Tax Benefits for NRIs on Income earned in India or Outside India : Key Exemptions and Insights from Renowned Tax Experts
Let’s talk about the tax benefits you can enjoy as an NRI in India and on Income earned outside India. Many NRIs don’t realize that the Indian tax system is pretty favorable, especially for those who mostly earn outside India. Here are some key points to keep in mind:
Taxation of NRIs on Income Earned in India
1. Tax on Indian Income Only
As an NRI, India only taxes the income you earn in India under Section 5 of the Income Tax Act. Anything you earn abroad is not taxable here.
Example: Suppose you own a flat in Mumbai and rent it out for ₹50,000 a month. That ₹6 lakh yearly income will be taxed in India. However, your salary from your job in Dubai or the US is not taxable in India.
Famous tax author A. P. Bhardwaj once said, “Taxation is not just about collecting revenue; it’s about fairness in contribution,” which is reflected in the fact that only your Indian income is taxed while your foreign income is exempt.
2. Tax-Free Interest on NRE and FCNR Accounts (Section 10(4)(ii))
You’ve probably heard of NRE (Non-Resident External) accounts and FCNR (Foreign Currency Non-Resident) accounts. The best part? The interest earned on these accounts is completely tax-free in India, as per Section 10(4)(ii).
Example: Let’s say you have ₹20 lakh in an NRE fixed deposit. If it earns, say, 6% interest, the ₹1.2 lakh interest won’t be taxed at all in India. That’s a great way to grow your savings without worrying about taxes eating into your returns.
3. Double Taxation Avoidance (DTAA)
If you’re living abroad and earning income in India, the Double Taxation Avoidance Agreement (DTAA) comes in handy. It’s an agreement India has with many countries to ensure you don’t get taxed twice on the same income.
Example: Imagine you earn ₹10 lakh in dividends from Indian shares, and India taxes it. If you’re in a country like the US, where you also need to declare that income, the DTAA will ensure you either get credit for the taxes paid in India or avoid being taxed again in the US.
As Dinesh Ahuja, a tax scholar, puts it, “Double taxation is not just about paying twice but about eliminating unfairness in international trade and income.”
4. Tax-Free Long-Term Capital Gains on Equity (Section 112A)
If you’re investing in Indian stocks or equity mutual funds, there’s a big benefit here. Under Section 112A, long-term capital gains (LTCG) from equities are exempt from tax if they are under ₹1 lakh per year.
Example: If you sell some shares after holding them for more than a year and make a gain of ₹90,000, you won’t have to pay any tax in India. Even if the gain is more than ₹1 lakh, the first ₹1 lakh is still tax-free.
5. TDS on Indian Income – Refundable if Overpaid (Section 195)
If you earn income in India, certain types like rental income or interest on deposits will have TDS (Tax Deducted at Source) applied at a higher rate for NRIs, as per Section 195. But if the actual tax you owe is less than the TDS, you can file a return and get a refund.
Example: Let’s say you have ₹1 lakh in rental income, and a 30% TDS is deducted (₹30,000). But your actual tax liability after deductions is only ₹15,000. When you file your tax return, you can claim the extra ₹15,000 back as a refund.
6. Deductions Under Section 80C
NRIs are also eligible for deductions under Section 80C—just like residents. This means you can reduce your taxable income by up to ₹1.5 lakh through investments like PPF, life insurance premiums, ELSS, etc.
Example: If you’re paying premiums on a life insurance policy in India or contributing to a PPF account, you can claim up to ₹1.5 lakh as a deduction, reducing your tax burden.
Famous tax expert Vinod Kothari says, “Tax deductions are the rewards for prudent financial planning.”
7. Exemptions on Property Sales (Section 54 and 54EC)
If you’re selling a property in India and it’s a long-term capital asset, you can avoid paying tax on the gains by either reinvesting in another property (under Section 54) or investing in NHAI or REC bonds (under Section 54EC).
Example: If you sell a property and make a profit of ₹50 lakh, instead of paying tax on the gains, you can buy another property or invest in those bonds. This helps you defer or completely avoid paying taxes on the sale.
8. Returning to India – Section 115H Benefits
If you’ve decided to return to India after being an NRI, there’s a special provision under Section 115H. It allows you to continue enjoying some NRI tax benefits for a limited time after you’ve become a resident again.
Example: If you return to India and still have income from foreign assets, you may be able to claim tax benefits on those foreign earnings for a few years, even though you’re no longer an NRI.
Taxation of NRIs on Income Earned Outside India
On the other hand, When it comes to NRIs (Non-Resident Indians), the Indian tax laws are structured to focus only on income generated within India. Income earned abroad is generally not taxable in India under certain conditions. Let’s break this down in simple terms:
1. Taxability Based on Residential Status (Section 5 of the Income Tax Act)
The most important factor in determining the taxability of an NRI’s income is their residential status. According to Indian law, an individual is considered an NRI if they have not resided in India for 182 days or more during a financial year.
- If you are an NRI, only your income earned or accrued in India is taxable here.
- Any income earned outside India will not be subject to Indian taxes, as long as the individual qualifies as an NRI.
Example:
If you are an NRI working in the UK and receiving a salary there, that salary will not be taxed in India. However, if you have rental income from property in India, that income will be taxed in India.
2. Scope of Total Income (Section 9 of the Income Tax Act)
The scope of an NRI’s income includes only the income that:
- Is received or deemed to be received in India.
- Accrues or arises in India.
Income earned abroad does not come under this scope. For instance, your salary from a foreign employer or any business profits generated outside India are completely exempt from Indian taxation as long as they do not enter the Indian financial system.
3. No Tax on Foreign Income
As long as an NRI’s foreign income does not get repatriated to an Indian bank account or is not used in India, it is completely free from Indian taxation. This allows NRIs to earn abroad without worrying about double taxation in India.
4. Double Taxation Avoidance Agreement (DTAA)
In cases where income is taxed both in India and the country of residence, the DTAA becomes important. India has signed DTAA with several countries to ensure that NRIs don’t face double taxation. If taxes are paid in the country of residence, India may either offer tax relief or allow a credit for taxes already paid abroad.
Example: If you’re an NRI living in the US and you earn interest on your Indian savings account, this interest may be taxed in both countries. However, under the DTAA, you may claim a credit in the US for taxes paid in India on this income.
5. NRE and FCNR Account Benefits (Section 10(4)(ii))
Interest earned on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is completely exempt from tax in India. These accounts are popular for saving foreign earnings without any tax liability on the interest generated.
6. Income from Foreign Sources While Returning to India
If an NRI decides to return to India and become a resident, they can still continue to enjoy some tax benefits on foreign income under Section 115H for a certain period. This means that certain types of foreign income may still remain exempt from Indian taxes for a short while after returning.
In conclusion, understanding the nuances of NRI taxation can help you make informed decisions and maximize your financial benefits. If you have further questions or need personalized advice, feel free to reach out. We’re here to assist you in navigating the complexities of taxation.
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For more detailed guidance, contact me at [email protected]. Looking forward to helping you with your tax planning and compliance!
Author Bio
Excellent presentation.
So nicely explained.