NRIs are bound to pay tax on income accrue or arise in India based on their residential status. Under Income tax act 1961, Residential status shall be defined as per below mentioned:
Residential Status under Income tax Act 1961:
6. For the purposes of this Act,—
(1) An individual is said to be resident in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or
(b) [***]
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
Explanation 1.—In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted and in case of such person having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted.
Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.26
(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
Explanation.—For the removal of doubts, it is hereby declared that this clause shall not apply in case of an individual who is said to be resident in India in the previous year under clause (1).
(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.
(3) A company is said to be a resident in India in any previous year, if—
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
Explanation.—For the purposes of this clause “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.
(4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.
(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.
(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—
(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or
(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less ; or
(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or
(d) a citizen of India who is deemed to be resident in India under clause (1A).
Explanation.—For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in India.
Taxable Income in the hands of NRI in India:
Any income earned by NRI that originated or received in India is taxable in India. Such income includes, but is not limited to
- Salary earned in India
- Rental income from property owned in India
- Business Income
- Income from the sale of financial securities and assets held in India
- Interest income
- Capital gains
- Dividend Income
Deduction under Section Chapter VI A:
Income tax for NRIs are subject to certain tax deductions, these are
- Tax deduction is applicable under Section 80C of the Income Tax Act, 1961. Under this section, the investment made in a life insurance policy, ULIP (Unit-linked Insurance plan), tuition fees paid for school-going children, etc. is allowed as deduction up to a maximum of Rs. 1.5 lakh in each financial year.
- Deduction under Section 80D of the Income Tax Act: Under this section, a health insurance policy taken for self, spouse, and children is eligible for a tax deduction. Tax benefits allowed amounting to Rs. 25,000 if the policyholder is below 60 years of age. Up to Rs. 50,000 can be availed as a tax benefit for senior citizens above 60 years of age. Moreover, preventive health check-up deduction can be claimed up to Rs. 5000 per year.
- Deduction for a mortgage can be availed for principle and interest repayment for housing or education loan taken in India.
- According to Section 80G of the Income Tax Act, any qualifying donations made in India are eligible for tax deduction from the income taxable in India.
- NRIs, holding saving bank account in India, are eligible to receive a tax deduction under Section 80TTA. As per this section, the interest earned up to Rs. 10,000 during a financial year can be claimed for a tax deduction.
Any interest credited to NRI individuals, irrespective of the amount, is the net amount (post TDS deducted amount). This means that an NRI earning interest income from NRO account as the only source of income, can avail income tax refund for income up to Rs. 10,000 earned in India.
Below mentioned tax-saving instruments are prohibited for NRIs
- Public Provident Fund
- National Saving Certificate
- Senior Citizen Saving Scheme
- 5-year deposit with a post office
- Tax deduction under Section 80DD, 80DDB and 80U.
NRIs are bound to file income tax return filing in India if they derive Income accrue or arise in India and it is above taxable limit defined under income tax act 1961.
NRIs can get advantage of DTAA for avoiding higher deduction of taxes and tax Labilities in India.
Conclusion: For NRIs, understanding the intricacies of taxation in India is crucial to ensure compliance with the law and optimize tax efficiency. By knowing their residential status, taxable income sources, and available deductions, NRIs can effectively manage their tax liabilities. Additionally, leveraging Double Taxation Avoidance Agreements (DTAA) can help minimize tax burdens and prevent double taxation. Therefore, NRIs should stay informed about tax regulations and seek professional advice to maximize their tax benefits while fulfilling their tax obligations in India.
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