Compliance with Income Tax Act 1961 by NRIs: An Overview

Summary: Non-Resident Indians (NRIs) are defined under the FEMA Act as Indian citizens who live abroad for employment or business purposes with an indefinite stay. Under the Income Tax Act, 1961, NRIs are categorized into three classifications based on their physical stay in India: Resident, Not Ordinarily Resident (NOR), and Non-Resident (NR). A Resident is someone who stays in India for at least 182 days in a financial year, while NOR and NR statuses depend on prior years’ residency. NRIs are taxed differently based on their residential status. A Resident is taxed on their global income, while an NOR is taxed on income earned in India and partially controlled businesses outside India. An NR, however, is taxed only on income accruing or received in India. NRIs are eligible for deductions under several sections, such as Section 80D (health insurance) and 80E (education loan interest). However, some benefits, such as those for senior citizens and differently-abled individuals, are limited or unavailable to NRIs. Sections like 80EE, 80EEA, and 80EEB offer deductions for interest payments on loans for house property and electric vehicles. NRIs can also claim deductions for donations (under Section 80G) and interest from savings accounts (Section 80TTA). Certain investments like PPF and NSC, however, are not available to them.

1. The term Non-Resident Indian (NRI) is defined under the FEMA Act as an Indian citizen who has left India or resides outside the country for reasons such as employment, conducting business, or pursuing a vocation abroad, with the intention of staying outside India for an indefinite duration. In other words, an NRI is a person who is not a person resident in India but who is citizen of India. However, as per Income tax Act 1961, the residential status of NRIs is defined in different way considering the period of physical stay in India. Based on the period of stay in India in a given financial year, an Individual may be classified as

1.1 (A) Resident, (B) Not Ordinarily Resident (NOR)  and Non Resident (NR).

A. Resident of India:- According to Section 6(1) of the Income Tax Act, 1961, an individual is considered a resident in India if they stay in the country for a total of 182 days or more during any previous year, or if they are present in India for at least 60 days in the current financial year and 365 days or more in the four years preceding that financial year.

B. Not Ordinarily Resident (NOR):- Furthermore, Section 6(6) states that an individual is classified as Not Ordinarily Resident (NOR) if they have been a non-resident in India for 9 out of the 10 previous years preceding the relevant year, or if they have been in India for a total of 729 days or less during the 7 years preceding that year.

C. Non -Resident (NR):- Non -Resident is a person who does not satisfy any of the conditions as stated in (A)

1.2 Deemed Resident:- Section 6(1A) of the I.T Act:- The Finance Act, 2020 has added a new section 6(1A) to the Income-tax Act, 1961. This provision states that an Indian citizen will be considered a resident of India only if their total income, excluding foreign income, exceeds Rs. 15 lakhs in the previous year. For these purposes, foreign income refers to income earned outside India, unless it is from a business controlled or a profession established in India. Additionally, an individual will only be deemed an Indian resident if they are not liable to pay tax in any other country or jurisdiction based on their domicile, residence, or similar criteria. Therefore, starting from Assessment Year 2021-22, an Indian citizen with total income above Rs. 15 lakhs (excluding foreign income) will be regarded as a resident of India if they are not liable to tax in any country. “Liable to tax” means having an income-tax obligation under that country’s laws, including individuals who may have been subsequently exempted from such liability.

2. Scope of taxable income:-

2.1 Regarding residents, income received, accrued, or arising in India and from overseas is taxable. Additionally, the global income of the resident is also subject to taxation.

2.2 In respect of NOR is concerned income received in India and income accruing or arising in India including deemed to be accrue or arise in India. Besides, income from business or profession controlled wholly or partly in India also taxable in the hands of NOR.

2.3 With regard to NR, the income received in India and income accruing or arsing in India as well as income deemed to accrue or arise in India.

2.4 The following chart highlights the tax incidence in case of different persons:-

(*)  ROR means resident and ordinarily resident.

RNOR means resident but not ordinarily resident.

NR means non-resident.​

2.5 Following incomes are treated as incomes deemed to have accrued or arisen in India:

> Capital gain arising on transfer of property situated in India.

> Income from business connection in India.

> Income from salary in respect of services rendered in India.

> Salary received by an Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case.

> Income from any property, asset or other source of income located in India.

> Dividend paid by an Indian company.

> Interest received from Government of India.

> Interest received from a resident is treated as income deemed to have accrued or arisen in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and used by resident for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.

