Everything you need to know about NRI Income Tax

As an individual living abroad, you may wonder what your tax implications are in India, and once you dive into the details you will realise that taxation rules are different for NRIs when compared to residents. In this article, we try to answer a few questions which will give you an insight into the must-knows of NRI Income Tax.

Before going into the details, the first and most basic question that needs to be answered is:

When are you considered an NRI under the Income Tax Law?

An NRI is any person who is not a resident in India. If a person does not satisfy both the below conditions, he is considered an NRI:

1. If he/she is in India for 182 days (6 months) or more during the FY; or
2. If he/she is in India for 60 days (2 months) or more in the FY and 365 days or more in the last four FYs.
   

Below are a few exceptions to the above rule. In the following situations, the second condition of 60 days + 365 days shall not apply:

• Indian citizen who leaves India as member of the crew of an Indian ship
• Indian citizen who leaves India for the purpose of employment outside India
• Indian citizen having Indian source income not exceeding INR 15 lakhs, who, being outside, comes on a visit to India

In case of Indian citizen having Indian source income exceeding INR 15 lakhs, who, being outside, comes on a visit to India, 60 days criteria in the second condition shall be substituted by 120 days (4 months).

What are the incomes on which NRI Income Tax is paid in India?

NRI Income Tax is to be paid on Indian source incomes, irrespective of residential status. Examples of a few Indian source incomes are interest from savings accounts or fixed deposits in India, rental income from property situated in India, profits made on sale of house property located in India, gains from trading in Indian company shares etc.

Income from foreign sources of an NRI is not liable to tax in India.

When is an NRI required to file Income Tax Return in India?

An NRI is mandatorily required to file Income Tax Return in India only if his Indian source income exceeds the basic income tax exemption limit of INR 250,000 in that FY. However, there are many benefits to NRIs on filing Income Tax Returns in India; the major one being refund of TDS credits.

In case of NRIs, tax is deducted on incomes (popularly known as TDS or Tax Deducted at Source) without any threshold limit. In a situation where the Indian source income in a FY does not exceed INR 250,000, the entire amount of TDS may be claimed as refund by the NRI.

Please refer to our Article “Is it mandatory for NRIs to file income tax return in India?” for a more detailed perspective on benefits to NRIs who file Income Tax Returns in India.

Does a senior citizen NRI earning INR 260,000 a year have to file Income Tax Return in India?

Yes. Non-resident senior citizens do not have the benefit of higher exemption limit of INR 300,000 for paying taxes and filing Income Tax Return as is available to resident senior citizens. Hence, even senior citizen NRIs earning Indian source income exceeding INR 250,000 are required to pay tax and file tax returns in India.

What is the due date for NRIs to file Income Tax Return in India?

July 31 of the year following the financial year end is the original due date for an NRI to file an Income Tax Return in India. The income tax return may further be submitted belatedly by up to 31 December on payment of applicable late fees. For FY 2019-20, the time limit for filing Income Tax Return belatedly has been extended to 31 May 2021.

Are NRIs also required to pay Advance Tax in India?

Any person whose tax liability is more than INR 10,000 is required to pay advance tax in India – even NRIs. Any default / non-payment of advance tax attract interests.

INDIAN SOURCE INCOMES

Income from Salary

If you are an NRI, and your salary comes from the services rendered by you in India, then it will be taxed in India; regardless of where you are receiving the income. In case you are employed by the Indian government and you are a citizen of India, income from your salary, even if your services are provided outside India, will also be taxed in India.

Income from House Property

Rental income from a property situated in India is an Indian source income and is therefore taxable.

All types of properties are covered under the term “House property” including residential houses, flats, shops, office space, godowns, factory sheds, other commercial spaces or some land attached to the building, e.g. a parking lot. The Income Tax Act does not differentiate between a commercial and a residential property.

The person who is paying rent to the NRI is liable to deduct tax at source (TDS). In case of an NRI, TDS rate shall be 30% (effective rate including education cess shall be 31.2%) irrespective of the amount of rent. In other words, no threshold limit is applicable for deducting TDS on rent to NRI.

For computing the taxable rental income, an NRI can reduce the amount of municipal taxes paid, the amount of any interest paid on a housing loan taken on the property and a standard deduction of 30% from the rental income.

