When an Indian citizen moves abroad, their residential status changes, which directly affects their tax liabilities in India. This change in status is not just a legal formality; it significantly impacts how the individual is taxed, particularly for Non-Resident Indians (NRIs). The recent income tax bill introduced for NRIs outlines the updated regulations that affect NRIs’ tax obligations. In this blog, we’ll discuss the constituents of NRI income tax, providing insights into how NRIs’ tax obligations are determined based on their income sources and residential status.
What is NRI Status?
An NRI is defined as an Indian citizen who stays outside India for a specific duration. The criteria for determining NRI status differ based on the Income Tax Act, Foreign Exchange Management Act (FEMA) and the Reserve Bank of India (RBI).
- RBI’s Definition of NRI: An individual is considered an NRI if they haven’t stayed in India for more than 182 days during the preceding financial year.
- Income Tax Act’s Definition of NRI: According to the Income Tax Act, an individual is considered an NRI if they’ve stayed in India for less than 182 days during the previous year or for less than 60 days in the previous year and 365 days or less during the preceding four years.
- Foreign Exchange Management Act (FEMA) Definition of NRI: Under the Foreign Exchange Management Act (FEMA), an individual is considered an NRI if they have been residing outside India for more than 182 days during the preceding financial year, or if they are staying abroad for an uncertain period with the intention of staying outside India for an indefinite duration. FEMA regulations focus on the financial and foreign exchange aspects of NRI status, including repatriation of funds and foreign investments.
Income Tax Implications for NRIs
Once an individual’s status shifts to NRI, their tax obligations in India change drastically. Here’s how:
- Resident: An individual is taxed on global income. This means that income from all sources, whether it’s in India or abroad, is taxable in India.
- NRI: An NRI is taxed only on income that is earned or accrued in India. This means that income sources like rental income, dividends, or any capital gains from Indian assets are taxable in India, while their global income from abroad remains untaxed in India.
For example, Raj, an NRI, earns rental income from his property in India and salary income in the USA. While his salary will not be taxed in India, the rental income he earns from his property in India will be taxable in India.
Benefits of Double Taxation Avoidance Agreement (DTAA)
India has signed Double Taxation Avoidance Agreements (DTAA) with several countries, ensuring that NRIs are not taxed twice on the same income. However, it’s important to note that not all states in the USA, for example, fully consider the DTAA provisions. In such cases, NRIs may still face state-level taxation, even if they are eligible for relief under the DTAA at the federal level. For more details, we’ve previously covered this topic in a blog.
Key Constituents of NRI Income Tax
Now that we understand the basic framework of NRI taxation, here are the key constituents that determine the NRI income tax:
- Income Earned in India:
- Salary: Salary income received for services rendered in India is taxable in India.
- Property Income: Rental income from properties located in India is subject to tax in India.
- Capital Gains: Gains from the sale of assets like real estate, shares, gold or bonds in India are taxed under capital gains tax provisions.
- Interest Income: Interest earned from savings accounts, fixed deposits, or bonds in India is taxable.
- Income Earned Outside India:
- NRIs are not taxed on income earned outside India. However, the income from sources outside India is not included in India’s tax system unless it is brought into India.
- Tax Exemptions and Deductions:
Navigating the complexities of property sales in India can be challenging for Non-Resident Indians (NRIs). Understanding available tax deductions and exemptions is crucial to optimize financial outcomes.
- Section 80C: NRIs can avail tax deductions for investments in certain savings instruments like Public Provident Fund (PPF), National Savings Certificates (NSC), etc.
- NRE/ NRO Accounts: NRIs can open Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts in India. Interest earned in NRE accounts is tax-free, while interest in NRO accounts is taxable.
- Exemption under Section 54
NRIs can claim a tax exemption on long-term capital gains by reinvesting in another residential property in India. The new property must be purchased within one year before or two years after the sale, or completed within three years for under-construction properties. If the new property costs less than the capital gains, the remaining amount is taxable.
- Exemption under Section 54F
This applies to capital gains from non-property assets like land or shares. The proceeds must be reinvested in a residential property, and the same timelines as Section 54 apply.
- Exemption under Section 54EC
NRIs can invest in government-approved bonds such as those issued by NHAI or REC within six months of selling property. The maximum investment limit is ₹50 lakhs per year, with a five-year lock-in period. The interest earned on these bonds is taxable.
4. Tax on Indian Investments:
-
- NRIs are allowed to make investments in India, but these investments can attract taxes, such as capital gains tax on the sale of securities or real estate.
5. Tax Filing for NRIs:
-
-
- Even though NRIs may not need to file taxes on their global income, they must file income tax returns for any income earned in India, including income from property, dividends, or capital gains.
-
The tax returns for NRIs must be filed in the Income Tax Department’s prescribed format, and NRIs may claim tax credits for any taxes paid in their country of residence under the DTAA.
Importance of Maintaining Day Count for NRI Status
An important aspect for an NRI is to track the number of days spent in India, especially when frequent travels occur. This is crucial for maintaining the correct NRI status. Tools like the NRI status calculator can help NRIs keep track of their residential status for tax purposes.
Common Misconceptions about NRI Status and Taxes
There are several misconceptions surrounding NRI taxation, including:
- Myth: NRIs cannot invest in India.
- Fact: NRIs can invest in Indian markets, including real estate, stocks, and bonds. However, certain restrictions may apply, such as prohibited investments in agricultural land.
- Myth: NRIs are taxed on global income.
- Fact: NRIs are only taxed on income earned within India and not on their global income, provided it is not remitted to India.
Conclusion
Understanding the constituents of NRI income tax is crucial for efficient financial and tax planning. By being aware of your tax obligations on Indian income, utilizing tax exemptions, and maintaining accurate records of your NRI status, you can ensure compliance and avoid unnecessary penalties.
At Brivan Consultants, we assist NRIs with tax filing, investment strategies, and financial management to help you navigate the complexities of NRI taxation.
For personalized guidance on NRI taxation and how to manage your finances effectively, contact Brivan Consultants today!
Frequently Asked Questions (FAQs)
- Which income of NRI is taxable in India?
Non-resident Indians (NRIs) are taxed only on income earned or collected in India, such as property rent, dividends, and capital gains from investments or savings, if they exceed a specified limit. Income earned outside India is not taxable in India. - How many days can NRIs stay in India without tax?
An NRI can stay in India for more than 182 days in a financial year, but doing so will change their residential status from NRI to Resident. To maintain their NRI status, they must stay in India for less than 182 days during the financial year. - Do OCI holders need to pay tax in India?
Overseas Citizen of India (OCI) cardholders are required to pay income tax in India on income earned within the country. You can file your income tax return (ITR) online for income earned in India. - Does an NRI need to file income tax return in India?
Yes, NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) should file an Income Tax Return (ITR) if they have taxable income in India. It is recommended to file an ITR even if no tax is due. - Is an NRO account taxable in India?
Yes, an NRO account is taxed at a rate of 30% on income accrued in India, as per the Income Tax Act of 1961, with an additional 3% cess. Interest income from NRO accounts is also taxable, though interest up to ₹10,000 is eligible for deduction under Section 80TTA.
