Income Tax Return for NRIs

Taxation forms the foundation of any country’s economy, and India is no exception. For India, a nation with a substantial overseas population, the taxation of Non-Resident Indians (NRIs) holds particular significance. Many NRIs spend a significant portion of the year residing outside India, which raises questions about their tax obligations within the country. This comprehensive guide explores the various provisions, rules, and regulations that apply to NRIs concerning their taxation in India.

Who is a Non-Resident?

A “Non-Resident” is an individual who has not resided in India for a specified period. An individual’s residential status depends on how many days they have physically spent in India during a financial year. This status is unrelated to an individual’s nationality or domicile.

How to Determine Residential Status?

Residential status is determined based on specific criteria, including

• Staying in India for 182 days or more during the financial year.
• Staying in India for 60 days or more during the financial year and 365 days or more in the preceding four years.

Types of Non-Residents

Under the Income Tax Act of 1961, a Non-Resident is broadly categorised into three groups:

1. Non-resident Indian/Person of Indian Origin
2. Foreign Company
3. Other Non-Resident Person

Who is a Non-Resident Indian (NRI)?

An NRI is an individual who is a citizen of India or Indian origin but is not a resident of India. NRIs are primarily governed by the Income Tax Act of 1961 and the Foreign Exchange Management Act of 1999 (FEMA) for various tax-related matters. While both acts define NRIs differently, adherence to the Income Tax Act is essential for income tax purposes.

How to Determine Residential Status for NRIs?

For NRIs, determining residential status is crucial. An individual can be considered a resident in India if they meet either of the following criteria:

• Stay in India for 182 days or more during the financial year.
• Stay in India for 60 days or more during the financial year and 365 days or more in the preceding four years. However, some exceptions apply to specific situations, such as employment abroad or visits to India.

Taxation of Income Earned Abroad by NRIs

The income taxation for NRIs depends on the source of income and residential status. Income from India is taxable, while income earned abroad is generally not subject to Indian taxation.

What is Income Earned or Accrued in India?

India follows the “source rule” basis of taxation, which means that income generated or derived from sources within India is subject to taxation. Various forms of income, such as salary, property rental, capital gains, interest on deposits, and more, are considered taxable if the source is in India.

Which Income is Taxable for NRIs in India?

For NRIs, specific categories of income are taxable in India, including

Income from Salary

• Situation A: If salary is received in India: If an NRI receives salary income directly into an Indian account or if someone else receives it on their behalf in India, that salary income becomes taxable in India.
• Situation B: If salary is earned in India: Income is considered earned in India if it is earned for services rendered within India. Therefore, if an NRI’s salary is earned for services rendered in India, it is subject to taxation in India.

Income from House Property

Any income from a property in India, whether rented or vacant, is considered taxable income for an NRI. The calculation of such income is similar to that for a resident.

Like a resident, an NRI is allowed:

• A standard deduction of 30%.
• To deduct property taxes.
• To claim interest deductions if there is a home loan.
• To claim principal repayment of the loan as a deduction under section 80C.
• To claim stamp duty and registration charges paid on purchasing a property under section 80C.

It’s important to note that even if the income is received directly into the non-resident’s account outside India or in their NRE account, the income remains liable to tax in India as long as the source of income (i.e., the property) is in India.

Income from Other Sources

Indian-sourced income in the form of interest on fixed deposits and savings accounts held in Indian banks is taxable in India. Interest received on NRE and FCNR accounts is tax-free, whereas interest received on NRO accounts is fully taxable.

Income from Capital Gains

Any capital gain arising from transferring capital assets situated in India is taxable in India. Capital gains on investments in India, such as shares and securities, are also taxable in India.

If an NRI sells a capital asset, like a house property, the following TDS rates apply:

• TDS of 20% on Long-term capital gains.
• TDS of 30% on Short-term capital gains.

The buyer is responsible for deducting tax at the source and remitting it to the government. Since the onus of deducting tax on payments made to non-residents is on the buyer, they must obtain a Tax Deduction Account number (TAN) and issue a TDS certificate accordingly.

Like residents, even Non-Resident Indians can claim exemptions under section 54, section 54EC, and section 54F on long-term capital gains from the sale of a house property. The long-term capital gain can be invested in specified assets to avail of these exemptions.

Rental Payments to an NRI

A tenant paying rent to an NRI property owner must deduct TDS at a rate of 30% while making the payment, whether to an Indian or NRI account. The TDS deductor must submit Form 15CA online to the Income Tax Department.

In some cases, the tenant is also required to furnish Form 15CB, a CA-certified form, applicable when the remittance is less than Rs. 5,00,000 in a year or if the Assessing Officer (AO) orders a lower TDS deduction or if the transaction falls under Rule 37BB of the Income Tax Act.

