Understanding Non-Resident Taxation: A Simple Guide
Don't let non-resident taxes confuse you. This guide simplifies the complexities of international taxation, which makes it easy to understand and manage your tax responsibilities
Non-Resident Taxation under Income Tax
The Indian taxation system is very tricky, and it gets even more confusing if you're living in a country but are not considered a permanent resident. Here comes the role of Non-resident taxation. Let our tax experts guide you through Non-Resident Taxation complexities!
Who Is a Non-Resident Indian?
A Non-Resident Indian (NRI) is an Indian citizen or an Indian-origin individual who lives outside India. The Foreign Exchange Management Act defines an individual as an NRI if they meet the required conditions as detailed below.
How To Determine Residential Status?
An individual will be considered an NRI for a financial year if they meet the conditions below.
● If they are in India for less than 182 days or 6 months in a financial year.
● If they are in India for less than 60 days in the current financial year and 365 days total or less in the four preceding financial years.
However, there are exceptions to the 60-day rule.
In the below scenarios, the 60-day criterion is not applicable.
● If an Indian citizen left the country in the financial year for employment abroad or as a crew member of an Indian ship.
● If you are a Person of Indian Origin (PIO) or a citizen of India visiting the country.
Simply put, if individuals do not satisfy any of the above conditions, they are deemed as "NRI (Non-Resident Indian)."
Are NRIs Mandated To File Income Tax Returns in India
Whether residents or Non-resident Indians, every individual must file an income tax return in India if their income exceeds the basic exemption limit, i.e., Rs. 2.5 lakh.
What Sources of Income Earned in India?
Various sources of income earned or accrued in India are subject to taxation, as listed below.
● Salary income received in India or for services rendered in India.
● House property income
● Interest earned from FDs (fixed deposits), savings accounts, or other financial transactions.
What are the special provisions for the investment income of NRIs?
Absolutely! NRIs get some special provisions regarding their investment income in India. They are subject to a 20% tax rate when they invest in certain assets. The noteworthy benefit is that if the NRI's income exclusively comprises this special investment income and the applicable TDS (Tax Deducted at Source) has been deducted, they do not need to file an income tax return.
Some investments are eligible for special treatment, including.
● Shares in Indian Companies (whether Public or Private)
● Debentures, limited to those issued by publicly-listed Indian companies (excluding private ones)
● Deposits made with banks and public companies
● Any security issued by the Central Government
● Other assets of the Central Government, as specified in the official gazette.
Which Income Is Considered Taxable For NRIs In India?
The taxable income for NRIs includes various categories, as listed below. The taxpayer is required to file taxes according to the slab rate.
● Income From Salary
A tax on the salary income is levied in different situations.
➔ If an individual gets a salary in India and is deposited directly into an Indian bank account or received on somebody else behalf, the earned money will be taxable.
➔ If an individual earns a salary in India, it is for the work done in India; it could be subject to taxation here.
To sum it up, if you're earning money in India as an NRI, you might have to pay taxes on your salary if it's received or earned here.
● Income From House Property
If you're an NRI earning money from a property in India, whether it's rented out or vacant, that income is taxable. It is calculated in the same way as it would be for someone living in India.
And of course! you get some benefits just like residents do.
➔ A standard deduction of 30% from your rental income.
➔ Allowed to deduct property taxes.
➔ You can benefit from an interest deduction if you have a home loan.
➔ The repayment of the loan's principal amount can be levied as a deduction under section 80C.
➔ Stamp duty and registration charges reimbursed during the property purchase can also be claimed under section 80C.
Important: Even if the income goes directly into your account outside India or your NRE account, it's still taxable in India. Why? Because the source of the income—the property—is in India.
If a resident is renting from an NRI, they must deduct TDS at 30%. Submitting form 15CA/15CB to the Income Tax Department is mandatory when making a payment.
● Income From Other Sources
When an individual earns profit from interest on fixed deposits or savings accounts in India, they will get taxed depending on where they keep that money.
