Did you know that there are about 280 Million NRIs residing outside of India? Is their income earned taxable? If so, at what rate? Do they get any tax exemptions?
With the help of this guide, you will be able to answer all of these questions yourself and many more, in no time! In order to do so, we will be covering the following topics:
- Basic Idea of Taxation in India
- Who is an NRI?
- What are NRE, NRO, and FCNR accounts?
- Different Forms of Income Taxable for NRIs
- Special Provisions for Investment Income & Investments that are Eligible for Special Treatment
- Exemptions and Deductions for NRIs
- Taxation under Specific Circumstances
- Double Taxation Avoidance Agreement
- Steps for Filing Income Tax for NRIs
Let’s get started!
BASIC FRAMEWORK OF TAXATION IN INDIA
You may choose to skip this and go directly to the part on NRI Taxation if you already know the basis of taxation. This will include some of the important terms we will be using throughout the guide.
Before we dive in to understand how NRIs are taxed, we need to make sure we have a clear understanding of how taxation works in India.
So here’s a quick explanation of that- Taxation in India, in a nutshell:
Taxes are nothing but revenues collected from the residents of a country, by the government, in order to run the nation. These taxes are then used to better the infrastructure, provide facilities to the citizens, etc.
Taxes can be of two types:
- Direct Tax: Tax on your income earned (Example: Income tax)
- Indirect Tax: Tax from goods and services (Example: GST)
Now when we use the term “income”, there are various income heads that come into consideration with reference to taxation. They are as follows:
- Income from Salaries– This includes the salary you receive from your employer, as well as all the perks and other facilities that come as a part of your salary. Pensions come under this.
- Income from House Property– If you’re paying any interest on a housing loan for where you’re staying, then the deduction from that comes under this. This also includes income from rent.(Is PMAY applicable to NRI?, Learn More)
- Income from Capital Gain– “Capitals” here include land, bonds, shares, etc. If you’ve purchased these capital assets and then you decide to sell them, the profit earned from that is called a capital gain.
- Income from Profits and Gains from Business and Profession– The earnings you make through your businesses.
- Income from Other Sources– This refers to miscellaneous income. Examples would be Interest on savings, FDs, the dividends received on cooperative banks’ shares,REITs etc.
The above income heads are your taxable incomes.
The amount you get after adding all these income heads is called your Gross Total Income.
The next most important thing when it comes to taxation is deduction. Deductions lower a person’s tax liability by lowering his/her taxable income. The government allows specified deductions. Section 80 of the Income Tax Acts talks about deductions.
Gross Total Income – Deductions = Net Taxable Income
Tax is charged at different rates based on your income. Therefore, income is categorized into different groups, each group known as a slab.
Here are the current slab rates for paying tax in India:
|INCOME TAX SLAB (In Rs)||SLAB RATE|
|Upto Rs 2.5 Lakh||–|
|2.5 Lakh to 5 Lakh||5%|
|5 Lakh to 7.5 Lakh||10%|
|7.5 Lakh to 10 Lakh||15%|
|10 Lakh to 12.5 Lakh||20%|
|12.5 Lakh to 15 Lakh||25%|
|15 Lakh and Above||30%|
This is subject to health and education cess of 4%
Ways to Pay Taxes:
- Advance Tax– To be paid by the taxpayer in installments. Whatever income you’ve earned in that particular financial year, you have to estimate the tax liability and pay that amount through the year in installments. This is distributed over different timelines.
- Tax Deducted at Source (TDS)– This is deducted by others at the time of receiving of income. The person who is paying your income will deduct a certain percentage from that for tax (salary, rent, professional fees, etc)
- Self Assessment Tax: This is paid at the time of filing Income Tax Return.
The amount paid while filing Income Tax Return is calculated as follows-
Total Tax Liability – TDS – Advance Tax = Amount to be paid.
Some other important terms we will be using through the guide are:
- Financial Year- A financial year starts on the 1st of April and ends on the 31st of March. 1st April 2019 to 31st March 2020 is one financial year. Whatever income you earn in your financial year becomes taxable in your Assessment Year:
- Assessment Year: The year which immediately succeeds a financial year.
So this was a brief summary of taxation in India. Hope this acts as your base concept while diving into our main topic- NRI taxation.
