How an NRI income will be taxed in India – Income tax and Tax matters

How an NRI income will be taxed in India Income tax and Tax matters

 Introduction

It is a fact that the taxes collected plays a dominant role in the growth and development of the Indian economy. All the residents of India pay taxes for their income earned under provisions of the Income Tax Act, 1961. Similarly, The Indian Income Tax Act, 1961 also provides certain conditions for taxation for NRIs (Non-Resident Indians) who earn their income outside India. However, the rules and regulations of income tax for NRIs are far more different than that of the resident Indians. Therefore, this article discusses the taxation of NRIs income.

Summary

  • An NRI must file his income tax return like any other Resident Indian in India.
  • The residential status of the NRI plays a detrimental role in tax liability for NRIs.
  • If an Individual’s status is Non-Resident, then the income earned only in India will be taxable.
  • Income earned outside India cannot be taxed in India.
  • Interest earned on an FCNR and NRE account is also not taxable.
  • Interest received on NRO accounts will be subject to tax on the part of an NRI.

How do I determine my residential status?

For calculating a taxpayer’s income, it is essential the residential status of the taxpayer is clarified, whether they are a Resident or a Non-Resident Indian, for tax. To be considered as Resident Indian for a particular financial year, a taxpayer has to fulfil any of the below-mentioned conditions;

  1. The taxpayer had lived in India for at least 182 days or at least six months during that particular financial year.
  2. If the taxpayer has been in India for 60 days in the previous year and lived during the last four years in India for 365 days.

It is to be noted that if a taxpayer is an Indian citizen working outside India, then, in that case, only the first condition will be applicable. That means a taxpayer will become a Resident if he had lived in India for 182 days or more in one financial year.

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Similarly, the provision described above is also applicable to the Persons of Indian Origins who visit India. Further, the second condition is not relevant to the Persons of Indian Origins taxpayers. A Person of Indian Origin (PIO) means a person whose parents or grandparents were born in India.

If a taxpayer does not fulfil any of the aforementioned conditions, he will be considered a Non-Resident Indian for income tax purposes.

Resident but Not-Ordinary Resident (RNOR)

The individual taxpayer will be termed as RNOR for a particular financial year if they fulfil the below-mentioned conditions;

If a taxpayer is Non-Resident in India for nine years and out of 10 previous years preceding the considered financial year.

OR

If the taxpayer has lived in India for 729 days or less during the last seven years preceding the considered financial year.

The Finance Act 2020 made certain amendments concerning the provisions of residency. It included the Persons of Indian Origins and Indian Citizens who are coming to visit India will now be termed as Resident, but Not-Ordinary Resident provided the below-mentioned conditions are fulfilled;

  • Total income excluding the foreign income exceeds Rs 15 lakh.
  • The taxpayer has lived in India for 120 days or more but less than 182 days in the previous year; OR
  • The taxpayer has lived in India for 365 days, or more the last four preceding the last financial year

Before the amendment mentioned above, such taxpayers were categorized as Non-Resident for income tax purposes. However, due to the amendment discussed above, the residential status of an individual taxpayer can be classified as RNOR, which can ultimately lead to loss of benefits of DTAA, can increase the scope of total income concerning taxability and loss of several allowed exemptions etc.

Further, in the amendment described above, an individual taxpayer living for 182 days or more will be categorised as a Resident irrespective of the income level in the previous financial year.

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Deemed Residency Status under Finance Act 2020

The Finance Act 2020 introduced the term “Deemed Residency”. According to the provisions of this Act, the Indian citizens earning more than Rs. 15 lakhs in a financial year from Indian sources will be deemed as residents of India for income tax purposes in case the taxpayers are not eligible for payment of taxes in any other foreign country.

With effect from the financial year 2020-21, all the deemed Residents will be considered as Resident but Not-Ordinary Resident (RNOR). The amendment, as mentioned earlier, came into force to tax the incomes of Indian citizens who are not eligible to pay taxes in other foreign countries.

Is my income earned abroad taxable?

According to the provisions of Income-tax laws, the income of an NRI is taxable depending upon his or her residential status for that particular financial year. Determining an individual’s residential status is already mentioned above.

If an individual’s status is Resident, then the global income of such an individual will be taxable in India.