You don't have to pay taxes on the earned interest if it's in a Non-Resident External (NRE) or Foreign Currency Non-Resident (FCNR) account.
If it is a Non-Resident Ordinary (NRO) account, the interest you make on that is fully taxable.
● Income From Capital Gains
When it comes to making gains from selling assets in India, the tax rules are quite straightforward.
Any profit made from the sale of assets, whether it's a property or investments like shares and securities in India, is subject to taxation in India. This includes both short-term (STCG) and long-term capital gains (LTCG).
Now, let’s have a look at the TDS rates!
➔ For long-term capital gains on the property sale, the applicable TDS rate is 20%.
➔ Short-term capital gains from property sales attract a TDS rate of 30%.
Just like residents, Non-Resident Indians (NRIs) can claim exemptions under sections 54, 54EC, and 54F when dealing with long-term capital gains from the sale of a house property. These sections provide certain conditions and criteria that, if met, allow the taxpayer to enjoy exemptions and reduce their tax liability.
● Rental Payments To An NRI
➔ Renting from an NRI involves a TDS (Tax Deducted at Source) deduction of 30% on the rent payment. It applies whether the rent is sent to an Indian or NRI account.
➔ To comply with regulations, the person deducting TDS must submit Form 27Q online to the Income Tax Department. In some instances, the tenant may also need to furnish Form 15CB, a CA-certified form.
➔ Form 27Q might be exempted
➢ If the annual remittance is less than Rs. 5,00,000,
➢ If the AO approves a lower TDS deduction, or
➢ If the transaction comes under Rule 37BB of the IT Act.
Tax Deductions Available For NRIs
Here’s the list of the tax deductions available for NRIs. The following deductions can be claimed under different sections.
➔ Under Section 80C,
➢ Life insurance premium payment
➢ Education expenses or tuition fees
➢ Home loan interest
➢ Unit-Linked Insurance Plan (ULIP)
➢ Investments in Equity Linked Tax Saving Scheme (ELSS)
➔ Under Section 80D
➢ This section provides deductions for premiums paid towards health insurance policies.
➔ Under Section 80E
➢ Interest paid on education loans
➔ Under Section 80G
➢ Donations made to eligible charitable institutions.
➔ Under Section 80TTA
➢ Interest income earned from savings accounts held with banks, cooperative banks, or post offices.
Tax Deductions Unavailable For NRIs
➔ Under Section 80C,
➢ Investment in PPF (Public Provident Fund)
➢ 5year Deposit scheme of Post Office
➢ National Savings Certificates (NSCs) Investments
➢ Senior Citizen Savings Scheme (SCSS)
➔ Under Section 80DDB,
➢ Tax benefits for expenses incurred on the treatment of specified diseases (as certified by a prescribed specialist)
➔ Under Section 80DD,
➢ Medical treatment of any dependent with a disability.
➔ Under Section 80U,
➢ Deduction for the disabled taxpayer
Is It Necessary For NRIs To Pay Advance Tax?
Yes! Non-resident Indians are indeed obligated to pay Advance Tax. If the tax liability exceeds Rs. 10,000, they must pay advance tax in four instalments as outlined in the tax regulations. It is made in the current or previous financial year, based on the estimated tax liability for the entire year.
If the taxpayer doesn't pay advance tax on time or pay less than what they really owe, this can result in the imposition of interest under Section 234B & Section 234C.
Frequently Asked Questions (FAQs)
1. Is the income earned abroad by Non-Resident Indians (NRIs) taxable in India?
No, income earned by NRIs outside India is not subject to taxation in India. The taxation is based on the principle that only income originating within the country or deemed to be earned in India is liable for tax.
2. Which ITR form is required to be filed by NRIs?
NRIs can file two ITR forms, i.e., ITR-2 & ITR-3.
● ITR-2
It is applicable for those who do not have income under the head "Profits and Gains of Business or Profession."
● ITR-3
It applies to those with income under the head "Profits and Gains of Business or Profession."
You have reached the end of this article.