> Interest received from a non-resident is treated as income deemed to accrue or arise in India if such interest is in respect of funds borrowed by the non-resident for carrying on any business/profession in India.

> Royalty/fees for technical services received from Government of India.

> Royalty/fees for technical services received from resident is treated as income deemed to have accrued or arisen in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.

> Royalty/fees for technical services received from non-resident is treated as income deemed to have accrued or arisen in India if such royalty/fees is for business/profession/other source of income carried by the payer in India.

> Income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid on or after 05-07-2019 by a person resident in India to a non-resident.​

3. Exempt Investment Income in the following categories for Non-resident:-

3.1. Interest on NRE Account:- According to section 10(4)(ii), for individuals, any income derived from interest on funds in a Non-Resident (External) Account at any bank in India—permitted under the Foreign Exchange Management Act, 1999 (42 of 1999)—is exempt from tax. This applies provided that the individual is a resident outside India as defined in clause (w) of section 2 of that Act or has received permission from the Reserve Bank of India to maintain the account. Additionally, interest, redemption premiums, and other payments related to NRNR deposits, securities, bonds, and annuity certificates specified under section 10(15)(i) are also exempt. Non-resident individuals can benefit from this interest exemption as long as they remain non-resident under the Income-tax Act.

3.2. Interest on Relief Bonds :- Sec 10(15)(ii)(c) – In the case of an individual or a Hindu undivided family, interest on such Relief Bonds also exempt, as the Central Government may, by notification in the Official Gazette, specify in this behalf.

3.3. Interest on Specified Bonds:- Section 10 (15)(iid) Interest on bonds specified by the Central Government through a notification in the Official Gazette shall be exempt for:

(a) a non-resident Indian individual who owns the bonds;

(b) any individual who owns the bonds as a nominee or survivor of the non-resident Indian; or

(c) any individual to whom the bonds have been gifted by the non-resident Indian. This exemption applies provided that the bonds were purchased by the non-resident Indian using foreign exchange, and the interest and principal received—whether at maturity or otherwise—cannot be transferred out of India. Furthermore, if a non-resident Indian becomes a resident in India in a subsequent year after acquiring the bonds, the provisions of this clause will still apply to that individual. If the bonds are cashed before maturity by an eligible individual in a previous year, this clause will not apply to them for the relevant assessment year. Additionally, the Central Government will not designate any bonds for this purpose after June 1, 2002.For clarity, “non-resident Indian” refers to the definition in clause (e) of section 115C.

3.4. Interest paid by Scheduled banks approved by RBI:- Also, interest paid by scheduled banks on RBI-approved foreign currency deposits, including FCNR and RFC accounts for non-residents or those not ordinarily resident, is exempt under Section 10(15)(iv)(fa).

3.5. Interest from Offshore Banking Unit:- 10(15) (viii) says that any income earned as interest by a non-resident or a person who is not ordinarily resident in India, on a deposit made on or after April 1, 2005, in an Offshore Banking Unit as defined in clause (u) of section 2 of the Special Economic Zones Act, 2005, is exempt.

3.6. Income from dividends:- 10(34) Any income received as dividends as specified in section 115-O: Provided that this clause does not apply to any dividend income subject to tax under section 115BBDA.Additionally, this clause does not apply to any dividend income received on or after April 1, 2020, except for dividends on which tax has been paid under section 115-O and section 115BBDA, as applicable.

3.7. Income from transfer of Capital asset:- Section 10 (38) Any income arising from the transfer of a long-term capital asset, such as an equity share in a company, a unit of an equity-oriented fund, or a unit of a business trust, is exempt if:

(a) the sale transaction is executed on or after the effective date of Chapter VII of the Finance (No. 2) Act, 2004; and

(b) the transaction is subject to securities transaction tax under that Chapter.Provided that the long-term capital gains of a company must be included in calculating the book profit and income tax payable under section 115JB.

Additionally, this clause does not apply to transactions conducted on a recognized stock exchange in an International Financial Services Centre where the payment for the transaction is made in foreign currency. Furthermore, this clause does not apply to any income from the transfer of a long-term capital asset, specifically an equity share in a company, if the acquisition transaction (other than those specified by the Central Government) occurs on or after October 1, 2004, and is not subject to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.Moreover, this clause does not apply to income arising from the transfer of a long-term capital asset, including an equity share, a unit of an equity-oriented fund, or a unit of a business trust, made on or after April 1, 2018.

