising out of any service rendered to the Government of India outside India, when the non-resident Indian was a citizen of India. Such a situation arises for those people who are officers deputed in Indian missions, consulates and embassies abroad.
  6. Dividend paid by an Indian company
  7. Interest, technical fees or royalty received from the Central or the State Government or any specified person.
 
WHAT CONSTITUTES AS TAXABLE INCOME IN INDIA FOR A NON-RESIDENT INDIAN?

Once the residential status of an individual is identified by the law, then the person’s taxable income is calculated. The tax liability needs to be calculated for a non-resident Indian in a somewhat similar manner as it is calculated for a resident Indian under the income tax act. The tax liability of a person is calculated, even if a non-resident Indian, as per the tax slabs prescribed in the finance laws and the Union Budget of the relevant previous year.

Currently, the tax slabs are as follows:-

1. Rs 0- Rs. 2.5 Lakh – Nil tax
2. Rs. 2.5 Lakh to Rs. 3 Lakh- 5% tax (rebate available under Section 87A of the Act)
3. Rs. 3 Lakh- Rs. 5 Lakh- 5 % tax (rebate available under Section 87A of the Act)
4. Rs. 5 Lakh- Rs. 7.5 Lakh- 10% tax
5. Rs. 7.5 Lakh- Rs. 10 Lakh- 15% tax
6. Rs. 10 Lakh – Rs. 12.5 Lakh- 20% tax
7. Rs. 12.5 Lakh- Rs. 15 Lakh- 25%
8. Above Rs. 15 Lakh- 30%
 
The same tax rates shall be applicable on the income of a non-resident Indian’s taxable income to calculate the tax liability of the non-resident Indian.

The tax liability of a non-resident Indian can arise in the following categories of Income:-
 
  • SALARY INCOME
Salary income refers to that income of a person which arises out of a contract of employment and is earned against the rendering of any form of service to the employer. For a salaried income to exist, the person earning the income should be able to establish an employer-employee relationship out of which the income arises. Salaried income is different from an income earned from professional activities, because though services are being rendered, the same shall be taxable under the head of income from business and profession.

Any service rendered in India which is deriving salaried income shall be taxable in India as per Indian tax laws. Thus, if a non-resident is receiving a salary for any service rendered by him in India, the same shall be taxable in India. The place where income is received is irrelevant here as the income has accrued in India. 

In cases where the Government of India remits any salary or income in favour of any Indian citizen rending services outside India, the same shall be considered as Indian income as it is presumed to have arisen in India and shall be chargeable to tax as per Indian laws.
Here, exemption is provided to the income of diplomats and ambassadors.
              
  • INCOME FROM HOUSE PROPERTY
Income from house property refers to the income arising out of a residential or commercial property in terms of rental income received by the owner, in whose account the same shall be taxable. As per Indian laws, non-resident Indians can buy residential and commercial property but cannot buy agricultural property. The same can be held by an NRI only through inheritance.

If the owner of a house property located in India is a non-resident Indian, then also the rental income accruing from the property shall be taxable in India because the income has arisen in India. For determining the taxable house property income, the same shall be calculated on the basis of notional rent as per market rate if the property is unoccupied.

The benefits of standard deduction of 30 per cent, deduction of interest on home loan and deduction of property tax paid against the property shall be available to resident and non-resident individuals alike. Deductions under Section 80C, pursuant to principal repayment, stamp duty and registration charges paid at the time of purchase of the property shall also be deductible from the taxable house property income of a non-resident.

A tenant paying rental income to a non-resident income should be mindful to deduct Tax Deducted at Source from the payable amount at a rate of 30 per cent, as per Section 195 of the Income Tax Act. The tenant is also required to fill Form 15CA and submit online on the website of the Income Tax department along with Form 15CB, filled by a chartered accountant, which is required on a conditional basis mentioning and certifying the details of the amount of payment, the TDS rate and deductions availed as per Section 195, Rules of Double Tax Avoidance Agreement.

