We all recognize that taxes collected from citizens form the bedrock of India’s economy. However, the Indian Income Tax Act of 1961 prescribes a distinct taxation framework for Non-Resident Indians (NRIs) who earn income outside their home country. This framework varies significantly from the rules applicable to resident Indians.
Determining Your Residential Status
To determine your residential status for a financial year in India, consider the following conditions:
- If you spend at least 182 days in India during the financial year, you are considered an Indian resident.
- Alternatively, if you’ve been in India for 60 days during the previous year and 365 days over the last four years, you qualify as an Indian resident.
- Please note that Indian citizens working abroad or serving as crew members on Indian ships are considered residents if they spend at least 182 days in India.
- The same 182-day rule applies to Persons of Indian Origin (PIO) visiting India. The second condition does not apply to PIOs, who are individuals with parents or grandparents born in undivided India.
- If none of the above conditions apply to you, you are classified as a Non-Resident Indian (NRI).
Resident but Not-Ordinary Resident (RNOR) Definition Amended
Individuals are considered RNOR under the following circumstances:
- If they have been non-residents in India for nine out of the ten previous years preceding the year under consideration or
- If they have stayed in India for 729 days or less during the seven previous years before the year under consideration.
The Finance Act of 2020 amended the residency rules to include Indian Citizens and Persons of Indian Origin who visit India. They will be considered RNOR if:
- Their total income, excluding foreign income, exceeds Rs 15 lakh.
- They have stayed in India for over 120 days but less than 182 days in the previous year.
- They have stayed in India for 365 days or more in the four years preceding the previous year.
- Before this amendment, such individuals were classified as non-residents. This change in status may lead to the loss of certain benefits and an increased scope of total income for taxation.
- It is noteworthy that, due to the above amendment, individuals staying for more than 182 days are considered residents, regardless of their income in the previous year.
Deemed Residency Status Introduced in Finance Act 2020
The Finance Act of 2020 introduced the concept of ‘Deemed residency.’ Indian Citizens earning over Rs 15 lakh from Indian sources will be deemed residents of India if they are not liable to pay taxes in any other country. Deemed residents are classified as RNOR starting from the financial year 2020-21.
This amendment was enacted to tax the incomes of Indian citizens who are not liable to pay tax in any other country.
Special Relief Due to COVID Lockdown
For the fiscal year 2019-20, individuals who arrived in India before March 22, 2020, and faced certain situations due to the COVID-19 lockdown are granted special relief. Their period of stay during specific circumstances related to quarantine or evacuation flights is not considered when determining their residential status.
Taxation of Income Earned Abroad
An NRI’s tax liability in India depends on their residential status for the year, as explained above:
- If your status is ‘resident,’ your global income is taxable in India.
- If your status is ‘NRI,’ only the income earned or accrued in India is taxable in India.
- Income earned or accrued outside India is not subject to taxation in India. Income taxable for an NRI includes salary received in India, income from property in India, capital gains from asset transfers in India, and interest on Indian bank accounts.
- Conversely, interest earned on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is tax-free, while interest on NRO (Non-Resident Ordinary) accounts is taxable for NRIs.
File Income Tax Returns as an NRI: A Step-by-Step Guide
8-step guide for filing income tax returns as an NRI:
Step 1: Determine Your Residential Status in India
The initial step for Non-Resident Indians (NRIs) involves establishing their residential status for each financial year. As per the Income Tax Act of 1961, an Indian citizen who departs India for employment or an NRI visiting India can reside in India for up to 181 days without losing their non-residential status.
- Under the Income Tax Act of 1961, an individual will be regarded as a resident in India for a previous year if they meet any of the following criteria:
- They were in India for 182 days or more during the previous year.
- They are in India for 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year.
Note: An individual who does not meet the aforementioned conditions will be considered a Non-Resident in that previous year.
Step 2: Reconciliation of Income & Taxes with Form 26AS
In the second step, you must reconcile and compare the Tax Deducted at Source (TDS) offset paid on your Income Tax Return (ITR) or input tax paid on your tax return against the TDS offset/input tax displayed on Form 26AS.
Step 3: Ascertain Taxable Income and Determine Your Tax Liability
This step involves determining the taxable income you must pay as an NRI. It may include capital gains from shares held in India, rental income from Indian properties, interest on Indian bank accounts, and more. Deductions can be claimed under various sections of the Income Tax Act to reduce this income.
Afterwards, calculate your tax liability based on the applicable income tax slab rates for individuals.
Step 4: Claim Double Taxation Treaty Relief
You can benefit from Double Taxation Avoidance Agreements (DTAA) if your income is taxable in India and another foreign country. The relief is offered based on the type of income. If your income remains taxable under DTAA, you must pay tax in India and claim a tax credit in your resident country based on certain conditions.
Step 5: Select ITR and Provide Details of Exempt Income
NRIs must file returns in ITR 2 for all cases, except for business income, starting from the financial year 2017-18. NRIs earning business income must file an income tax return in ITR 3. Please note that ITR 1 is no longer available for NRIs. Also, disclose exempt income, such as Long-Term Capital Gains (LTCG) on listed securities, interest on tax-free bonds, NRE/FCNR deposits, dividends, etc., which does not impact tax under the Exempt Income schedule.