WHO IS AN NRI?
In general definition- An Indian citizen who stays abroad for employment or business for an uncertain duration of time is an NRI or a Non-Residential Indian
In order to understand the definition of an NRI with reference to Income Tax, we need to know what defines an Indian Resident, in the same context.
Who is a resident Indian?
An individual is referred to as a resident of India, if he/she :
- Is in India for a minimum of 182 days during the Financial Year taken into consideration.
- Is in India for a minimum of 365 days during the 4 years preceding that Financial Year AND for a minimum of 60 days in that year.
Example: Consider the FY 2018-19. If you were in India for 365 days or more
During 2017, 2016, 2015, 2014, AND for 60 days or more during the FY 2018-19- You are a resident.
If you don’t satisfy either of the above two criteria, then you are an NRI.
Although, if you are an Indian citizen and you leave India for the purpose of employment abroad/ as a member of a crew on an Indian ship- the 60 days minimum period will be increased to 182 days for you.
Find out your accurate residential status from answering a few questions, by clicking here!
WHAT ARE NRE, NRO, AND FCNR ACCOUNTS?
Before we start looking into the different ways NRIs are taxed in India, we need to understand what NRE, NRO and FCNR accounts are.
These are primarily different types of bank accounts for NRIs.
- A Non-Resident Rupee Account or an NRE account is an Indian Rupee denominated account. It helps transfer the money earned abroad to India and maintain them.
- You can’t deposit your desired amount in Rupees, the deposit is to be made in the respective foreign currency which will then be converted into Indian Rupees at the time of deposit.
- With an NRE Account, you can transfer funds to another NRE Account as well as an NRO account (explained below.)
- An NRE Account allows savings, current, fixed deposit, or recurring.
- Interest earned from an NRE Account is not taxable in India.
- Deposit made in an NRE Account is subject to day-to-day fluctuations in the value of Indian Rupee and conversion loss– since the deposit is made in a foreign currency.
- A Non-Resident Ordinary Rupee Account or an NRO Account helps maintain a regular flow of income in the form of pensions, rents or dividends from India. It is also a Rupee- denominated account like NRE.
- You can deposit funds in the respective foreign currency in an NRO account as well, but unlike in an NRE account, funds originating from India, in Indian Rupees, can only be deposited in an NRO account
- With an NRO Account, you can transfer funds to another NRO Account but not to an NRE Account.
- Income earned from an NRO account is taxable in India.
- The risks that come with an NRE Account such as day-to-day fluctuations based on INR value and conversion loss, are not faced by NRO Accounts.
- A Foreign Currency Non-Resident bank account allows you to transfer your foreign income to India, in the same currency as your resident country. It is a foreign currency-denominated account unlike an NRE Account.
- Unlike NRE and NRO Accounts, in an FCNR Account you can only open term deposits with a tenure of anywhere between 1 and 5 years. It does not allow savings, current or recurrent deposits.
- Income earned from an FCNR account is not taxable in India
- Since an FCNR account allows you to deposit in the foreign currency itself, your money is protected from the risks of exchange rates that you will come across in the case of an NRE account.
TAXABLE INCOME FOR NRIs
Any income earned by an NRI in India is taxable in India. NRIs have to pay tax on income that accrues or arises in India.
Given below are the various taxable incomes for NRIs.
Let’s break it down:
- Income from Salary: The income from your salary received in India, or received by someone else on your behalf will be taxed at a rate of specified tax slab limits. If you are an employee under the Government of India, income earned abroad also becomes taxable. Tax on income from salary is also applicable if your services were provided in India.
- Income from House Property: This refers to the income from a house situated in India. Tax on this house will be calculated the same way it would be for a resident. If an NRI has purchased a home loan, then he/she gets a deduction of 30%, a reduction in property tax, and interest deduction. Income from house property is taxed at slab rates.
- Income from Rental Payment: An NRI owner will experience a 30% TDS deduction from the tenant. Income can be received through an account in India or from his/her account abroad.
Different Forms for income taxable for NRIs
- Form 15CA & 15CB:
The individual making the payment to the NRI must submit Form 15CA to the Income Tax Department online. Sometimes a certificate from a Chartered Accountant i.e Form 15CB is needed before uploading Form 15CA online, where the Chartered Accountant will certify the details of the payment, TDS rate, deduction, etc.