Income from Capital Gains

Capital gains refer to income arising from transfer of a capital asset. The most common forms of capital asset NRIs invest in are land, building / house property, shares and securities. Income generated or, in other words, profits made from transfer or sale of such assets are also liable to tax in India for NRIs.

Depending on the period for which these assets have been held, the asset may be classified as a long-term capital asset or a short-term capital asset. Taxability on transfer of capital assets varies depending on its classification as long-term or short-term. Equity shares are classified as long term if they are held for more than 12 months, whereas in case of land and building it is 2 years.

Long term capital gains on sale of equity shares are taxable at a flat rate of 10% whereas short term capital gains are taxable at 15%. In case of sale of land and building, long term capital gains are taxable at a flat rate of 20% whereas short term capital gains are taxable at slab rates.

It may also be noted that where capital gains are taxable at flat rates, the same shall be payable without considering the basic exemption limit of INR 250,000 or any deductions such as 80C, 80D etc (to be discussed in the ensuing paragraphs).

An NRI has the option to avail certain exemptions from long term capital gains on meeting certain conditions. For example, exemption from long term capital gains on sale of residential house property may be availed through investing in another house property or through investing in specified bonds etc.

Income from Business and Profession

All forms of income generated by an NRI from a profession, business set up or controlled in India will be taxable in India.

Does Share Trading Income of NRIs come under Business Income or Capital Gain Income?

Before reporting such income in the tax returns, it is crucial that one decides the nature and taxation of the transactions i.e. whether the same would be taxable as business profits or capital gains. The Income Tax Department clarified through a Circular that the income from share trading activity of listed securities may be treated as capital gains or business profits at the option of the investor.

Many factors such as the frequency of transactions, scale of activity, intention of purchase, treatment in books of accounts, typical holding period etc. would influence the characterisation of the income.

Please refer to our Article “Share Trading Income for NRIs – Is it Business Income or Capital Gain?” for a detailed perspective on the topic.

Income from Other Sources

Incomes which are not specifically covered in any of the above heads are taxable as Income from Other Sources. The major incomes covered under this include interest income (savings and fixed deposit), dividend income etc.

Can an NRI maintain a regular Savings Bank account in India?

No, regular savings bank accounts are to be converted to NRO or NRE accounts upon change in residential status to NRI. Non-conversion of such savings bank accounts attract a penalty of up to 3 times the amount involved and a penalty of INR 5,000 per day from the first day of default until penalty is paid.

Interest Taxability

In case of an NRI, interest income from NRO savings and fixed deposit accounts are fully taxable. On such income, banks would also be deducting TDS @ 30% (effective rate including education cess shall be 31.2%). Interest income from NRE and FCNR accounts of an NRI are exempt from tax in India.

Dividend Taxability

With effect from FY 2020-21, dividend income in the hands of NRI shareholders has been made taxable @ 20%. In case of NRI shareholders, companies would pay out dividends only after deduction of TDS @ 20%. There is no minimum dividend income limit for TDS in case of NRI shareholders.

NRI shareholders have the option to avail lower rates of tax as per the Double Taxation Avoidance Agreement (DTAA) of India with the country of their residence. In order to avail such beneficial tax rates, the NRI is required to file his Income Tax Return in India.

DEDUCTIONS FROM INCOME

Just like residents, NRIs are also allowed to claim similar deductions from their Indian source incomes:

Section 80C of the Income-tax Act, 1961

Some of the popular tax saving investments that can be claimed as deductions by NRIs under this Section include:

• Payment of life insurance premium (in the name of self, spouse or children);
• Principal repayment of housing loan taken for purchase or construction of house property;
• Tuition fee paid for full-time education of up to two children in India (no deduction for donation paid to the university or school);
• Investment in term deposit for a period of not less than five years.

Some of the investments that cannot be claimed as deduction by an NRI (which is otherwise allowed to a resident) include investment in Public Provident Fund (PPF), Sukanya Samriddhi Scheme, National Savings Certificate etc. The maximum deduction that can be claimed under Section 80C is INR 150,000.

Section 80D of the Income-tax Act, 1961

Section 80D provides for deduction for premium paid on health insurance in the name of self, spouse, dependent children and parents.

The maximum deduction that can be claimed is as follows:

• In respect of self, spouse and dependent children - INR 25,000. In case any person is a senior citizen, the maximum deduction is INR 50,000;
• In respect of parents – INR 25,000. In case any person is a senior citizen, the maximum deduction is INR 50,000; and
• INR 5,000 for expenses towards preventive health check-up.

