The income tax rules and perks allowed to a Non-Residential Indian is drastically different from those applicable to resident Indians. NRI taxation in India is a constant matter of concern for the vast number of Indians living all over the world who have to send money to home and make investment planning for themselves and their family. In this article I have pointed out the key points related to NRI taxation.
NRIs income tax depends on his residential status for the previous financial year.
| Resident | Global income | Taxable |
| NRIs | Income earned/accrued in India | Taxable |
| Income from House properties in India | Taxable | |
| Capital Gain on the transfer of assets situated in India | Taxable | |
| Income from the fixed deposits/Interest on savings bank account in India | Taxable | |
| Income Earned outside India | Not Taxable |
I. Income from salary:
Salary received/services provided in India is taxable.
If Service is rendered in India (the salary is considered to be arise in India) it is always taxable
If the employer is a Govt. of India or a citizen of India, then even if your service is rendered outside India, it is taxable in India.
Exemption: Income of Diplomats, Ambassadors are exempt.
II. Income from House property:
Rental income earned from the House property situated in India whether it is a rented out/vacant is taxable.
NRIs is eligible for standard deduction @ 30%, housing loan interest, principal amount under section 80C and he can claim stamp duty as his expenses.
Important points to remember:
- Rental payment to NRIs: If the tenant pays the rent to NRIs, he has to deduct TDS @30%.
- IF a person is making a remittance to NRI he has to submit form 15CA and certificate from a Chartered Accountant in the form 15CB.
- A chartered Accountant has to certify the payments, TDS rate, TDS deduction as per the section 195 of the Income Tax Act.
- Form 15CB is not required when the remittance does not exceed Rs.5 Lakh in the financial year. Only form 15CA is required. He can deduct lower TDS by the order of an A.O. or he has to receive a certificate as per section 197
III. Income from Business:
Income earned by an NRI from a business which is controlled/setup in India is taxable.
IV. Income from Capital Gain:
Capital gain on an investment in India in shares/securities is taxable.
If he sells housing property and he get a long-term capital gain, the buyer has to deduct 20% tax. But he can avail the 54,54EC exemption.
All you wanted to know about the taxable income & Non-taxable income of NRIs
| Income which is exempted in India | Income which is taxable |
| Income earned abroad | All LT/ST capital gain from various investment in India |
| Interest on the NRE account Deposit | Recurring gains on the inherited properties in the India will be taxed |
| Foreign currencies investment is taxed at much concessional rate | |
| Assets/Properties received in India in the form of a gift or inheritance |
When should NRIs file the ITR
√ When he wants to claim a refund
√ Facing a loss of transaction in any asset or investment that you want to carry forward
√ Taxable income in India exceed the limit to file the return
√ LT/ST gain on the sale of investment
What are the circumstance in which NRIs not to file his ITR
× If total income during the concerned F.Y comprises only investment income and TDS has been deducted then it is not required to file your return.
× Apart from this if the TDS has already taken place at the income source then NRIs may not file the IT return.
× Special investment Income is the only Income which the NRI has during the financial year and the TDS has been deducted on that then such NRI is not required to file income tax return.
Last date for filing ITR
July 31st is the last date to file income tax return in India for NRIs.
Special provision related to Investment Income
When NRI invest in a certain Indian asset, it is taxed @20%. It is not that every type of income of NRIs is entitled to the uniform rate of Income tax@ 20%. Section 115c(b) Foreign exchange assets would mean any specified asset which the asseesse has acquired or purchased or subscribed in a convertible foreign exchange.
Foreign exchange 115c(a): Foreign exchange, which is for the time being treated by RBI as convertible foreign exchange for the purpose of Foreign exchange regulation Act, 1973 and any rules made under it.
It includes;
- Shares in an Indian company
- Debenture issued by the Indian Public company
- Deposit with an Indian public company
- Any security of Central Government as defined.
- Such assets as the Central Government may specify on the behalf of notification in Official Gazette
These 5 types of assets acquired/purchased out of convertible foreign exchange can be termed as specified assets.
It is the investment income from such foreign exchange assets which alone is entitled to special treatment under Chapter XIIA of the Income tax Act.
No deduction under Section 80 is allowed while calculating investment income.
If NRIs is making Long term capital gain on the sale of transfer of foreign assets, he cannot avail the benefit of indexation. But he can claim exemption on profit under section115F
Section 115(f) provides for complete exemption of LTCG on the transfer of foreign exchange assets in certain cases; For NRIs any LTCG arises from the transfer of foreign exchange asset and the NRIs has within the period of 6 months from the date of such transfer invested or deposited whole or any part of the net consideration in any specified assets or savings certificates as per the section 10(4) & 10(4B) then no tax is payable.
If the amount of net consideration is invested in the purchase of new assets as specified earlier, then no income tax is leviable on such LTCG, however cost of the new asset is less than the net consideration then the Income Tax to be levied on the proportionate capital gain.
****Net Consideration = Full value of consideration received/accrued- Expense incurred wholly /exclusively in connection with such assets.