Click here to download Form 15CA.
Click here to download Form 15CB
Form 15CB is not required in the following circumstances:
- Money transferred or paid is not more than Rs 5,00,000, in a Financial Year.
- If lower TDS has to be deducted and a certificate is received under Section 197 for it. Or if lower TDS has to be deducted by order of the AO.
- Neither is required if the transaction falls under Rule 37BB of the Income Tax Act– where a list of 28 items is specified. Click here to view the list.
- Income from Capital Gains: Any capital gain on capital assets in India is taxable. Capital gains on securities, shares invested in India become taxable. If an NRI sells his house with a long-term capital gain, then the buyer should deduct TDS at 20%.
Special Provision With Reference to Long-Term Capital Gains
When considering long-term capital gains made from foreign assets, it is important to note that there are no deductions allowed under Section 80. An NRI can receive an exemption on the profit under Section 115 F, if the profit is reinvested back into:
- Shares (Indian company)
- Debentures (Indian public company)
- Deposits (banks and Indian public companies)
- Securities (Central government)
- NSC VI and VII issues
If the cost of the new asset is less than net consideration, capital gains are exempt proportionately.
If the asset acquired is sold before 3 years,the profit exempted will be included to the income in the year of sale.
If the NRI chooses to opt out of these special provisions, the income will be taxable under the usual provisions of the Income Tax Act.
5.) Income from Other Sources: Income from FDs and Saving Accounts in India is taxable. Interest earned on an NRE account and FCNR account is non-taxable in India, although interest earned on an NRO account is taxable in India (Detailed explanation on what NRE, NRO and FCNR accounts are is given in the previous pages, do refer for further information).
6.) Income from Business and Profession: Income earned from any business established or located in India is taxable.
SPECIAL PROVISIONS FOR INVESTMENT INCOME & INVESTMENTS THAT ARE ELIGIBLE FOR SPECIAL TREATMENT
NRI investments on Indian assets are taxed at a rate of 20%. The need to file Income Tax Return is exempted for an NRI, if the income from the special investment is the only income for the NRI in a given financial year.
INVESTMENTS THAT ARE ELIGIBLE FOR SPECIAL TREATMENT:
Income earned from the following Indian assets, in foreign currency:
- Shares in an Indian Company (both public and private)
- Debentures (publicly-listed Indian company)
- Deposits in banks and public companies
- Securities (central government)
- Other assets of the central government (as specified in the official gazette)
EXEMPTIONS AND DEDUCTIONS FOR NRIS
1.) Deductions Related to Insurances and Schemes-
- Life Insurance Premium: Premium must be less than 10% of sum assured. Life Insurance must be in the NRI’s name/ name of their husband or wife/ or any child’s name.
- Health Insurance- If you are an NRI, you are eligible to receive a deduction for premium paid for health insurance for:
- Up to Rs 50,000 for senior citizens
- Up to Rs 25,000 in other cases for insurance for yourself, your husband or wife and your children.
- Up to Rs 50,000 for the insurance of your senior citizen parents
- Upto Rs 25,000 for non-senior citizen parents.
- Unit-linked Insurance Plan (Ulips): Contribution to Unit-linked Insurance Plan of LIC mutual fund e.g. Dhanraksha 1989 and contribution to other units, linked insurance plan of UTI.
- Investments in ELSS: Equity Linked Savings Scheme is a very reliable option that helps you claim a deduction under Section 80C upto Rs 1.5 lakhs. EEE (Exempt-Exempt-Exempt) benefits taxpayers and offers earnings as these funds invest primarily in the equity market.
2.) Deductions Related to Education:
- Children’s Tuition Fee Payment- Fees paid to any educational institution situated in India (school, college, university)towards the full-time education of any two children.
- Education Loan- The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier. As an NRI, you can claim a deduction from the interest paid on an education loan taken for:
- Your higher education
- Higher education of your spouse or children
- For a student to whom you are a legal guardian.
There is no limit on the amount which can be claimed as a deduction under this Section. The deduction is not available on the principal repayment of the loan.
3.) Deductions Related to Loans and Interests on Bank Accounts:
- Principal Repayments On Loan For The Purchase Of A House Property: Deduction for repayment of loan taken to buy or construct a house property, including stamp duty, registration fees and other expenses incurred by the NRI.
