NRI Taxation in India: Key Rules and Regulations Explained

As the Indians abroad are taking up the stays more rapidly, the laws relating to the taxation of NRIs get complicated. NRI taxation In India differs from the resident Indians’ taxation; therefore, there is a need for a proper understanding of the rules to be able to plan finances accurately. There are special acts that specify the origin of income, liability for tax, and exemptions related to NRI taxation in India. Most of the important rules and regulations are clarified, clearing up most of the doubts of all NRIs managing their taxes in India.

Who Qualifies as an NRI?

Before discussing taxation, it’s important to establish the count of people defined and classified as NRIs. An NRI is a person who satisfies specific requirements for a particular period based on the number of days he or she spends in India during any financial year. According to the Income Tax Act, of 1961, an individual is classified as an NRI if:

1. Less than 182 days in India during any one financial year from April 1 to March 31.
2. They have spent fewer than 365 days in the country over the last four years and fewer than 60 days in the current financial year.

If these conditions apply, such a person would be considered an NRI and taxed accordingly.

Types of Income Taxable for NRIs

Indian taxation of NRIs is determined by the source of income. Though a globally earned income is taxed for the resident Indians, the case for the NRIs is that they pay taxes in India on income earned or received here. Here are the types of incomes that come under the purview of NRI taxes:

1. Income from Salary: Any NRI who draws his income in the form of salary for services rendered in India, will be taxable. Here, it is not the place where he draws his salary but the place where he renders that service.
2. Income from Property: All the properties owned by an NRI are taxable if they generate income, for example, rents on the property. Additionally, a capital gains tax is levied at the time of selling the property.
3. Income from Business or Profession: If any NRI has a business or a profession in India, then all the income he/she would earn from such business/profession would be taxed.
4. Income from Investments: The interest income on saving accounts, fixed deposits, and other investments within India is taxable except for the interest on NRE accounts.
5. Capital Gains: All interest income from saving accounts and fixed deposits, and all other such Indian investments, except interest from NRE accounts, shall be taxable.

Tax Rates for NRIs

NRIs in India receive the same slabs as their resident Indian brethren, but carry certain conditions and tax benefits specifically applicable to NRIs. Here’s a quick overview of the applicable tax rates:

• Income up to ₹2.5 lakh: No tax.
• Income between ₹2.5 lakh to ₹5 lakh: 5%.
• Income between ₹5 lakh to ₹10 lakh: 20%.
• Income above ₹10 lakh: 30%.

Besides the above rates, NRIs are liable to health and education cess @4% of total tax liability, and they also have to shell out a surcharge if income is above ₹50 lakh.

Tax Deductions and Exemptions for NRIs

There are some tax deductions for which NRIs are eligible, just like the resident Indians. A few important deductions and exemptions are as follows:

1. Section 80C: The deductions up to ₹1.5 lakh under Section 80C can be claimed in the case of NRIs; this includes life insurance premium payments, tuition fees, and contributions to the Public Provident Fund (PPF).
2. Section 80D: Health insurance premium paid by self, spouse, or children. Under Section 80D, NRIs can claim a deduction of up to ₹25,000 and an extra ₹25,000 if one pays premiums for parents.
3. Section 80E: The amount paid as interest on education loans availed is allowed as a deduction under Section 80E. There is no cap on the amount of deduction under this section.
4. Section 80G:  A contribution to a charitable organization can be claimed as a deduction. NRIs can contribute to the identified institutions and the benefit of deduction is allowed in this section.

Double Taxation Avoidance Agreement (DTAA)

The other sore area relates to the twin threat of being taxed twice: in one source country, and also in India itself. India has, thus, entered into DTAA with many countries to avert this kind of taxation. In return, under the DTAA, NRIs are also entitled to the following benefits:

1. Exempt Income: Income that is already liable to tax in the foreign country is exempt from tax in India.
2. Tax Credit: NRIs can claim the tax credit for overseas taxes paid and hence reduce their tax liability in India.

This will be crucial since NRIs should find out whether their country of residence has a DTAA with India. That may massively differ the situation of the net tax burden for NRIs.

Filing Tax Returns as an NRI

NRIs are required to file a return in India if their income exceeds ₹2.5 lakhs in any financial year. The threshold, however, does not prevent NRI’s from lodging a return in case they require a refund or in case of capital gains. ITR can be filled through the government’s e-filing portal.

Some of the key documents and papers that are required to be submitted to file a return are as follows:

1. PAN (Permanent Account Number): A permanent account number is a unique identification number required for all tax-related transactions in India.
2. Bank Statements: used to verify the income obtained in India.
3. Investment Proofs: This is needed to be produced from the NRIs to gain the tax benefits on the investment in India.
4. Form 16/16A: This is a certificate that gives a detail about the amount of taxes deducted at source (TDS) on salary or other income.

Tax Saving Tips for NRIs

Some tax-saving strategies that may help an NRI decrease his or her tax liability are:

1. Invest in NRE Accounts: Income accrued on the NRE accounts is tax-free, hence an excellent vehicle for parking savings for NRIs.
2. Use DTAA Benefits: If applicable to them, use the agreements under DTAA so as to gain exemption from double taxation.
3. Plan Investments: Investments directly under Section 80C or any other relevant sections made with the objective of tax saving decrease taxable income.
4. Monitor Residential Status: An NRI needs to keep a count of the number of days he is spending in India. If he exceeds the limit prescribed, it can make him a resident, thereby changing his tax liabilities.

Conclusion

Most people do not understand Indian NRI taxation, thus suffering penalties and forgoing tax benefits. Whether it is salary income, rental income, or investments, NRIs must know about their tax liabilities. Keeping a tack on tax rates, filing returns, and using deductions may be the way forward for effective tax management.If you are an NRI who needs professional advice for tax planning and compliance, then the services of MC Maheshwari & Co. will guide you through all the complicated issues that govern the taxation for an NRI in India. Contact us to manage your taxes properly as well as observe Indian tax laws strictly.