Section 115f (2) :Net asset transferred or converted in to money within the period of 3 years from the transfer of original assets not so charged under section 45 on the basis of cost of such new assets as provided in this section- It would be deemed to be income charged under the head Capital gain.
LTCG related to foreign exchange assets.
Long term capital gain is can be completely Income tax free if they invested in specified assets or other assets as mentioned above.
Section 115H: Such a non-resident Indian who becomes a resident in respect of the total income of any subsequent year can also continue to be assessable to income tax at the special rate of 20% income tax on the investment income in future years as well. For this purpose, he has to exercise his option. Where such a non-resident Indian becomes a resident in India in a subsequent year and wishes to avail himself of the special provisions of Chapter XII-A, he should furnish to the Assessing Officer a declaration in writing along with his return of income under Section 139 for the assessment year for which he is assessable to the effect that the provisions of Chapter XII-A would continue to apply to him in respect of the investment income from any foreign exchange asset. However, only the last four items of the specified assets, would enjoy this special concession. Thus, in respect of the income from investment in shares of a limited company a non-resident Indian will not get the privilege of this tax concession under Chapter XII-A when he becomes a resident. He would, however, be eligible to the tax concession in respect of the income from the investments from the assets of the four types mentioned in Section 115C(f)(ii) or (iii) or (iv) or (v).
NRIs recently moved back to India:
Returning NRIs is assumed as a Resident Not Ordinary Resident if they fulfill the below criteria
√ You have been an NRI in 9 out of 10 financial year preceding the year of your return
√ You have lived in India for 2 years or less in the last 7 financial year.
Then the IT department allow the resident not ordinary resident to continue to enjoy exemption available to NRI for a period of 2 years after their return. Therefore, deposit held in foreign currency exempted for NRI shall be exempted to the returning NRI for 2 years. After this is taxable as a resident.
Exemption on sale of property for a NRI:
Long term capital gain (Which is held more than 3 Years) is taxed @20%. NRIs can avail the exemption from Capital Gain under section 54, 54EC, 54F at the time of Filing the returns and claim refund of TDS deducted on capital gain.
Documents needed to file the return
There are a couple of things you need to pay attention to when filing your IT returns.
> Passport of residence: To get the total number of days spent outside India
> Demat Account: Required for the knowledge of their bank account and transaction held in India
> TDS Certificates from the parties
Investment not allowed to NRIs:
- Investment in PPF is not allowed. (NRIs are not allowed to open PPF accounts, however PPF accounts which are opened while they are resident are allowed to be maintained.)
- Investment in NSCs
- Post office 5-year deposit scheme.
- Senior citizen savings scheme.
Double taxation
♦ If 2 country is taxable for the same income of the same person is called double taxation
♦ It is taxed either in 1) Country of residence 2) India
♦ If there is DTAA in between two countries he can seek relief from the IT department.
There are 2 methods to claim tax relief.
1) Exemption method: NRI are taxed in only in one country other is exempted
2) Tax credit method: Income is taxed in two countries; tax relief can be claimed in the country of residence.
For getting PAN card:
Apart from the usual procedure the below documents are also needed to be submitted.
- Copy of the passport
- Bank account statement in the country of residence.
- Copy of NRE bank account statements with atleast 2 transaction in the last 6 months period that is duly attested by Indian embassy/Consular office/High Commission or Apostille or by the Manager of the bank in which the account is held.
- Foreign address can be provided as a residential address and the office address by NRI applicant if they do not have any Indian address of their own.
NRE account, NRO account, FCNR account
NRE account
NRE account is a bank account opened in India in the name of NRI to park his foreign earnings.
NRE principal amount plus interest is a tax free
NRE account is opened if you want to transfer your foreign income to India and want to avoid taxation liability.
NRO account
NRO is a bank account which is opened in India in the name of NRI to manage the income earned by him in India includes rent, dividend, interest, etc.
Interest earned in the NRO account is however taxable at 30%
If your total income includes income earned in India and you want to manage it within the country you can opt for NRO account.
FCNR account
It stands for the Foreign currency nonresident account
This is a kind of fixed deposit account opened for depositing income earned overseas. This account is held in foreign currency. This account is available in a choice of 9 currencies USD, GBP, EUR, JPY, CAD, AUD, SGD, HKD, and CHF. This account is exempted from TDS in India. Overdraft against FCNR is provided. The overdraft amount will be disbursed in INR, and the fund utilized in India. Interest is not paid if the deposit is prematurely withdrawn before the completion of one year. Post one year there are no premature penalty charges. FCNR deposit account can be opened for a tenure of 1 year up to 5 years.
Difference between NRE account & NRO account
| NRE account | NRO account |
| Nonresident external account | Nonresident ordinary account |
| It is an account of an NRIs to transfer foreign earnings to India | It is an account of NRIs to managing the income earned in India. |
| Can be opened by 2 NRIs as a joint account | Can be opened by an NRIs along with an Indian citizen or another NRIs |
| Can repatriate: you can transfer both principal and interest accumulated to foreign account | Can repatriate the interest amount. The principal amount can be repatriating within the set limit. Ie. Principal amount you can remit only up to USD 1 Million in the F.Y |
| Interest earned is tax free | Interest earned is taxable @30%. |
| Can deposit in Foreign Currency and withdrawn in Indian currency | Can deposit in Foreign and as well as India currency and withdrawn in Indian currency |
| There is a risk of exchange rate | Not prone to the risk of exchange rate. |
It is important for an Indian who is working abroad to understand the FEMA Rules for NRIs very carefully since it can affect the way they can send and receive funds from India.
