NRI Taxation Basics
Non-Resident Indians famously called NRIs are one who lives outside the borders of the country where they were born. In a more detailed aspect, it means that individuals who are non-residents but Indian Citizens who are residing outside India. There are situations when NRI’s have to pay tax which includes instances where the source of income is in India or one expects to be receiving in India. This NRI Taxation situation includes income which is accrued or is expected to be accrued.
The definition of NRI at the end of the Financial year 2019-20 is defined as one who has stayed in India for 182 days (or less). In March 2020 the government has introduced these changes.
The residency status will change if changes meet certain criteria as:
- The total income from India is more than RS. 15 Lakh during the financial year and if one has stayed for more than 120 days in the same financial year.
- An NRI is supposed to be a resident of India if they are an Indian citizen having a total income exceeding Rs. 15 Lakhs and are not liable to pay tax in another country.
Another type of residential status is, for example, if one has visited India frequently in the four years before the current financial year of one’s recent visit. If the total number of days is more than 365 in the four years, then one will be considered as the resident Indian income for the tax purpose. In this case, the status will become resident Resident But Not Ordinarily Resident (RNOR).
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Taxable income for NRI Taxation in India
When one has established one’s residential status, then one needs to calculate one’s taxable income. In case the total gross income is more than Rs. 2.5 Lakh for a given financial year the one has to pay tax.
The categories of NRI Taxation income are as follows:
- Income from salary or professional consultation
If the services are rendered in India then the income is supposed to arise from India. In the case of an individual who is NRI but/is getting a salary concerning the services/ product rendered is considered to be taxed according to the Indian context.
The only income of Ambassadors, Diplomats are exempt from the tax. In a scenario if the employer is the Government of India and an individual is also a citizen of India even if the service is rendered outside of India it is taxed.
- Income from house property (a standard deduction of 30% applies)
For NRIs, if they own property in India then it is taxed. In concern with the calculation, it goes the same as that of the resident even if the property is rented or vacant. A deduction of 30% is allowed for NRI to claim the deduction and take benefit. The deduction for Principal repayment along with Stamp duty and registration charges which is under Section 80C can also be claimed by NRI. All the taxes are levied according to the tax slab in one which falls.
- Income from a business in India
It is the income which is earned by an NRI from the business which is under their ownership or set up by them in India and is taxed accordingly.
- Income from other sources
Income which one earns from the fixed deposits and other saving accounts which are held by one account in India. The interest on NRO is taxable whereas interest on NRE and FCNR are tax-free.
- Income from capital gains arising out of the sale of assets
The capital gain which happens on the transfer of capital assets which is in India is taxable. Also, the capital gains which happen over investments in shares/ securities are taxable. If one has long-term capital gain then the buyer will deduct 20% as TDS. Under Section 54 and Section 54EC one can claim capital gains exemption by investing in house property.
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- Special Provisions related to Long Term Capital Gains
As per Section 80, the long term capital gain which happens due to the sale or transfer of the foreign assets then for it there is no benefit or deduction. One can avail exemption for the profits under Section 115F (in the case when the profit is invested back) in-
- An Indian company shares
- Indian Public company’s debentures
- Deposits in Indian public companies and banks
- In Central Government securities
- N NSC VI and VII issues
Note: For the last point the capital gains are exempt accordingly if the cost of the new asset (which is sold or transferred within 3 years) is less than the net consideration. These benefits that are stated for NRI Taxation are for the NRIs even after one has become a resident until the asset is converted to money.
In case NRI plans to opt-out special provisions and the income is charged under the usual provisions of the Income Tax Act.
- Income tax for NRI Taxation
The income which is earned outside the Indian land by NRI or PNOR is not taxable.
- Special Provision related to Investment Income
The investment which is made by NRI in Indian assets is taxed at 20% and in case of special investment if TDS is deducted NRI need not file Income Tax Return.
- Investments that qualify for Special Treatment
Income derived from the following Indian assets acquired in foreign currency:
- Shares in a public or private Indian company
- Debentures issued by a publicly-listed Indian company (not private)
- Deposits with banks and public companies
- Any security of the central government
- Other assets of the central government as specified for this purpose in the official gazette
Note: Under Section 80 deduction is not allowed for calculating investment income. For the other incomes which are derived from any Indian investment have to file Income Tax Return suitably abiding by the law.
Rental Payments to an NRI
NRI who gets rent payment will get payment after TDS at 30% is deducted. The income will be added up in the NRI Taxation irrespective of the country where the account is opened. Individual who is making a payment to the NRI has to mandatory fill out Form 15CA.
Note: Certain conditions have to be met before submitting Form 15CA. There are times when one needs to submit Form 15CB which is technically a certificate from Charted Accountant.
But there are instances where Form 15CB is not required:
- Individuals making remittances should not exceed Rs. 5,00,000
- In case of lower TDS deduction, under Section 197 a certificate is received by the AO.
- If the transaction falls under the Income Tax Act of Rule 37BB.