Form 15CB might not be required in a case where the remittance amount doesn’t exceed Rs. 5 Lakhs in one financial year. Here, only Form 15CA is required to be filled. The tenant, here, can deduct TDS even at a lower rate by the virtue of an order of an assessing officer or if a certificate under Section 197 has been received by him.
 
  • INCOME FROM BUSINESS AND PROFESSION
Income from business and profession is the income arising out of taxable business activities run by the assessee or from the professional activities undertaken by the assessee. Any business or professional income earned by a non-resident shall be taxable in India, if such a business is set up or controlled in India.
 
  • INCOME FROM CAPITAL GAINS
Capital gains refer to gain from that transaction which involves sale of a capital asset of the assesse, namely house property, shares, securities, gold etc. Capital gains can be long term capital gains and short term capital gains as per the nature of the property involved and the time period for which the property held by the assessee.

If any capital asset situated or originating from India is transferred, then any gains accruing from it shall be treated as a capital gain accruing in India and its tax treatment shall happen as per the tax laws of India.

If the house property is held by the NRI for more than 2 years before selling it, then the buyer shall be responsible to deduct Tax Deducted at Source at a rate of 20 per cent from the payment made for the sale. However, if the holding period is less than 2 years, then the TDS amount deducted shall be 30 per cent.

Exemption from capital gains tax can be availed by an NRI by investing the amount of capital gains in another housing property or in capital gain bonds, as per Section 54EC.

Capital gains arising from sale of listed Indian stocks and securities shall be taxed for non-residents as they are taxed for residents. If the holding period is more than 12 months for shares, it is termed as long term and is taxable at the rate of 10 per cent exceeding Rs. 1 Lakh gains and if the period is short term, i..e less than 12 months, then tax is payable at 15 per cent.

It must be noted that NRIs cannot adjust their capital gains income against the basic exemption limit, which is currently Rs. 2.5 Lakhs.
 
  • INCOME FROM OTHER SOURCES
Income from other sources refers to the income received from any sources which is not fit to be included in any other heads of income. Income from other sources includes interest income in savings account and interest income from fired deposits.

If, for a non-resident, the income from other source is arising out of any asset held in India, then the same is taxable in India. It must be noted that interest on a NRE and FCNR account isn’t taxable in India but interest earned in NRO account is taxable fully, as it is opened in the name of a non-resident to manage the incomes earned by him in India.
 
SPECIAL PROVISIONS PERTAINING TO INVESTMENT INCOME

NRI’s investments in India in certain assets are taxed at the rate of 20 per cent but not all incomes of NRI are taxed at a flat rate of 20 per cent. As per Section 115c(b), a foreign exchange asset is one which would be any specific asset acquired, subscribed or purchased by the assesse in convertible foreign exchange. It includes:-
  1. Shares of Indian company
  2. Debentures issued by an Indian Public Company
  3. Deposits held with an Indian Public Company
  4. Any assets prescribed by the Central Government
  5. Assets specified by the Central Government in a notification in Official Gazette
These investments are entitled to separate and special treatment, as mentioned under Chapter XIIA of the Income Tax Act and no deductions under section 80 shall be allowed here while calculating investment income. Benefits of indexation can also not be availed by an NRI while making long term capital gains on transfer of foreign assets, however, he can claim profit as per Section 115F.   
 

NRI’s Income Taxable in India

NRI’s Income Exempted from Tax in India

Long term and short term capital gains

Income earned outside India

Recurring gains on inherited properties situated in India

Assets received in India by way of gift or inheritance

 

Foreign currency investments are taxed at a lower rate

 

Interest on deposits in NRE and FCNR accounts

 
TAX DEDUCTION BENEFITS AVAILABLE TO NON-RESIDENT INDIANS
 
NRIs face stringent taxation laws and rules as against resident citizens. Fewer deductions are available to them, which are listed as follows:-
 
