NRI and his Tax Affairs: An Awareness Manual

This article is all about the NRI and its taxation aspects in India. Generally we observed that most of the NRI tax payers are in dilemma at the time of return filing. Therefore in this article we are covering the tax treatment of the income of NRI earned in India, which bank accounts should be maintained by NRI, basic exemption and deduction allowed for NRI and so on.

For any queries, NRI is trying to reach out their tax consultants for clearing their doubts or started goggling the Tax Portals. The most common doubts are:

• Which Income is Taxable in India and which one is exempt?
• Do I need to file Income Tax Return in India?
• Is the Basic exemption limit available to me?
• Options available to keep a Bank Account in India?
• How can I claim the excess Tax deducted? And the list continues…..

If you are also one of them, relax!!! DO NOT WORRY, here is an effort to clear your all doubts and help you in all the possible way. Let’s decode it one by one…

1. Who is Non Resident Indian (NRI)

Taxability in India depends on the Tax Status of assesses and whether your tax status is of NRI or not? Can be determined as per Section 6, the criteria are as under:

(a) If he is in India during the relevant previous year for a period amounting in all or in aggregate to 182 days or more.

OR

(b) If he was in India for a period or periods amounting in all to 365 days or more during the four years preceding the relevant previous year

AND

he was in India for a period or periods amounting in all to 60* days or more in that relevant previous year. (*182 days refer note)

Note:

For persons as mentioned below test (a) remains the same but in test (b) words ‘60 days’ have been replaced by 182 days.

For Indian citizen going abroad on a job or as a member of crew of an Indian ship

In case of an Indian citizen:

♦ Who is going outside India for a job and his contract for such employment outside India has been approved by the Central Government; or

♦ He is a member of crew of an Indian ship;

For Indian citizens and persons of Indian origin*

In case of an individual being a citizen of India, or a person of Indian origin, who being outside India, comes on a visit to India in any previous year’           

*A person shall be deemed to be of Indian origin if he or either of his parents or any of his grandparents was born in India or undivided India

2. Tax Treatment of the Income of NRI Earned in India and Abroad

A. For an NRI, only Income Earned in India or Accrued in India is Taxable in India, rest of the Income is exempted in India. It means Income Earned outside India by an NRI is not taxable in India.

Certain Points to remember in this regard:

• Salary received by NRI, directly in to his Indian Bank Account is Taxable in India.
• Salary paid to an NRI is taxable in India, if paid for services rendered by him in India.
• Salary paid to employees of Government of India is always taxable in India, even though he/she rendered service Outside India.
• Salary paid to Indian Diplomats/ Ambassador of India is exempted.
  

B. Income from House Property situated in India/Housing Loan for Acquisition of House

Income from House Property situated in India (Rental Income) is taxable for an NRI. However Deduction u/s 24 of Income Tax Act, 1961 for Standard Deduction @ 30% and for Interest on Housing Loan and Deduction u/s 80C for Principal Repayment, Stamp Duty and Registration Charges are available to NRI, in the same way as it is available to a Resident Individual.

• While applying for a housing loan, thought must be given on to whether to borrow funds in India or outside India. Normally Interest on borrowed fund is less, if you borrow outside India. So it is advisable to take your call after due consideration of all these valuable inputs.
  

3. Maintenance of Bank Account/Demat Account in case of NRI

A. Bank Account:

Basically there are three types of Account an NRI can maintain in India (Apart from his local account in his country of Residence, i.e.-Foreign country).

a) NRO (Non Resident Ordinary) Account:

An NRI is supposed to close his Indian Saving Account or convert it to NRO Account and any Indian Income (Rent, Commission, Dividend etc) should be deposited into his NRO Account.

• Interest on NRO account is taxable.
• Indian Incomes can’t be deposited into NRE Account.

b) NRE (Non Resident External) Account:

This Account is for remitting the overseas savings to India by converting the Foreign Currency into Indian Rupees.

•  Interest on NRE account is exempted.

c) FNCR (Foreign Currency Non Resident) Account:

It’s a kind of Fixed Deposit Account with some lock in period that can be maintained only in Foreign Currency.

• This account is opened with a view to earn higher interest on surplus amount earned by NRI. (Compared to Other countries, India has very high Interest rate on FD)
• Interest on FCNR account is exempted
• This account can also be used for Hedging Purpose to eliminate the Exchange Rate Risk.

B. Demat Account:

Once you become an NRI, you are supposed to close your normal Demat account and transfer (if not selling) your existing shares to NRO Demat Account. This NRO Demat account will allow you to purchase shares from the primary market only.

For, Purchasing shares from the secondary share market an NRI need to open PIS (Portfolio Investment Scheme) Account, where he/she can buy shares from his/her NRE account fund. Further upon sale, sale proceeds will be credited to NRE/NRO account respectively based on shares were purchased on repatriable / non-repatriable basis.

4. Basic Exemption, Deductions Available to NRI and Return to be filed by NRI

Basic Exemption of Rs.250,000/- and   most of the deductions under chapter-VIA (like-LIC, ,Tuition Fee, Housing loan, Mediclaim, Education Loan etc)  is available to an NRI, except :

• Investment in PPF/ NSC/ Senior Citizen Savings Scheme
• Post Office Term Deposit
• Deduction for the Differently-Abled under Section 80DD/80DDB/80U

As far as Filing of Income Tax Return is concerned- An NRI should mandatorily file his Income tax return if :

• His/her Gross Earning in India is more than the basic exemption limit of Rs.250,000/- or
• He/she is having some loss/losses eligible for carry forward, or
• He/She is eligible to claim refund for excess tax deducted at source.

**So, even if Gross Earning is less than the Basic Exemption, and you have some amount of Tax Deducted at Source, it is advisable to file your income Tax Return and claim the TDS Refund. Without filing the Return, it’s not possible to get the TDS Refund.

5. Ghar Waapsi- What Happens when NRI comes back to India

Returning NRI will be treated as RNOR (Resident but Not Ordinary Resident) for 2 years if:

• He/she has been an NRI for 9 out of 10 preceding financial years of the year under consideration, or
• They have been lived in India for 2 years or less (729 days or less) in the last 7 financial years.

An Assessee having RNOR status is allowed to enjoy exemptions available to NRI for a period of 2 years after returning India, hence deposits held in foreign currency, which are exempt for an NRI, shall be exempt to returning NRIs for 2 years thereafter they (returning NRIs) will be treated as resident Individuals.

(Author is a “Finance Functional Consultant” with “Awal Gulf Manufacturing Company”, Manama, Kingdom of Bahrain and can be reached at “[email protected]”).

(Republished with Amendments)