♦ FEMA Rules for NRIs do not allow holding a savings bank account.
♦ NRIs need to set up an NRO or NRE account as stipulated by RBI.
♦ NRIs are permitted an unlimited amount of Investment option through repatriable and non-repatriable transaction. However as per the FEMA Rules for NRIs they cannot make investments in small savings or PPF Scheme the govt.
♦ NRIs can acquire immovable property.
♦ NRIs can purchase any residential or commercial properties in India, however purchase of any agricultural property, plantation, farm house land etc. isn’t allowed. NRIs can also receive immovable property as gift from relatives or through inheritance.
♦ NRIs are permitted to remit foreign currency back to India on the foreign repatriable assets such as rent earned from an immovable property owned in overseas.
♦ According to FEMA guidelines for NRIs sales proceeds of such assets are non-repatriable outside India without RBI approval. Repatriation up to USD 1 MILLION per F.Y is allowed if you have inherited the property or retired from employment in India.
What to do
I. Resident to NRIs status:
√ Open NRO account convert existing bank to NRO by submitting an application to your bank
√ Open NRE or FCNR account to invest your foreign earning in India
√ Update your KYC at MF, Insurance Policies etc.
II. NRIs returning to India and becoming an Indian resident
√ Transfer the balance in your NRE/FCNR account to resident foreign currency account
√ You can re designate your account in your banks as a domestic resident account
√ FCNR accounts can be converted to resident foreign currency account upon the maturity
√ Till maturity FCNR account may be continued
√ You need to convert your NRE account to a resident account immediately upon returning to India.
Budget 2020 for NRIs Important points
♦ In case a person become resident under section 6(1A) no tax will be levied on foreign income unless it is derived from an Indian profession/Business. Indian income will be taxed. Income earned outside India not to be taxed.
♦ What the new section is saying Indian citizen is deemed to be resident incase she/he is not liable to tax in any other country by the reason of residence, domicile or any other criteria of similar. Once the person is resident of India his global income is subject to tax in India the maximum margin rate in case of income exceeding RS.50 million can be as high as 42.7%. Further resident is required to report their global assets and financial interest. In addition to that, changes have been proposed in the finance bill to reduce maximum number of days in order to maintain NRIs status reduced from 182 to 120.
♦ At present, resident individual in India has to pass a secondary test to determine whether they should be categorized as resident and ordinary resident or resident but not ordinary resident. For taxation purpose the global income of ROR is taxable in India whereas only Indian sourced income of RONR is taxable in India. As per the Budget the provision deems an Indian citizen or person of Indian origin to be Indian Resident. Actually, nobody can avoid taxation by saying that the do not have the country of residence.
Financial plans for NRIs
Most of NRIs prefer to invest in their hometown. Some NRIs not limiting their options to metros. Destination such as Kochi, Coimbatore, Hyderabad, Thiruvananthapuram, Pune have also become popular. By investing there NRIs can also expect to earn favorable rental income.
NRIs retirement plans must be completely created on the basis of your requirements and circumstances. Like the time of retirement, your preferred place of settlement, future goal etc.
In short you need to customize your retirement plan. Most of the NRIs plan for early retirement compared to resident Indians. When you know the time left for your retirement you will get a clear picture of how your retirement plan should be structured.
Even if you understand the rules and try to create your own financial plan by yourself, the problem is that these rules get updated periodically and it became very hectic and unpracticable to keep track of all the planning related to finances. Firm goal is important for good financial life. Without proper knowledge regarding investments and financial planning it is a huge risk of losing Money.
NRIs retirement plan must have mapped out financial strategies for
- Buying assets
- Savings for your children education and marriage
- Maintain post retirement life style
- Building an emergencies fund
- Medical Insurance
- Planning for holidays, the future desires you always want to do
This will give you an understanding on how much to spend today where when what to save for your future retirement.
Investment aren’t just about savings but are also meant to make your finance grow for a time when you aren’t earning much.
Earning is hard, saving the earnings is even harder, investing the savings is the hardest.
Advisable to consult a professional before making the decision since a piece of advice from the expert would always be valuable and can make a sound difference.
Summary
In every family we can see one NRI, so it is necessary to understand the various provision related to NRIs. Taxation is an essential aspect of personal finance, whether you are a resident Indian or a non-resident Indian (NRI).
The rules for NRIs are slightly different compared to resident Indians, and in some cases, you may end up paying double tax if you are unaware of the rules.
India has signed a Double Tax Avoidance with various countries to help NRIs. To avail this benefit, you need to gather all the necessary document of tax, paid in India, as proof.
References:
TAXMANN Students’ Guide To Income Tax Including GST – Dr.Vinod K.Singhania
Handbook on Taxation – CA G.Sekar
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