Deductions and Exemptions in NRI Taxation
Concerning various types of investments, the deductions and exemptions are based accordingly. The various types of it are explained in detail-
- Section 80C
Most of the deductions to NRIs are available under this section. As per the financial year 2019-21, a maximum deduction of Rs. 1.5 can be availed (from Gross Total Income).
The deductions which are allowed to NRI under the NRI Taxation section are-
A) Life insurance premium payment
The policy must be taken up in the name of any of the family members of NRI and the premium must be less than 10% of the sum assured.
B) Children’s tuition fee payment
The tuition fee which is paid for the full-time education of any two children of an individual irrespective of the class.
C) Principal repayments on loan for the purchase of the house property
For the repayment of the loan, the deduction is allowed along with other expenses (for the transfer of the property).
D) Unit-linked insurance plan (ULIPS)
ULIPS is sold with life insurance cover for deduction under Section 80C. Includes contribution to a unit-linked insurance plan of LIC mutual fund e.g. Dhanraksha 1989 and contribution to another units-linked insurance plan of UTI.
E) Investment in ELSS
This is one of the most preferred deductions which are claimed as it offers an Exempt-Exempt-Exempt (EEE) benefit at the same time one can earn as these funds invest primarily in the equity market (with a diversified portfolio).
- House Property Income (for NRIs)
Deductions for property tax can be claimed for the property which is purchased by them in India.
- Section 80D
Premium which is paid for Health Insurance is allowed to be claimed by NRIs. The deduction is up to Rs. 50,000 for senior citizens and Rs 25,000 is allowed for self, spouse and dependent children. Also, under NRI Taxation, the NRI can claim a deduction for parents up to Rs. 30,000 (if parents are not senior citizen then Rs. 25,000).
Deductions up to Rs. 5,000 for preventive health check-ups are also available.
- Section 80E
Interest paid on the educational load can be claimed by NRIs under this section. The claim amount is not fixed but the deduction is available only for 8 years or till the time when the interest is paid.
Note: The deduction is not available on the principal repayment of the loan.
- Section 80G
For donations for the social cause, NRI can claim the deduction.
- Section 80TTA
NRI’s are eligible to claim deduction under this category which happens to be from the interest on saving bank account (maximum of Rs. 10,000). This is allowed deposits with bank, post-office or co-operative society.
Deductions not Allowed to NRI’s
Deductions which are not allowed to NRIs are as follows:
- Under Section 80C
- NRIs are not allowed to use PPF accounts. In case, the account has already been opened when they were resident, then one can continue with it.
- Investments in NSCs
- Post office 5-year deposit scheme
- Senior citizen savings scheme
- Under Section 80CCG
This Section is also known by the name, Rajiv Gandhi Equity Savings Scheme. The scheme was to increase the participation of retail investors in the equity market. The deduction of Rs. 25,000 or 50% lower is allowed. This scheme does not apply to NRIs.
- Under Section 80DD, 80DDB and 80U
These Sections are especially for differently-abled individuals who are defined as per the Section or as per the specialist. This scheme does not apply to NRIs but only to the resident.
Under Section 80U, when the taxpayer him/herself suffers from disability but is NRI is not eligible to avail of this deduction.
Exemption on Sale of Property for an NRI
Under Section 54, 54EC and 54F NRIs can claim exemptions for the long term Capital gain which is taxed at 20%.
Section 54 is for the sale of a house property, Section 54F is for the capital gain by the sale of a house property and Section 54F is for the sale of any other asset apart from house property.
1. Additional exemption is under Section 54EC when the capital gains happened for the sale of property which is re-invested into specific bonds (up to Rs. 50 Lakhs issued by National Highway Authority of India/ Rural Electrification Corporation).
ii. The homeowner has 6 months to invest the profit in these bonds, although to be able to claim this exemption, you will have to invest before the tax filing deadline.
4. The invested money is supposed to be redeemed only after 3 years and cannot be sold before the lapse of 5 years from the date of sale.
5. The exemptions which are under Section 54EC is restricted to the capital gain which arises from the transfer of asset like land, building or both.
The NRI must make these investments and show relevant proof to the buyer to get no TDS deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.
NRI becoming Resident in India
In this process, Resident, Non-Ordinary Resident (RNOR) status one get when any of the following condition is met-
- An individual is NRI for 9 years of the 10 preceding financial years
- An individual has lived in India for 2 years or 729 days/ less in the last 7 years.
Note: The IT department of India has allowed RNORs to continue with the exemptions which apply to NRIs for 2 years. After 2 years they will be considered resident individuals
A resident with Global Income
If an individual is a resident of India but the global income earned by him is taxable in India. In case the income is also taxed in the other country then one can avail Double Tax Avoidance Agreement benefit.
The tax relief can be availed in two ways, by tax credit method and the exemption method. In the former one, the income is taxed in both the countries but one can claim a tax refund in the country of residence whereas in the latter method one is taxed only in one country and is exempted in the other.
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