- Interest on Saving Bank Accounts: Just like resident Indians, as an NRI, you can claim a deduction on income from interest on savings bank accounts up to a maximum of Rs 10,000. This is allowed only on deposits in savings accounts with a bank, co-operative society or post office .
4.) Deductions related to Capital Gains:
Exemption on Sale of Property
Long-term capital gains earned by NRIs are subject to a TDS of 20%. An NRI can take benefit of the exemptions from capital gains at the time of filing a return and claim a refund of TDS deducted on Capital Gains.
Exemptions available for an NRI with respect to the selling of property:
- Exemption on long-term capital gains on sale of a house property.
- Exemption on sale of any asset other than a house property.
- Exemption on reinvesting capital gains:
This exemption has been restricted to the capital gain arising from the transfer of long term capital assets being land and building or both
If you are an NRI,
- Instead of reinvesting your profit from the sale of your first property elsewhere, you can also invest that amount in bonds up to Rs.50 lakhs that are issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
- You have 6 months’ time to reinvest the profit in these bonds. In order to receive this exemption, you must re-invest before the Tax Filing Deadline.
- This re-invested amount can be redeemed after 3 years, yet you cannot sell it before the stipulated duration of 5 years from the date of sale.
Upon completion of these investments, relevant proof is to be shown to the buyer- then you are eligible to waiver the TDS deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.
These are the deductions and exemptions available for Non-Residential Indians.
TAXATION UNDER SPECIAL CIRCUMSTANCES:
Here is how taxation works under the following circumstances-
An Indian Resident on a Temporary Foreign Assignment:
- Your taxes for a particular Financial Year will depend on your residential status. If you have not been outside of India for more than 182 days, you will be considered a resident and you will be taxable in India for that year, including your salary earned during the temporary foreign assignment abroad.
- If your assignment extends to more than 182 days, you will not be considered as a resident. You will then be taxable in India, only on the income earned in India during that particular Financial Year.
An Indian Resident Who Has Recently Moved Abroad:
Say you have an NRE or NRO account in India, you keep up with your FD investments and some money in a savings account in India. Once you receive your salary, NRI or not, every individual is expected to file a tax return if their income is beyond Rs 2,50,000 (Refer previous pages for tax slabs). Your income earned/collected in India is taxable. Therefore your income earned in India, and that accrued from FDs and savings accounts- are taxable.
If You are Residing in a Foreign Country:
Considering you reside in another country and your salary is credited in that country’s currency, say you have your money invested in a savings account and FDs in India. You will be expected to file a tax return in India if your income exceeds Rs 2,50,000.
Money transferred as gifts are non-taxable. If there are any insurance expenses you pay in India while residing abroad, you can claim respective deductions (Refer above pages for detailed information on Deductions and Exemptions for NRIs)
An NRI Who Recently Moved Back to India
Once you move back to India, you gain the RNOR (Resident, Non-Ordinary Resident) status, if you satisfy one of the two conditions for a resident and the following conditions: (Refer to previous pages on the conditions for the status of a resident)
- If you have been an NRI in at least 9 out of 10 Financial Years preceding the year you move back to India.
- If you have lived in India for 2 years or less (729 days or less) in the last 7 Financial Years, preceding the year you move back to India.
Once you’ve moved, even as an RNOR you can continue to enjoy exemptions that were available to you as an NRI, for a period of 2 years. After which you will be treated as an Indian Resident.
A Resident With a Global Income
As an Indian Resident your global income is taxable in India and the other country from wherever you are being paid. You can thus make use of the DTAA (Double Tax Avoidance Agreement).
Double taxation avoidance agreement for NRI
- NRIs can avoid getting taxed on the same income both in their resident country and India with the help of DTAA.
- Double Taxation Avoidance Agreement primarily is a treaty signed by two countries to relieve NRIs from having to pay taxes multiple times.
List of Income Listed Under DTAA Protected Against Double Taxation
With the benefit of DTAA, the following list of incomes are those that NRIs can avoid from being taxed for multiple times:
- Services provided in India.
- Salary received in India.
- House property located in India.
- Capital gains on transfer of assets in India.
- Fixed deposits in India.
- Savings bank account in India.