Explanation: For the purposes of this clause:

(a) An “equity-oriented fund” is defined as a fund where more than sixty-five percent of the investable funds are invested in equity shares of domestic companies, and which has been established under a Mutual Fund scheme specified in clause (23D). The equity shareholding percentage is calculated based on the annual average of monthly opening and closing figures.

(b) “International Financial Services Centre” has the meaning assigned in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005).

(c) “Recognized stock exchange” is defined in clause (ii) of Explanation 1 to sub-section (5) of section 43.

3.8. Income received from sale of crude oil:-  section 10(48) Any income received in Indian currency by a foreign company in India from the sale of crude oil, other goods, or the provision of services, as specified by the Central Government, is exempt: Provided that—(i) the foreign company receives this income in India as part of an agreement or arrangement entered into or approved by the Central Government;(ii) the foreign company and the agreement or arrangement are notified by the Central Government in the interest of national priorities; and(iii) the foreign company is not involved in any activities in India beyond the receipt of this income.

4. Taxable Income for an NR:-

4.1 Income from Salary :- When an NRI receives salary in India and the same taxable under the provisions of Indian Income tax Act 1961. This salary income would be taxed at the applicable slab rates.  Income from salary will be considered as originating in India if the services are performed in India. Thus, even if a Non-Resident Indian (NRI) resides abroad, any salary paid for services rendered in India will be taxable in India, irrespective of where the payment is received. The phrase “services rendered in India” covers a wide range, indicating that any salary earned during the time spent working in India will be taxable, regardless of the individual’s residential status or payroll location. However, the NRI may qualify for tax exemptions under the Double Taxation Avoidance Agreement (DTAA) if the source country has a DTAA with India. Recently, the ITAT Hyderabad[1] ruled that:

‘18. Respectfully following the decision of the Hon’ble AAR in British Gas India (P) Ltd., In re (supra), we hold that though the provision under section 5(2)(a) of the Act fastens tax liability on the assessee, but, because of the overriding effect of section 90 of the Act, article 16 of the DTAA would prevail over the 5(2)(a) of the Act and consequently, the salary received by the assessee in India for the services rendered in USA are not liable to tax in India. Consequently, we direct the learned Assessing Officer to delete the addition made. 19. In the result, appeal of the assessee is allowed”

4.2 In line with the Hon’ble AAR’s decision in British Gas India (P) Ltd., the ITAT held that although section 5(2)(a) of the Act establishes tax liability for the assessee, the overriding provisions of section 90 mean that article 16 of the DTAA takes precedence over section 5(2)(a). Consequently, the salary received by the assessee in India for services rendered in the USA is not taxable in India. Accordingly, the ITAT directed the Assessing Officer to remove the addition made.

5. Income from house property

5.1 Income from property located in India is subject to taxation for NRIs, calculated in the same way as for residents. This property may be rented out or remain vacant. NRIs can claim a standard deduction of 30%, deduct property taxes, and benefit from interest deductions on home loans. Additionally, they can claim principal repayment deductions under Section 80C. Stamp duty and registration fees paid during the property purchase can also be claimed under Section 80C. Income from house property is taxed at the applicable slab rates.

6. Rent receipts by NR from the property located in India:-

6.1 A tenant paying rent to an NR owner must remember to deduct TDS at 30% when making the payment. The rental income can be credited to an account in India or the NR’s account in their current country of residence. When making a remittance to an NRI, the payer must submit Form 15CA online. In some cases, a Form 15CB certificate from a chartered accountant is required before submitting Form 15CA. Form 15CB certifies payment details, TDS rate, and deductions in accordance with Section 195 of the Income Tax Act, any applicable Double Tax Avoidance Agreement (DTAA), and the nature and purpose of the remittance.

Form 15CB is not necessary if:

The total remittance does not exceed Rs 5,00,000 in a financial year; only Form 15CA needs to be submitted.

A lower TDS rate is applicable and a certificate under Section 197 has been obtained, allowing for reduced TDS as per the assessing officer’s order.

In accordance with sub-rule (3) of Rule 37BB, Form 15CA and Form 15CB are not required to be furnished in case of following transactions:

Remittance is made by an individual and it does not require prior approval of the Reserve Bank of India as per the provisions of section 5 of the Foreign Exchange Management Act, 1999 (42 of 1999), read with Schedule III to the Foreign Exchange (Current Account Transaction) Rules, 2000; or Remittance is of the nature specified as follows:

7. Income from other sources

7.1 Interest income from fixed deposits and savings accounts in Indian banks is subject to taxation in India. However, interest earned on NRE and FCNR accounts is tax-free, while interest from NRO accounts is fully taxable.

