Income Tax: Concept of Taxation for NRIs

Income Tax Concept of Taxation for NRIs

 The taxation system in India is a fundamental part of the country’s economy. India has a well-structured tax system. From income tax to custom duty, various taxes apply to Indian citizens under the country’s taxation system. Almost all taxes under the taxation system can be primarily classified into direct and indirect taxes. Some of the most crucial direct taxes are income tax, property tax, capital gains tax, corporate tax, etc. While the significance of taxes to the country’s government cannot be overstated, the central government also makes various provisions to help citizens save income taxes in India and prevent double taxation, especially for NRIs. If you are an NRI and have income accruing in India to file your income tax return every financial year properly, you may need to consult an income tax lawyer.

The Income Tax Act, 1961(chapter XII-A) provides special provisions relating to certain incomes of non-residents and deals with the requirements for NRI taxation under the Indian Income Tax Act, 1961, which apply to those earning income outside the country. The income tax rules and leverages allowed to NRIs are much different from those applicable to resident Indians. This article will briefly discuss Income Tax for NRIs and tax implications related to the sale/purchase of property in India.

Summary:

  • For taxation purposes, before investing in India, an NRI will have to apply for a Permanent Account Number (PAN) necessary for compliance.
  • NRIs are liable to pay taxes only on the income earned in India, while income earned outside India remains tax-free.
  • NRI’s do not need to file a return of income if total income includes only investment income and long-term capital gains arising from the transfer of a foreign exchange asset wherein tax has been deducted from such income.

Tax Regulations for NRIs

To determine whether the income earned abroad will be taxed in India, NRIs must first consider their residential status for the relevant financial year and whether the income was earned in India. According to Indian law, two statutes govern NRIs taxation and foreign investment – FEMA-Foreign Exchange Management Act and ITA- Income Tax Act. FEMA regulates foreign investment and transactions of Indians overseas. The 1961 Income Tax Act, on the other hand, regulates taxation and defines the appropriate tax treatment of such investments.

General guidelines for NRIs concerning taxation

The previous year’s income of a person is chargeable to tax in the immediately following assessment yearThe rate of tax is applicable as specified by the Annual Finance Act of that year. Regarding income chargeable to tax, tax shall be deducted at source or paid in advance wherever is applicable.

There are some pre-requisites which NRI must keep in mind. Those are: –

  • For taxation purposes, before investing in India, an NRI will have to apply for a Permanent Account Number (PAN) for the purpose of compliance.
  • NRIs are liable to pay taxes only on the income earned in India, while income earned outside India remains tax-free.
  • NRI’s do not need to file a return of income if total income includes only investment income and long-term capital gains arising from the transfer of a foreign exchange asset wherein tax has been deducted from such income.

Income of NRI and its taxability

A question frequently asked by NRIs is the conditions in which NRIs have to pay taxes in India? Whether NRI is supposed to pay taxes depends on their residential status. After determining their residential status, the next step is to identify their taxable income in India.

For NRIs, only income earned or accrued in India is deemed to be taxable in India. Income from any other country besides India is not taxable in India.

Therefore, tax determination on an individual’s income depends on the source of such income and their residential status in India.

The residency rules in the Income Tax Act specifies that if an individual is determined to be a Non-resident, then they are liable to pay tax only on the income earned or accrued in India. Thus, if any income received has a direct or indirect source of origination from India, then such income will be considered accrued in India.

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Now let’s discuss some principles to determine that what is income accrued in India.

  • Firstly, the income earned in India is taxable in India, e.g., sale of land (capital gains)
  • Secondly, income earned outside India is not taxable in India – NRI’s Income earned outside is not taxable in India.
  • Thirdly, income which accrues/arises in India is taxable in India.
  • Fourthly, the income deemed to accrue/arise in India is also taxable in India.
  • Fifthly, the income which is received in India is taxable India.

Further, for an NRI, the Interest earned on an NRE account and FCNR account is tax-free, and Interest on an NRO account is taxable.