Maximum deduction that can be claimed under Section 80D is INR 100,000.

Section 80E of the Income-tax Act, 1961

Section 80E allows NRIs to claim a deduction of interest paid on education loans. There is no deduction available on the principal repayment of the loan. The deductions are applicable for loans taken for the higher education of the NRI individual, spouse or children, or for a student for whom the NRI individual is a legal guardian.

There is no limit on the maximum amount that can be claimed as a deduction under this Section. It is important to note that the deduction is available only for a maximum period of 8 years or till the interest is paid, whichever is earlier.

Section 80G of the Income-tax Act, 1961

NRIs are also permitted to claim deduction for contributions made to specified funds and other charitable institutions. Deduction of 100% or 50% of the amount of donation is available depending on the fund or charitable institutions.

Some of the funds to which contribution is eligible for 100% deduction is Prime Minister’s National Relief Fund, National Defence Fund, Chief Minister's Distress Relief Fund Kerala etc. Contributions to the Prime Minister’s Drought Relief Fund (PMDRF), Jawaharlal Nehru Memorial Fund, Indira Gandhi Memorial Trust, Rajiv Gandhi Foundation are eligible for 50% deduction.

Section 80TTA of the Income-tax Act, 1961

NRIs can also claim a deduction on the income by way of interest from their savings account. Maximum deduction that can be claimed under this Section 80TTA is INR 10,000.

THINGS YOU SHOULD KNOW IF YOU ARE AN NRI WHO RECENTLY MOVED BACK TO INDIA

Upon return, NRIs can assume Resident but Non-Ordinary Resident (RNOR) status so long as the below conditions are satisfied:

⮚ Been an NRI in 9 of the 10 preceding financial years; or

⮚ Lived in India for 729 days (2 years) or less in the previous 7 financial years

So long as any one of the above conditions is satisfied, an NRI who has returned to India will be taxable in India in the same way as when he was a non-resident. In other words, you would be taxable mainly only in respect of Indian source incomes. Additionally, the income that will be brought to tax is the income from business controlled or profession set up in India.

Once both the conditions are not satisfied, the person will become an ordinary resident in India and taxable on his global income in India. In this case, if the income is also taxable in another country, an individual resident can take advantage of the Double Tax Avoidance Agreement (DTAA). Resident individuals should disclose every income earned abroad while filing their income tax return in India.

Another aspect that needs to be kept in mind by returning NRIs is redesignation of their NRE Accounts. NRE FDs are completely exempt for tax irrespective of any threshold limit, so long as you qualify as a non-resident under the Foreign Exchange Management Act (FEMA).

Under FEMA, non-resident is a person who resides in India for not more than 182 days in the preceding financial year. Intention to stay can also be a deciding factor to determine residential status. If you return to India with the intention to stay for an uncertain period, such person would qualify as a resident under FEMA from the day he / she comes back to India. If a person leaves India with the intention to stay outside India for an uncertain period, he/she qualifies as a non-resident for the day they leave India.

For a more detailed discussion on this topic, please refer to our Article “What happens to the NRE Account of an NRI once he or she returns to India?”

NRI and AADHAAR

Can an NRI apply for Aadhaar?

Yes, an NRI (whether minor or adult) with a valid Indian Passport can apply for Aadhaar. In this regard, it is important to note that this is an option and not a mandatory requirement for NRIs to obtain an Aadhaar.

What is the last date for linking PAN and Aadhaar?

The last date for linking PAN and Aadhaar has been extended to 30 June 2021.

What are the consequences if PAN and Aadhaar are not linked by 30 June 2021?

If PAN and Aadhaar are not linked by 30 June 2021, the PAN will be made inoperative. Once PAN is made inoperative, one cannot open a bank account or enter into any financial transaction in India where PAN is required to be quoted. Further, there is also a penalty of INR 10,000 for quoting inoperative PAN. Additionally, there is also a late fee of INR 1,000 for delay in linking PAN and Aadhaar. Also, TDS deduction in cases where PAN and Aadhaar are not linked will be at a higher rate.

Is Aadhaar – PAN linking also mandatory for NRIs without Aadhaar?

No, NRIs without Aadhaar have been exempted from the requirement of quoting Aadhaar vide Notification No. 37/2017 dated 11 May 2017.