If an Individual’s status is Non-Resident, then the income earned only in India will be taxable. The following are some of the aspects which must be kept in mind;

If a taxpayer receives a salary in India and salary received for the services provided in India, Income earned from a house property located in India, Capital gain received due to sale of assets located in India, income received from fixed deposits and received Interest on a savings bank accounts are some of the examples of revenue generated, accrued or earned in India.

The following are the incomes taxable for a Non-Resident Indian;

  • Income earned outside India cannot be taxed in India.
  • Interest earned on an FCNR and NRE account is also not taxable.
  •  Interest received on NRO accounts will be subject to tax on the part of an NRI.

Does an NRI required to file an income tax return in India?

Whether an Individual taxpayer is NRI or not, if their income exceeds Rs. 2,50,000 in a financial year, they are required to file an income tax return in India.

Do NRIs have to pay advance tax?

If the tax liability of an NRI exceeds Rs 10,000 in a particular financial year, then, in that case, the NRI is required to pay advance tax. Interest under Section 234B and Section 234C will be applicable if the advance is not paid.

Taxable income for an NRI

When an income is received in India, it is taxable in India. For example, the salary received in India is taxable, or if someone receives it on behalf of the taxpayer, it is also taxable. Thus, if a taxpayer is an NRU and gets a salary from an Indian account directly, then the income received will be taxable as per Indian Income Tax Laws. The said income will be taxed according to the income tax slab specified by the Central Government every year.

Income from salary

Income from the salary earned for the services rendered in India is taxable under the provisions of income tax laws of India. It does not if the taxpayer is an NRI or not. If the salary is paid towards the services provided in India, it will be taxed as per the Indian Income-tax laws as income is received and generated in India.

For example, the employer is the Government of India, and the taxpayer is an Indian citizen. In that case, the services provided outside India, the income from salary will be subject to tax in India.

It is to be noted that Diplomat’s and Ambassador’s income is exempted from tax.

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Income from House Property

Income from a property located in India is subject to tax on the part of an NRI. The calculation of such income will be done in the same way as that of the provisions that apply to a Resident taxpayer. The property can be vacant or rented out. An NRI has the provision to claim a standard deduction of 30% and get the benefit of deduction of Interest on a home loan. Apart from that, an NRI under Section 80C can also claim a deduction for repayment of the principal amount. The registration fees and stamp duty paid regarding the property’s purchase are also allowed for deduction under Section 80C.

Income from house property is subject to tax according to the applicable rates. For example, suppose Mahesh, who is residing in the USA, owns a house in Goa and has rented it out and is receiving the rent payments made by his tenant directly into his bank account in the USA. In that case, the income earned from his rented house in India will be taxable in India.

Rental Payments to an NRI

A tenant of an NRI must deduct TDS at the rate of 30% while paying rent. The income can be accepted to an account in India or in a bank account of another country of an NRI in which he is currently staying.

For example, John pays a monthly rent of Rs. 20,000 to his NRI landlord. He is required to deduct TDS of 30% or Rs 9000 before transferring money to the landlord’s account. He also must prepare Form 15CA and submit it to the income tax department online. It is to be noted that a person making a remittance must submit Form 15CA. The form described above has to be submitted online. In most cases, a certificate from a charted accountant in Form 15CB is needed before uploading Form 15CA online. In Form 15CB, a charted accountant will certify the payment details, TDS rate, and deduction of TDS as per the Section 195 of the IT Act, any DTAA (Double Tax Avoidance Agreement) applicable.

Income from Other Sources

Interest income from fixed deposits and savings bank accounts held in banks in India is taxable in India. While, the Interest received on FCNR and NRE accounts is not taxable. However, the Interest on the NRO account is subject to tax entirely.

Income from Business and Profession

Any income earned from a business set up and controlled in India by an NRI is taxable in India on the part of an NRI.

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Income from Capital Gains

Any capital gain received due to the transfer or sale of a capital asset located in India will be taxable in India. It is to be noted that capital gains on investment in shares and securities of India will be taxable in India. In case a house is sold and receives a long-term capital gain, the purchaser will deduct TDS at the rate of 20%. However, the taxpayer can claim exemption on the capital gain by investing in a house under the provisions of the Section 54 of Income Tax Act, 1961 or investment in capital gain bonds according to Section 54EC of the Income Tax Act, 1961.

