India’s tax system differentiates between residents, non-residents, and Non-Resident Indians (NRIs) on the basis of their physical presence in the country, impacting their tax liabilities. Non-Resident Indians (NRIs) are taxed only on income earned or received in India, including salary, rental income, capital gains, interest, and dividends. Certain interest incomes, such as those from Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts, are exempt from tax. In contrast, others, like Non-Resident Ordinary (NRO) account interest, are taxable. Tax Deducted at Source (TDS) is applied to various incomes at different rates. NRIs can file income tax returns to claim refunds if excess tax is deducted. (NRIs) can avoid paying tax twice on the same income by providing the Tax Residency Certificate of their country of residence to Indian tax authorities.
In this guide, we will understand what NRIs are, tax liabilities for NRIs in India, sources of taxable income for NRIs, and how they can claim a refund.
Who is a Non-Resident?
The Indian Income Tax Act classifies individuals based on their physical presence in India during a financial year, which spans from April 1 to March 31. This classification determines the scope of their tax liability in India:
- Resident: An individual who stays in India for 182 days or more during the financial year, or 60 days or more in the year, and 365 days or more in the preceding four years.
- Non-Resident (NR): An individual who does not meet the conditions to be classified as a resident.
- Resident but Not Ordinarily Resident (RNOR): A special category that includes individuals who are residents but have been non-residents in a specified number of previous years.
Who is an NRI?
An NRI, or Non-Resident Indian, is a person of Indian origin or citizenship who resides outside India for employment, business, or any other purpose for an uncertain duration.
Tax Liability of Non-Residents and NRIs in India
- Income Tax Based on Residential Status: One of the fundamental principles of Indian taxation is that the residential status of an individual determines the extent of their taxable income:
- Resident Individuals: Taxed on their global income, i.e., income earned anywhere in the world.
- Non-Resident Individuals and NRIs: Taxed only on income that is earned, received, or deemed to accrue in India.
Income Tax on Income Earned in India
For non-residents and NRIs, income taxable in India includes:
- Income from salary received or earned in India.
- Income from property located in India (such as rent).
- Income from a business or profession carried out in India.
- Capital gains from the transfer of assets situated in India.
- Interest income on deposits held in Indian banks or financial institutions.
- Income from investments, such as dividends or securities.
Sources of Taxable Income for NRIs
1. Salary Income: Non-Resident Indians (NRIs) who earn a salary in India from an Indian employer or for services rendered in India are liable to pay tax on that income. Income from foreign employers for services performed outside India is not taxable in India.
2. Income from Property: Income from any property owned in India, including rent received, is taxable. NRIs are required to pay tax on such rental income after deducting municipal taxes and standard deductions.
3. Capital Gains: Capital gains arising from the sale of assets situated in India (like property or shares in Indian companies) are taxable in India. The nature of the capital gains (short-term or long-term) and tax rates depend on the holding period and type of asset.
4. Interest Income: Interest earned on fixed deposits, savings accounts, or other investments in India is taxable for non-resident Indians (NRIs). However, certain types of interest income, like interest on Non-Resident External (NRE) accounts, are exempted from tax, such as:
- Interest on Non-Resident External (NRE) Accounts: Interest earned on NRE savings, current, and fixed deposit accounts is fully exempted from the Indian Income Tax Act, 1961.
- Interest on Foreign Currency Non-Resident (FCNR) Accounts: Interest earned on FCNR accounts, which are fixed deposits held in foreign currency, is also exempted from tax in India.
7. Interest on Non-Resident Ordinary (NRO) Accounts: Unlike NRE and FCNR accounts, interest earned on NRO accounts is taxable in India.
Tax Deducted at Source (TDS) for NRIs
Tax Deducted at Source (TDS) is a system where tax is deducted by the payer at the time of making certain payments. This tax is then deposited with the government on behalf of the payee. For Non-Resident Indians (NRIs), tax deducted at source (TDS) is applicable on various types of income earned in India, including interest income, rental income, dividends, and capital gains.
Applicability of TDS on Different Incomes for NRIs
- Interest Income: Interest earned by Non-Resident Indians (NRIs) on fixed deposits, savings accounts (except certain exempted accounts, such as NRE accounts), and other financial instruments in India is subject to Tax Deducted at Source (TDS) at a rate of 30%.
- Rental Income: If Non-Resident Indians (NRIs) receive rental income from property in India, tax deducted at source (TDS) is deducted at a rate of 30% on the gross rental amount.
- Dividends: Dividends paid to NRIs are subject to TDS, but at a concessional rate of 20% plus applicable surcharge and cess, as per the Income Tax Act.
- Capital Gains: TDS on capital gains depends on whether the gains are short-term or long-term, as well as the type of asset (e.g., equity shares, property). The rates vary accordingly, with short-term capital gains generally taxed at a higher rate than long-term gains.
Claim Refunds and Adjusting Tax Liability
NRIs may sometimes have excess TDS deducted if their total tax liability is lower than the amount deducted. In such cases, they can file their income tax returns in India to claim a refund of the excess tax deducted at source (TDS).
Income Tax Return Filing for NRIs
- When to File: NRIs are required to file an income tax return in India if their total taxable income exceeds the basic exemption limit (which differs depending on age and category). Additionally, filing a return is necessary to claim refunds on excess TDS deducted or if the NRI has other sources of income in India.
- Due Date: The due date for filing income tax returns for NRIs is generally July 31, following the end of the financial year. For example, for the financial year April 1, 2023, to March 31, 2024, the due date would be July 31, 2024.
Double Taxation Avoidance Agreements (DTAA)
Double Taxation Avoidance Agreements (DTAA) are treaties signed between two countries to ensure that income earned by a person or company in one country is not taxed twice, i.e., both in the country where the income is earned and the country of residence. DTAA helps NRIS in:
- Avoidance of Double Taxation
- Lower Tax Rates
- Claim Credit on certain Income
- Clarity on Tax Jurisdiction, i.e., which country has the right to tax a specific type of income.
To avail of benefits under a Double Taxation Avoidance Agreement (DTAA), Non-Resident Indians (NRIs) must provide a Tax Residency Certificate (TRC) from their country of residence.
Conclusion
For NRIs, understanding tax rules in India can be challenging, but it doesn’t have to be that complex. Knowing which incomes are taxable and making use of exemptions like those on NRE and FCNR accounts can save you from paying more than necessary. DTAAs are also a big help, as they prevent you from being taxed twice on the same income. Filing your returns on time and keeping track of your tax deductions will not only keep you compliant but also give you peace of mind.