TDS Rates Under DTAA
Specific tax deduction rates on income paid to residents of the respective foreign countries are fixed upon signing the DTAA agreement. On the income earned by the NRI in India, the TDS applicable would be according to those rates set in respective agreements.
Here is a list of fixed rates that India has agreed upon along with major countries around the world:
|LIST OF MAJOR COUNTRIES INDIA HAS SIGNED A DTA WITH||FIXED TDS RATE ACCORDING TO DTAA|
|United States of America||15%|
For obtaining original DTAA Agreements of various countries- click here to be navigated to the official website of the Income Tax Department (Government of India).
- Methods of Availing the Benefits of DTAA
- Tax Credit– Tax relief can be claimed only in the country of residence.
- Exemption– Tax relief can be claimed in either of the two countries.
For more information on DTAA- click here.
STEPS FOR FILING INCOME TAX RETURNS FOR NRIs:
STEP 1- Determine your Residential status
(Refer to previous pages for understanding who is an NRI and who is a resident. Or, click here to take a quiz that will determine your residential status.)
STEP 2- Calculate Your Taxable Income-
- Find out your Gross Total Income. The total sum received after adding your incomes from all the income heads is your Gross Total Income (Refer to previous pages to know more about income heads)
- Gross Total Income – Deductions = Net Taxable Income.
- Reconcile the advance taxes paid or TDS credit, in the tax return, with advance tax or TDS credit, as reflected in Form 26AS.
STEP 3- Claim Double Taxation Treaty Benefit (DTAA)-
- According to DTAA (Refer to previous pages) an income can be exempted from tax deduction in one country or taxed at a lower rate in the home country. If you have already paid tax in India, you can get a tax credit in your country of residence.
- For claiming relief, Tax Residency Certificate (TRC) of the country where NRI is tax resident, is necessary.
STEP 4- Selection of the ITR Forms
NRIs are to file the returns in ITR 2, excluding those who are having business income- who must file returns in ITR 3. Aadhar details need not be quoted by NRIs while filing ITR.
The following links pertain to the Assessment Year 2019-20.
STEP 5- Report Exempt Income ( Interest, dividends on FCNR/NRE deposit, long-term capital gains on listed securities, eligible gifts received, interest on tax-free bonds, etc)
STEP 6- Bank Account Details
- If you are not requesting a refund, or are requesting a refund but have a bank account in India, you do not need to provide details of your foreign bank account.
- If you are requesting a refund and do not have a bank account in India, you can provide the details of one foreign bank account for the issuance of the refund.
STEP 7- Details Of Assets And Liabilities
If you are an NRI and your total income is above Rs.50 lakh, you are required to report the details of your assets in India (moveable and immoveable) and the liabilities under Schedule AL in the Income Tax Return.
STEP 8- Verification of ITR
- Upon uploading ITR, it must be verified within 120 days. Returns that are not verified will be considered as invalid.
- You can also choose the method of e-verification through your net banking account in India.
- If you don’t want to e-verify, you may verify your ITR physically by sending your signed ITR V to the Income-tax CPC, Bengaluru (1800 103 4455)
We revised the basic framework of how taxation occurs in India– we learned about Income heads, Gross Total Income, Net Taxable Incomes, the meaning of deduction and slab rates.
We moved on to define who an NRI is and who a resident is. Any income earned by an NRI in India is taxable in India.
Then we studied what are NRE, NRO and FCNR Accounts and how different they are from each other. As an NRI, your income from an NRO account is taxable whereas your income from NRE and FCNR accounts are non-taxable.
We then looked into detail at the various forms of taxable income for NRIs. They are- Income from salary, house property, rental payment, capital gains, business or professions in India, and income from other sources.
We looked at certain special provisions for investment income and the eligibility for such special treatment.
After which we dived into deductions and exemptions available for NRIs, in detail.
Following that we looked at how income is taxed under certain special circumstances– such as if you are an Indian Resident on a temporary foreign assignment, an NRI who has recently moved back to India, etc.
We learned what Double Taxable Avoidance Agreement is and looked into its various aspects.
Lastly, we went through the various steps to file ITR for NRIs.
I hope this guide equipped you to comprehend NRI Taxation from every angle possible. You are now familiar with how NRI taxation works, and every little detail behind it!