8. Income from business and profession

8.1 Any income earned by an NR from a business controlled or set up in India is taxable

9. Income from capital gains:-

9.1 Any capital gains from the transfer of a capital asset located in India will be taxable in India. This includes capital gains from investments in Indian shares and securities. If an NRI sells a house property and realizes a long-term capital gain, the buyer must deduct TDS at a rate of 20%. However, the NRI can claim an exemption on capital gains by investing in another house property under Section 54 or in capital gain bonds under Section 54EC.

9.2 Sale of Property by NRs other points :-

9.3 Long-term capital gains for NRs are taxed at 20%, and TDS at this rate is applicable on long-term capital gains earned by NRs. However, the  as per amended provisions, for NRs who acquire or inherit properties before July 2024, they can still choose between 20% tax with indexation or 12.5% without it, but for properties acquired later, indexation is no longer an option.

9.4 NRs can claim exemptions under Sections 54, 54EC, and 54F on long-term capital gains, allowing them to benefit from these exemptions when filing their returns and claim refunds on TDS deducted from capital gains.

9.5 Section 54 provides exemptions on long-term capital gains from the sale of a house property, while Section 54F applies to the sale of any asset other than a house property. More details about Section 54 can be found here.

9.6 Section 54EC allows exemptions when capital gains from the sale of the first property are reinvested in specific bonds.

9.7 If NR is not interested in reinvesting profits from the sale of your first property into another property, he can invest in government-notified bonds up to Rs 50 lakhs.

9.8 The homeowner has six months to invest the profits in these bonds, and to claim the exemption, the investment must be made before the tax filing deadline.

9.9 The invested amount can be redeemed after three years but cannot be sold before five years from the sale date. As of FY 2018-19, the holding period has been extended from three to five years.

9.10. Since FY 2018-19, the exemption under Section 54EC is limited to capital gains from the transfer of long-term capital assets, specifically land and buildings. Previously, it applied to any capital asset. NRIs must make these investments and provide relevant proof to the buyer to avoid TDS on capital gains. NRIs can also claim refunds for excess TDS deducted at the time of return filing.

9.11 Eligible bonds for exemption under Section 54EC include: (A) Rural Electrification Corporation Limited (REC) bonds (B) Power Finance Corporation Limited (PFC) bonds and (C) Indian Railway Finance Corporation Limited (IRFC) bonds

10. Special provision under section 115F

10.1 The applicability of Section 115F is limited to non-residents who earn income from specified investments made in India. The investments covered under this section include units of an offshore fund that invests in India, bonds issued by an Indian company, shares of an Indian company, deposits with an Indian company, and any other investment made by a non-resident in accordance with the regulations made under the Foreign Exchange Management Act, 1999. The tax rate applicable under Section 115F is 20%. This tax is payable on a gross basis, i.e., without allowing any deductions for expenses or other deductions. This tax rate is higher than the tax rate applicable to residents.

11. Deductions and Exemptions for NRIs – Tax deductions specified under Chapter VI-A of the Income Tax Act. (These deductions will not be available to a taxpayer opting for the new tax regime u/s 115 BAC, except for deduction u/s 80CCD (2) and 80JJAA which will be available under the new tax regime as well)

11.1 Deductions Under Section 80C :- Most deductions under Section 80 are applicable to NRIs as well. For the financial year 2023-24, individuals can claim a maximum deduction of up to Rs 1.5 lakh under Section 80C from their gross total income.

11.2 Allowable Deductions for NRIs Under Section 80C:

i. Life Insurance Premiums: The policy must be in the name of the NRI, their spouse, or any dependent child (regardless of age or marital status). The premium should not exceed 10% of the sum assured.

ii. Children’s Tuition Fees: Tuition fees paid for the full-time education of any two children at schools, colleges, universities, or other educational institutions in India (including fees for play school, pre-nursery, and nursery) are eligible.

iii. Principal Repayments on Home Loans: Deductions are available for the principal repayment on loans taken to buy or construct residential properties. This also includes deductions for stamp duty, registration fees, and other expenses related to transferring property to the NRI.

iv. Unit-Linked Insurance Plans (ULIPs): ULIPs that include life insurance cover are eligible for deductions under Section 80C, such as contributions to LIC mutual fund plans like Dhanraksha 1989 and other UTI-linked plans.

v. Investments in ELSS: Equity-Linked Savings Schemes (ELSS) are popular as they allow deductions under Section 80C up to Rs 1.5 lakh, offer EEE (Exempt-Exempt-Exempt) benefits, and provide a good opportunity for returns since they primarily invest in diversified equities.