Step 6: Disclosure of Bank Account Details
NRIs claiming an income tax refund and lacking a bank account in India may need to provide details of a foreign bank account for tax refund issuance. However, if you are not claiming a tax refund or have an Indian bank account, this requirement does not apply to you.
Step 7: Provide Assets and Liabilities Details in ITR
Suppose your total income exceeds Rs 50 lakh. In that case, you must provide information about your movable and immovable assets in India and details of your liabilities as the final step before filing your return.
Step 8: ITR Verification
In the final step, upload your ITR and verify it within 120 days. Failure to verify your returns renders them invalid and may be considered as if the income tax returns were never filed. E-verification can be done through an Indian net banking account, while physical verification can be completed by sending a duly signed ITR V to the Income-tax CPC, Bengaluru.
Filing Deadline for Income Tax Returns in India
The final date to submit income tax returns in India for Non-Resident Indians (NRIs) is July 31 unless extended by the government.
Advance Tax Obligation for NRIs
If the tax liability of NRIs exceeds Rs 10,000 in a financial year, they are required to pay advance tax. Failure to pay advance tax may result in interest charges under Section 234B and Section 234C.
Diplomats and Ambassadors are exempt from tax
- Income from House Property: Income from a property in India is taxable for NRIs. The calculation follows the same rules as for residents. NRIs can claim a standard deduction of 30%, deduct property taxes, benefit from interest deductions on home loans, and claim principal repayment deductions under Section 80C.
- Rental Payments to an NRI: Tenants paying rent to an NRI property owner must deduct TDS at 30% and may transfer the income to either an Indian account or the NRI’s foreign account.
- Income from Other Sources: Interest income from fixed deposits and savings accounts held in Indian banks is taxable in India. Interest on NRE and FCNR accounts is tax-free, while interest on NRO accounts is fully taxable.
- Income from Business and Profession: Any income earned by an NRI from a business controlled or established in India is taxable.
- Income from Capital Gains: Capital gains on transferring assets in India, including investments in Indian shares and securities, are taxable. TDS at 20% is applicable when selling a property with long-term capital gains, but exemptions are available under Sections 54 and 54EC.
- Special Provision Related to Investment Income: NRIs investing in certain Indian assets are taxed at 20% on the income earned. If this is their sole income for the financial year and TDS has been deducted, filing an income tax return is not required. Eligible investments include shares, debentures, deposits, and government securities.
- Special Provision Related to Long-Term Capital Gains: There is no benefit of indexation or deductions under Section 80 for long-term capital gains on foreign assets. Exemptions can be claimed under Section 115F when profits are reinvested in specific Indian assets. However, the exempted profit is added to the income if the new asset is sold within 3 years. Opting out of these special provisions leads to taxation under regular provisions.
Deductions and Exemptions for NRIs
Similar to resident taxpayers, Non-Resident Indians (NRIs) can also take advantage of various deductions and exemptions to reduce their total taxable income. These provisions are as follows:
Most of the deductions available under Section 80 are also applicable to NRIs. For the financial year 2020-21, individuals can claim a maximum deduction of up to Rs 1.5 lakh from their gross total income under Section 80C.
Specific deductions under Section 80C for NRIs include:
- Life Insurance Premium Payment: Deductions are allowed if the policy is in the NRI’s name, their spouse’s name, or a child’s name, with the premium being less than 10% of the sum assured.
- Children’s Tuition Fee Payment: Tuition fees are paid to educational institutions in India for the full-time education of up to two children, including payments to play schools, pre-nursery, and nursery.
iii. Principal Repayments on Loan for House Property: Deductions can repay loans taken for purchasing or constructing residential property in India, including stamp duty, registration fees, and other transfer expenses.
- Unit-Linked Insurance Plan (ULIP): Contributions to unit-linked insurance plans, such as those offered by LIC mutual fund and UTI, qualify for Section 80C deductions.
- Investments in ELSS: NRIs can invest in Equity-Linked Savings Schemes (ELSS) to claim deductions under Section 80C, with a maximum limit of Rs 1.5 lakh.
Other Allowable Deductions
In addition to Section 80C deductions, NRIs can also avail themselves of various other deductions under the income tax laws:
Deduction from House Property Income: NRIs can claim deductions available to residents, including deductions for insurance premiums on parents, property tax payments, and interest on home loans.
Deduction under Section 80D: NRIs can claim deductions for health insurance premiums paid for themselves, their spouse, and dependent children, with a maximum limit of Rs 25,000. The limit increases to Rs 50,000 if the premiums are for resident senior citizens.
Deduction under Section 80E: NRIs can claim deductions for interest paid on education loans taken for higher education, including for themselves, their spouse, children, or students for whom they are legal guardians. There is no limit on the deduction amount.
Deduction under Section 80G: NRIs can claim deductions for donations made for social causes under Section 80G.
Deduction under Section 80TTA: NRIs can claim a deduction of up to Rs 10,000 on interest income from savings bank accounts, just like resident Indians.