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Achieving Tax Optimization in India: All You Need to Know About Tax Savings for Resident/Non-Resident Indians

In India, taxes are one of the main sources of Government revenue and constitute a significant portion of overall economic growth of the country. People who are Indian citizens by birth or have become citizens of India by residence in the country are known as Resident Indians. The Indian tax system imposes various taxes on resident Indians across different parameters. Thus, it is important for each Resident Indian to understand the Indian tax system and utilize various tax saving options in order to reduce their tax liability. This article explains how Resident Indians can save tax on their Indian income.

Understanding the Indian Tax System

The Government of India levies several different taxes from Indian citizens and residents such as income tax, goods and services tax, value added tax, etc. The income tax is one of them. It is imposed on the combined income of individuals, companies, trust, Hindu Undivided Family, etc. Generally, the applicable rate of income tax is determined on the basis of their income slab. The tax slab and tax rate vary based on whether the person is a resident or a non-resident of India.

Non Resident Indians (NRIs) can avail various tax benefits in India owing to the taxation of their Indian incomes. Furthermore, India has signed Double Tax Avoidance Agreements (DTAs) with a number of countries in order to give preferential treatment to NRIs by reducing their taxes. The aim of this article is to provide an insight into how NRIs can save taxes on their Indian income. Further, the article will discuss the tax reliefs that are available to NRIs under the Income Tax Act, 1961 and other fiscal laws in India. Additionally, the tax implications of investing in different categories of financial products such as immovable property, derivatives and equities, etc. shall also be discussed.

Tax Benefits Available to NRIs in India

1. Indian Tax Regime:

As per the Indian tax regime, NRIs are exempted from paying taxes on certain categories of income. These are:

a) Rental income received from house properties in India.

b) Interest income received from fixed deposits and recurring deposits in India.

c) Dividend income received from Indian sources.

d) Pension or other annuity income received from India.

These incomes are exempted from taxation provided that the income is repatriated or payable outside India or credited to Non-resident External (NRE) or Non-Resident Ordinary (NRO) bank account of the NRI.

2. Double Tax Avoidance Agreements (DTAs):

India has signed DTAs with various countries in order to ensure various tax benefits to NRIs. These Agreements are aimed at avoiding double taxation of the same income in two countries. The DTAs are tailored to provide relief to NRIs from having to pay tax in two countries. Furthermore, DTAs also stipulate other reliefs such as a lower rate of withholding tax on certain incomes and an exemption from certain taxes.

3. Income Tax Act, 1961:

Under the Income Tax Act, 1961, NRIs are given various tax benefits. These include:

a) Concessional tax rate of 10% on long-term capital gains arising from the sale of listed equity shares or units of equity-oriented mutual fund.

b) Set off and carry forward of capital losses up to 8 years and set off of losses from one head of income to any other head of income.

c) Deduction of 70% of income from long-term capital gains from sale of any other assets.

d) Deduction of Rs 1.5 lakhs from the taxable income of an individual under Section 80C of the Income Tax Act, 1961.

Investment Options for NRIs

1. Immovable Property:

NRIs can avail deductions and tax benefits on income from rent on immovable property. In addition, NRIs can also avail the exemptions available under the relevant DTA. Further, NRIs need to pay a withholding tax on rent paid to them by their tenants.

2. Equity Investments:

NRIs are allowed to invest in the Indian stock market. Equity investments provide various tax benefits such as exemption from long-term capital gains, carry forward and set off of capital losses, etc. These investments also provide various tax benefits under the DTAs.

3. Mutual Funds:

NRIs can invest in mutual funds in India. These investments provide various tax benefits such as exemption from long-term capital gains, deduction of Rs 1.5 lakhs from the whole income under Section 80C, deductions of dividends and capital gains. These investments also provide certain tax concessions under the DTAs.

4. Real Estate:

NRIs can invest in real estate in India. These investments provide various tax benefits such as exemption from long-term capital gains, carry forward and set off of capital losses, deduction of rent received from tenants, etc. Furthermore, they can avail the tax concessions and exemptions available under the relevant DTAs.

Tax Saving Options for Resident Indians

1. Section 80C of The Income Tax Act, 1961

Under Section 80C of the Income Tax Act, 1961, a resident Indian can save tax on his Indian income by investing up to 1.5 lakhs in various instruments such as Public Provident Fund, Employee Provident Fund, Life Insurance Premium, Equity Linked Saving Scheme, etc. The deductions allowed under Section 80C is also applicable to tax-saving investments made for the benefit of dependent minors (i.e. investments made for minor children up to a maximum annual amount of 1.5 lakhs).

2. Section 80D of The Income Tax Act, 1961

Section 80D of The Income Tax Act, 1961 offers tax deduction to Resident Indians for payments made towards medical health insurance premium towards self, spouse, any dependent or senior citizens. The deduction amount is up to Rs.25,000 for individual and Rs.50,000 for senior citizens (above the age of 65 years).

3. Section 80E of The Income Tax Act, 1961

Under Section 80E of the Income Tax Act, 1961, Resident Indians can save tax on their Indian income on payment of interest on education loan. The deduction is applicable to the interest paid in a span of eight years, beginning the year in which the first payment of the loan is made.

4. Section 24 of The Income Tax Act, 1961

A Resident Indian can save tax on his Indian income by claiming a deduction of up to Rs.2,00,000 under Section 24 of the Income Tax Act, 1961 towards the interest paid on the loan taken for purchase of a residential house property.

5. Section 80GG of The Income Tax Act, 1961

Under Section 80GG of the Income Tax Act, 1961, Resident Indians can claim a deduction for the rent paid for their residential house property. The deduction amount is up to Rs.20,000 per annum or 25% of the total income, whichever is less.

6. Section 80TTA of The Income Tax Act, 1961

Section 80TTA of the Income Tax Act, 1961 offers Resident Indians a deduction of up to Rs.10,000 towards the income earned from interest on saving bank accounts.

7. Section 80RRB of The Income Tax Act, 1961

Under Section 80RRB of The Income Tax Act, 1961, a Resident Indian can claim a deduction of up to Rs.3,00,000 on royalties earned by an author or on any patent right.

Tax savings methods are essential for Resident Indians in order to obtain tax incentives and reduce their tax liability. The Income Tax Act, 1961 offers several options for Resident Indians for reducing their tax liability. This article discussed in detail the various tax saving options under the Income Tax Act, 1961, which Resident Indians can use to save tax on their Indian income.

In conclusion, Non Resident Indians can avail various tax benefits on their Indian incomes. These include exemptions, set off and carry forward of capital losses, concessional tax rates and deductions, etc. They can also avail the various tax benefits and exemptions available under the DTA with their host countries and the Income Tax Act, 1961. Moreover, NRIs can avail various investment options in India and avail the various tax benefits associated with these investments.

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(Author can be reached at email address [email protected] or on Mobile No. 9990365673)

Disclaimer :  “Neither this article nor the information contained herein shall in any way be construed as forming a contract or shall constitute professional advice required before acting upon any matter. CA Sharad Kumar Sharma has taken all due care in the preparation of this article for accuracy in its contents at the time of publication. However, no liability shall be accepted by him in the event of any direct, indirect or consequential damages arising out of or in any way connected with the use of this article or its contents. “

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I have started my journey from a small city Saharanpur, starting a business or profession in India without God father is not possible. But after getting a good team you can do anything in this world. So we know the pain of startups and we start consulting to startups we are associated with 150+ star View Full Profile

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