12. Other Allowable Deductions

In addition to deductions under Section 80C, NRIs can claim various other deductions as per income tax laws, including:

12.1 Deductions from House Property Income for NRIs

NRIs can claim all deductions available to residents, such as parents’ insurance deductions, for house property purchased in India. Deductions for property tax paid and interest on home loans are also permitted.

13. Deductions Under Section 80D

13.1 NRIs can claim deductions for health insurance premiums paid, up to Rs 25,000 for self, spouse, and dependent children. Additionally, they can claim a deduction of up to Rs 25,000 for insurance premiums for their parents (father, mother, or both).

13.2 The deduction limit increases to Rs 50,000 if the premium is for resident senior citizens (self, family, and parents). However, insurance premiums paid for senior citizen NRIs cannot be claimed under Section 80D.

13.3 Within the existing limits, NRIs can also claim a deduction of up to Rs 5,000 for preventive health check-ups. Moreover, medical expenses of up to Rs 50,000 for resident senior citizens can be claimed within the limits of Section 80D, provided the individual receiving the treatment is not covered by any health insurance policy.

14 Deductions Under Section 80E

14.1 NRIs can claim a deduction for interest paid on education loans taken for higher education for themselves, their spouse, children, or a student for whom they are the legal guardian.

14.2 There is no limit on the amount eligible for deduction under this section. The deduction is available for up to eight years or until the interest is fully paid, whichever comes first. Note that this deduction does not cover principal repayments.

15 Deduction under section 80EE

15.1 Deduction towards interest payments made on loan taken for Acquisition of Residential House Property where the loan is sanctioned between 1st April 2016 to 31st March 2017. Deduction limit of ₹ 50,000 on the interest paid on loan taken

16 Deduction under section 80EEA

16.1 Deduction towards interest payments made on loan taken for Acquisition of Residential House Property for the first time where the loan is sanctioned between 1st April 2019 to 31st March 2022 and deduction should not have been claimed u/s 80EE. Deduction limit of ₹ 1,50,000 on the interest paid on loan taken

17 Deduction under section 80EEB

17.1 Deduction towards interest payments made on loan for purchase of Electric Vehicle where the loan is sanctioned between 1st April 2019 to 31st March 2023. Deduction limit of ₹ 1,50,000 on the interest paid on loan taken.

18. Deductions Under Section 80G

18.1 NRIs can claim deductions for donations made to social causes under Section 80G. No deduction shall be allowed under this section in respect of donation made in cash exceeding ₹2,000/-.

19. Deductions Under Section 80TTA

19.1 Non-Resident Indians can claim a deduction on interest income from savings bank accounts, up to a maximum of Rs 10,000, similar to resident Indians.

19.2 This applies to savings accounts (not fixed deposits) with banks, cooperative societies, or post offices and -has been available since FY 2012-13.

20. Deductions Not Allowed for NRIs

20.1 Certain investments under Section 80C are not available to NRIs, such as:

(a) Public Provident Fund (PPF) (NRIs cannot open new PPF accounts, but can maintain existing accounts opened while they were residents). (b) National Savings Certificates (NSCs) (c ) Post Office 5-Year Deposit Scheme and (d) Senior Citizen Savings Scheme (SCSS)

21. Deductions for Differently-Abled Individuals Under Section 80DD

21.1 Deductions under this section for the maintenance, including medical treatment, of a handicapped dependent are not available to NRIs.

22. Deductions for Differently-Abled Individuals Under Section 80DDB

22.1 Deductions for medical treatment of a disabled dependent (certified by a prescribed specialist) are available only to residents.

23. Deductions for Differently-Abled Individuals Under Section 80U

23.1 Deductions for individuals with disabilities are allowed only for resident Indians.

References:

Income tax Act 1961 as amened by as amended by the Finance Act 2024(No.2)

FAQs issued by the CBDT, Income Tax Department, Govt of India

Author’s Note:

This article is intended to create tax awareness and for academic purposes only.

[1]  Prasanth Nadanuru, Hyederabad Vs ITO IInternational Taxation)-2  dated 28.02.2023