  • The Income Tax Act, 1961( chapter XII-A) provides special provisions relating to certain incomes of non-residents.
  • NRIs must consider their residential status for the relevant financial year to determine whether the income earned abroad will be taxed in India.
  • After the residential status has been determined, the next step is to identify taxable income in India as per the residential status.
  • A ‘Non-resident’ is liable to pay tax only on the income earned or accrued in India. NRIs income from any country besides India is not taxable in India.
  • Thus, if any income received has a direct or indirect source of origination from India, then such income will be considered accrued in India.

Types of Income Taxable for NRI in India

Different kinds of income are treated according to the provisions of the ITA, 1961. You may consult a tax lawyer to assess the same. Here are some types of incomes that are liable to tax in India –

(a) Income from Salary –

Salary or Income received by an NRI for the services provided in India shall become taxable, irrespective of the place of receipt. Such income shall be subject to Indian tax laws. The rate of tax will be decided as per the slab rate applicable in the particular financial year.

(b) Income from House Property

Any Income from a property that is situated in India, either rented or lying vacant, is taxable income for an NRI. The calculation of such income shall be done in the same manner as for a resident.

(c) Rental Payments to an NRI

Any income arising in the form of rental income is liable to be taxed at the source. Thus, the NRI Landlord is entitled to receive rental income after deducting tax at source by the tenant who pays such rent.

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(d) Income from Other Sources earned in India

Interest income from fixed deposits (FD) and savings accounts held in bank accounts in India are taxable in India. Interest on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) account are tax-free, whereas the Interest on the NRO account is fully taxable.

(e) Income from Business and Profession

The income earned by a Non-resident Indian from a business set up and controlled in India will be considered income accrued. Therefore the same will be taxable in India.

(f) Income from Capital Gains

Any capital gain on transfer of capital asset which is situated in India shall be taxable in India. In addition, capital gains on investments in India in shares, securities shall also be taxable in India.

Income tax slabs applicable to NRI

Indian Income-tax levies tax on individual taxpayers based on a slab system. A slab system means different tax rates are prescribed for different ranges of income. It means the tax rates keep increasing with an increase in the income of the taxpayer. This type of taxation enables progressive and fair tax systems in the country. Such income tax slabs tend to change every budget. Hence, it is advisable to consult an income tax lawyer to comprehend the slab of income that will be applicable.

Advance Tax

If your tax liability exceeds INR 10,000 in a particular financial year, you must pay advance tax.

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Tax liability for buying and selling properties by NRI

(I) NRIs Buying Property in India

NRIs buying immovable property in India does not require any special permission as such. However, the payment cannot be made in foreign currency. Instead, NRIs can purchase Indian currency through funds received in the country using normal banking channels. NRIs can purchase immovable properties (residential and commercial) in India except for agricultural land, farmhouse and plantation property. There are no restrictions in place,on the number of immovable properties that an NRI may purchase, either residential or commercial.

(II) Tax on Sale of property by NRI 

Most often asked questions by NRI are how much tax is payable and TDS deductible in case of NRIs who wish to sell property in India. NRIs who are selling house property situated in India is liable to pay tax on the Capital Gains. The quantum of tax payable on the gains depends on whether it is short-term or long-term capital gain.

As per Indian tax laws, capital gains can be divided into two categories, i.e. Long Term Capital Gains and Short-Term Capital Gains.

(a) Long Term Capital Gain- If an individual purchases a property and sells it after about two years, then the profits from the sale come under long-term capital gains. The tax department assesses long-term capital gains by using the Cost Inflation Index to calculate the property’s fair price at the time of its sale. The fair price helps in the correct evaluation of the long-term capital gain over the period. In case of long-term gains, tax is payable as per the provisions of the Income Tax Act, which is mainly taxed at 20 per cent.

(b) Short Term Capital Gain –When an individual buys a property and sells it within two years of purchasing such property, then the profit from the sale comes under short-term capital gains. Short-term capital gains add up to the individual’s taxable income and attract taxes as per the tax slab applicable to the individual. Short term capital gains are calculated by deducting the cost of purchase from the Full Sale Price of the property. The TDS calculation is done as per the Income Tax Slab Rates of Seller.