DEDUCTIONS FOR NRIs UNDER SECTION 80C
  1. Principal Payment on Loan for Purchase of House Property- As mentioned already, the payment of monthly installment for paying off loan taken for purchase of house property along with stamp duty and other registration charges are deductible.
  2. Life Insurance Premium Payment- It is deductible if premium is less than 10 per cent of the sum assured and the insured person is NRI himself, his spouse or his offspring
  3. Investment in ULIPs- Investment in Unit Linked Insurance Plans of Life Insurance Company Mutual Fund or Union Trust of India are deductible
  4. Deduction from House Property Income- Deduction of an amount up to Rs. 2,00,000 is allowed for interest paid on home loan of unoccupied house
 
DEDUCTIONS FOR NRIs UNDER SECTION 80D
  1. Premium of health insurance of dependents and immediate family of NRI allowed as deduction
  2. An amount up to Rs. 5000 is allowed for deduction for preventive health check-ups
 
DEDUCTIONS FOR NRIs UNDER SECTION 80E

Deduction of interest paid on education loan for higher education for the NRI himself, his spouse, his child or any other dependent student, subject to the earlier period of 8 years or till interest is paid, is allowed without any cap on the interest amount.
                  
DEDUCTIONS UNDER SECTION 80G

Deductions for donations made is available to NRIs under Section 80G
 
DEDUCTIONS UNDER SECTION 80TTA

Deduction of upto Rs. 10,000 is available on the interest earned on savings bank account.
 
INCOME TAX RETURN OF A NON-RESIDENT INDIAN

Income tax return is an official record of income and tax liability to be filed by every individual who has a taxable income. The income tax return is filed on the portal of the income tax department for every financial year, also termed as previous year, in the subsequent year, termed as the assessment year.

A non-resident Indian shall be required to file an income tax return in the following cases:-

  1. Taxable income in India is more than the exemption limit
  2. When the NRI wants to claim a refund of tax paid
  3. If the NRI is facing a loss in any transaction related to an investment or asset in India and wants to carry it forward to the next financial year
  4. When the NRI is incurring long term or short term gain on sale of an investment
However, in the following cases, an NRI is not required to file an ITR:-

  1. If the total income concerning a financial year only consists of investment income and tax deducted as source
  2. If tax has already been deducted at source
  3. If special investment income is the only income of an NRI in the relevant financial year and the TDS has been deducted pursuant to it
The last date to file an income tax return in India for a Non-Resident Indian is July 31st of the relevant assessment year.
 
AVOIDING DOUBLE TAXATION

An NRI’s Indian income is taxable in India, i.e. when the income is accrued or received in India by the non-resident individual, such an income shall be taxed in India. This is so because in such transactions, India becomes the source state of the income, thus acquiring the right to levy tax on it.

However, the country where the NRI resides also has right over the income as it becomes the state of residence. In such situation, there arises the issue of double taxation of income. Doubt taxation of income is when there are two states or territories within whose jurisdiction the income can be taxed. If the income is taxed in both the jurisdiction, it would levy unfair liability over the non-resident individual.

Thus, to curb this issue, the Double Taxation Avoidance Agreement has been formed which has also been signed by India. In this, there are two methods provided to avoid double taxation and seek relief from the income tax department:-

1. Exemption Method: In this method, the non-resident is taxed only in the one country, as per his wish and is exempted from taxation over the questioned income in the other country.

2. Tax Credit Method: If income is simultaneously taxed in two jurisdictions, then tax relief can be claimed in the country of residence of the non-resident Indian.
 
CONCLUSION

There is a rising trend of Indians leaving the country to settle abroad, especially young students and professionals who migrate with the aim of making a living for themselves abroad.

However, it isn’t necessary that they don’t earn any income in India. Rather, it is more likely that they earn income in India and abroad simultaneously in different heads. Considering this, it is important to evaluate and analyze the tax laws pursuant to NRIs in India.

The tax regime for NRIs and residents is different and if not remained vigilant, the assesse might pay tax wrongly or excessively. Thus, it is important to take note of tax laws and keep oneself update with the latest amendments and modifications.