Special Provision Related to Investment Income

When NRIs invest in some of the assets located in India, these are taxed at the rate of 20% of the earned income. However, if the particular investment income is the NRI’s income during the specific financial year, and deduction of TDS has been made. Hence, NRIs are not liable to file an income tax return in such cases.

The following are some of the investments which qualify for the special treatment;

Income generated from the below-mentioned Indian assets acquired in foreign currency;

  • Shares in private or public Indian Company
  • Debentures issued by an Indian Public listed company
  • Deposits with public companies and banks
  • Security of the Government of India
  • Other assets as specified in this regard in the official gazette of the Central Government.

It is to be noted that deductions are not allowed under Section 80 of the Income Tax Act, 1961 while computing investment income.

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Special provision related to long-term capital gains

Under the Section 80 of Income Tax Act, 1961, in case of long-term capital gain from transfer or sale of foreign assets, there will be no benefit of indexation and deduction is allowed.

A taxpayer can claim exemption on the profit received under the provisions of Section 115F of the Income Tax Act, 1961, when the profits are again invested in the banks;

  • Shares offered by an Indian company
  • Debentures provided by an Indian public company
  • Deposits made with banks and Indian public companies
  • Securities provided by Central Government
  • NSC VI and VII issues

In these cases, the capital gains are exempted proportionately if the cost of the new asset is less than the net consideration. It is to be noted that if the new asset is bought is, sold, or transferred within three years, then the profit received will be exempted, and the same will be added to the income of the same year of transfer or sale.

The benefits mentioned above can be available to NRI if it becomes a resident until and unless the asset described above is converted to money after submitting a declaration by an NRI as per the special provisions to the assessing officer.

The NRI can choose to opt for these provisions, and in such case, the income, including investment income and Long-term capital gain, will be subject to tax under the Income Tax Act, 1961.

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How can NRIs avoid double taxation?

The term “double taxation” means getting taxed on the same income two times in different countries, i.e., India and country of residence. According to provisions of income tax laws, Double Taxation Avoidance Agreement (DTAA) provides relief to NRIs from double tax.

Under the provisions of DTAA, there are two ways to claim for relief of tax exemption which is provided below;

  • Exemption Method
  • Tax Credit Method

If NRIs are taxed in a single country by applying the exemption method, they can be exempted in another. Under the tax credit method, tax relief can be claimed in the residence country when the income is taxed in both countries.

Tax rates as per Income-tax Act

The income tax rate for the financial year 2020-21 for NRIs is provided below;

Income Tax Slab Tax Rate
Below 2.5 Lacs No Tax
2.5 Lacs- 5.0 Lacs 5%
5.0 Lacs- 7.5 Lacs 10%
7.5 Lacs – 10.0 Lacs 15%
10.0 Lacs – 12.5 Lacs 20%
12.5 Lacs – 15.0 Lacs 25%
Above 15 Lacs 30%

Conclusion

Overall, it can be concluded that the taxation of NRIs for the income generated and earned in India is quite the same. However, certain essential things should be kept in mind while computing the total taxable income and accordingly analyzing the income’s taxation aspect based on the residential status. Apart from that, the location of income earned plays a dominant role while determining the tax liability of an NRI taxpayer.

FAQs

 Yes, capital gains on investment in shares and securities of India will be taxable in India. For example, if a house is sold and receives a long-term capital gain, the purchaser will deduct TDS at 20%.

 A tenant of an NRI, while paying rent, must deduct TDS at 30%. The income can be received in an Indian account or in an account of another country’s bank account of the NRI in which he is currently staying.

 According to provisions of income tax laws, an NRI can avoid double taxation by seeking relief under the provisions of Double Taxation Avoidance Agreement (DTAA) between the two countries.
Under the provisions of DTAA, there are two ways to claim relief of tax exemption: Exemption Method and Tax Credit Method. With the application of the exemption method, if NRIs are taxed in a single country, they can be exempted in another. Under the tax credit method, when the income is taxed in both countries, relief of tax can be claimed in the residence country.

 An NRI must file his income tax return like any other Resident Indian in India if the total gross income received in India is more than Rs. 2.5 Lakh for the provided financial year. Further, 31 July is the due date for filing the income tax return for an NRI of the relevant assessment year, or the due date can also be extended by the Government of India.

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