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Tax deducted at Source (TDS)

Whenever any property is purchased or sold, TDS is deducted. Before the amount is paid to the seller, the buyer will deduct some amount (technically known as TDS) and pay the balance to the seller. According to Section 195 of the ITA, 1961, any person responsible for paying an NRI, (not a company/ a foreign company) shall deduct income-tax thereon at the rates in force. The amount to be deducted will solely depend on the residential status of the seller. If the seller is an NRI – the amount of TDS to be deducted will depend on the amount of money received by the seller. One can consult an income tax lawyer to get proper TDS evaluated when selling a property.

How can an individual save tax on capital gains?

It should be clear,that one cannot avoid paying taxes on short-term capital gains if a person sells the property within two years of its purchase. However, there are some ways an individual can save taxes on long-term capital gains. For example, according to the provisions of the ITA, 1961, an individual can avoid paying tax on long-term capital gains by reinvesting the gains to buy another property. Also, an individual can claim long-term capital gains tax exemption if they invest the amount from the sale of a property into the purchase of bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation etc. Therefore, if you plan the sale of your property in the right manner, you can earn good returns on your property investments while saving long term capital gains tax. Thus, to effectively avoid such tax as per the provisions, it is recommended to consult an income tax lawyer.

Double taxation

Many countries levy tax on the sale of property by their Residents irrespective of the property’s location. For example, An NRI residing in the US sells property in India, then both the US and India will levy tax on this transaction. US will levy tax because an NRI is residing in the US, and India will levy tax because the property is located in India, leading to double taxation. However, India has entered into Double Taxation Avoidance Agreements (DTAA) with several countries to avoid levies of double taxes. According to these agreements, if a person has paid tax on the sale of property in India, he can get a tax credit of the taxes paid in India, reducing his tax liability in the other country. Tax relief can be availed by two methods– exemption method and tax credit method. In the exemption method, NRIs are taxed in only one country and exempted in another.

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Conclusion

For taxation, NRIs need to identify whether their income will be taxed in India or not. For the same, NRIs must consult an income tax lawyer who can help them determine their residential status for the financial year and further help them in evaluating whether the income was earned in India or abroad. According to the Act, if an individual is determined to be a Non-resident, then such an individual is liable to pay tax on income earned or accrued in India. However, it has often been seen that NRIs face many difficulties while determining and paying taxes in India. Therefore, for proper compliances, NRIs may need to consult an income tax lawyer.

FAQs

 Any individual, whether NRI or not, is liable to file ITR if his/her income is above INR 2,50,000 subject to certain conditions.

 In certain cases, even if the total gross income does not exceed the exemption limit, an individual will have to mandatorily file an income tax return, for example, when (i) an Individual has deposited an amount exceeding Rs 1 crore in one or more current accounts maintained with a bank or co-operative bank (ii) Individual has spent an amount or aggregate of amounts exceeding Rs 2 lakh for himself/herself or any other person for travel to a foreign country; (iii) an Individual has Spent more than 1 lac on electricity

 If a person has paid tax on the sale of property in India, then he can get a tax credit of the taxes paid in India, which will reduce his tax liability in the other country. Two methods are specified to claim tax relief – the exemption method and the tax credit method. In the exemption method, NRIs have to pay tax in only one country and have to be exempted in the other. In the tax credit method, if the income is taxed in both countries, tax relief can be claimed in the country of residence.

 Determination of Tax on an individual’s income depends on the source of such income and the residential status in India.

 Any individual whose income exceeds INR 2,50,000, irrespective of them being NRIs or not, has to file an income tax return in India.

 A non-resident is taxable on the salary income in respect of the services rendered in India under a deputation or any other arrangement.

 Yes, an NRI is liable to pay tax on the rental income earned from a house property situated in India.

 Besides PAN card, Copies of Passport and Immigration stamp, business income and the Balance sheet and Profit and loss statement, etc., are the documents needed to assess.

 If an individual buys a property and sells it within two years of the purchase, then the profit from the sale is called short-term capital gains. Short term capital gains add up to the taxable income of the individual and attract taxes as per the individual’s applicable Income Tax slab. Short term capital gains are calculated by deducting the cost of purchase from the Full Sale Price of the property as per the provisions.

 If your tax liability exceeds INR 10,000 in a financial year, you are required to pay advance tax.

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