Specific Provisions Related to Investment Income of NRI

NRIs can benefit from special provisions related to investment income. An NRI is taxed at 20% when investing in certain assets in India. Moreover, they are not required to file an income tax return if their income consists only of special investment income for which TDS has been deducted.

What are the Investments that Qualify for Special Treatment?

Income derived from the following foreign currency-denominated assets in India qualifies for special treatment:

• Shares in Indian Companies (public or private).
• Debentures issued by publicly-listed Indian companies (not private).
• Deposits with banks and public companies.
• Any security of the Central Government.
• Other Central Government assets as specified in the official gazette.

No deduction under Section 80 is allowed when calculating investment income.

Special Provision Related to Long-term Capital Gains

On long-term capital gains arising from the transfer or sale of these foreign assets, no benefit of indexation and deduction under Section 80 is allowed. However, NRIs can save on taxes by availing exemptions on the gains earned under Section 115F. To qualify for this exemption, an NRI must reinvest the net consideration received into specified assets, such as shares in an Indian company or bonds of the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).

Deductions Available to NRI

NRIs are eligible for several deductions under the Income Tax Act. These deductions help reduce taxable income for NRIs, and some of them include

1. Deductions under Section 80C

The maximum deduction allowed under Section 80C is Rs. 1,50,000. NRIs can claim deductions for

• Life insurance premium payments.
• Tuition fees.
• Principal repayment of home loans.
• Unit Linked Insurance Plans (ULIPs).
• Equity Linked Tax Saving Schemes (ELSS).

2. Deduction under Section 80D

NRIs can claim deductions for premiums paid for health insurance for themselves, their family, or their parents in India. The deductions depend on various factors, including the individuals covered and their age.

3. Deduction under Section 80E

Section 80E allows NRIs to claim a deduction for interest paid on an education loan. The loan can be for higher education for the NRI, their spouse, children, or a student for whom the NRI is a legal guardian. There is no limit on the amount claimed as a deduction under this section.

4. Deduction under Section 80G

NRIs can claim deductions for eligible donations made under Section 80G of the Income Tax Act.

Tax Slabs for NRIs in AY 2023-24

Unlike resident individuals, NRIs are subject to uniform tax slabs and are not classified based on age. These tax slabs are consistent for all NRIs.

Old Tax Regime

New Tax Regime u/s 115BAC

Double Taxation Avoidance Agreement (DTAA)

Under DTAA, the income is taxable in either the country of residence or the country in which it arises, depending on the provisions of the specific DTAA. An NRI can claim a tax credit for the taxes paid in the other country, reducing their overall tax liability.

How to Avoid Double Taxation for NRIs?

To avoid double taxation, NRIs can follow these steps:

1. Check DTAA Provisions: Determine the provisions of the DTAA between India and your country of residence. The agreement specifies which country has the primary right to tax certain types of income.
2. Claim Tax Credit: If your income is taxable in both countries, claim a tax credit for the taxes paid in one country while filing your tax return in the other country. This ensures that you don’t pay tax on the same income twice.
3. Tax Planning: Seek professional advice and plan to minimise your overall tax liability. Proper tax planning can help you take advantage of exemptions, deductions, and credits available under the tax laws of both countries.
4. NRI Status Certificate: Obtain an NRI status certificate from the Indian tax authorities to establish your non-resident status. This certificate can help claim benefits under DTAA.

How to File Income Tax Returns in India as an NRI?

Filing income tax returns in India as an NRI is straightforward. Here are the steps you should follow:

1. Determine Residential Status: Determine your residential status for the financial year to determine your tax obligations.
2. Collect Income Details: Gather all relevant income details, including income earned in India and income earned abroad but taxable in India.
3. Choose the Appropriate Form: NRIs can file their income tax returns using Form ITR-1, ITR-2, or ITR-3, depending on their sources of income and the complexity of their financial affairs.
4. E-filing: The income tax return can be filed online through the official website of the Income Tax Department of India (https://www.incometaxindiaefiling.gov.in/).
5. Verification: After filing the return, you need to verify it. You can use the Electronic Verification Code (EVC), Aadhar-based OTP, or send a signed physical copy of the ITR-V to the Central Processing Center (CPC) in Bangalore within 120 days of e-filing.
6. Claiming Refunds: If you are eligible for a tax refund, you can provide your bank account details to receive the refund through Electronic Clearance Service (ECS) or by getting a refund cheque.
7. Keep Records: It is crucial to maintain records of your income, investments, and tax returns for at least six years, as the Income Tax Department may ask for them for assessment or audit purposes.

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