NRI Taxation in India
The income of a non-resident Indian (NRI) earned in India is taxable. Whether a person will be classified as NRI or not will depend on the number of days he or she has stayed in India and the quantum of income earned.
Tax on an individual’s income depends on the source of such income and the residential status in India. The residential status of an Indian citizen needs to be determined individually for every financial year which may vary from year to year.
Till FY 2019-20, NRIs would include individuals of Indian origin who have visited India for less than 182 days in a particular financial year. However in Budget 2020, the residency period has been reduced to 120 days for the NRIs whose Indian income is more than Rs. 15 lakhs.
The individuals qualifying as ‘deemed residents’ due to the reason that they are not liable to tax in any other country will be considered as ‘ Residents but Not Ordinary Residents’ if their stay in India is more than 120 days but less than 182 days. In case of RNOR, only Indian sourced income is subject to tax. Indian sourced income also includes income derived from any business /profession controlled or set up in India.
The individuals who were taking the benefit of being outside the purview of taxation previously, shall find themselves coming within the purview of these new provisions. Hence it’s important for an Indian citizen to evaluate the residential status beforehand to assess the tax liability.
Incomes liable to tax in India:
Salary Income: Income from salary received in India or income for services rendered in India shall be subject to Indian tax laws. Hence if an NRI receives a salary towards services rendered in India, the income shall become taxable irrespective of the place of receipt. The rate of tax will be as per the slab rate applicable in the particular financial year.
In case the Government of India remits any salary or income to a citizen of India towards services rendered outside India, it will still be considered as income accrued in India and will be chargeable to tax even if the status of the individual is ‘Non-resident’ as per residency rules.
House property income: Rental income from the house located in India is taxable for an NRI owner of the house property. The determination of the taxable house property income shall be in similar lines as the resident. The benefit of standard deduction of 30%, deduction of property tax paid, and interest on a home loan is also allowed to the NRI. Section 80C deduction for principal repayment, stamp duty and registration charges paid on the purchase can also be claimed. House property income will also be taxable at individual slab rates applicable.
However, the tenant who pays rent to an NRI owner must remember to deduct TDS at 30% while paying rent. Further, he is required to file Form 15CA online on receiving CA certificate in Form 15CB (required in case remittance exceeds Rs. 500,000 in a FY).
Income from Other Sources: Other sources income like interest received in saving account and fixed deposits held in Indian banks shall be taxable in the hands of NRI. Interest on NRE and FCNR account is not liable for tax in India. However, interest earned in the NRO account is fully taxable. NRO account is opened in the name of NRI to manage income earned in India.
Capital gains income: Capital assets like house property, shares and securities, gold etc. which are of Indian origin, shall be taxable in India. If an NRI transfers any capital asset situated in India, he shall be liable to pay capital gain tax; the rules are the same as a resident.
Income from business & profession: Any income earned by a Non-resident Indian from a business set up or controlled in India will be considered income accrued and therefore taxable in India.
Double taxation relief: In case NRI income is taxed in both the countries, India and the country of residence, tax relief from a DTAA (Double Tax Avoidance Agreement) between the two countries can be sought. Tax relief under DTAA can be claimed in two ways
(i) Exemption method and
(ii) Tax credit method.
With the exemption method, NRI will be taxed in only one country and exempted in another. Whereas in the tax credit method, where the income is taxable in both countries, tax relief can be claimed in the land of current residence. If TDS has been deducted from your income, you are allowed to take credit for such taxes. For this purpose, reference shall be made to the relevant Double Tax Avoidance Agreement (DTAA) of the country where such income has been earned. Taking the benefit of a DTAA involves obtaining a Tax Residency Certificate (TRC) that helps identify and certify your tax residency status to make sure the correct DTAA has been applied. This is in line with the tax laws in India.
Deductions and exemptions for NRIs
Similar to residents, NRIs are also entitled to claim various deductions and exemptions from their total income. These have been discussed here:
- Deductions under Section 80C
Most of the deductions under Section 80 are also available to NRIs. For FY 2020-21, a maximum deduction of up to Rs 1.5 lakh is allowed under Section 80C from gross total income for an individual.
of the deductions under Section 80C, those allowed to NRIs are:
i. Life insurance premium payment: The policy must be in the NRI’s name or in the name of their spouse or any child’s name (child may be dependent/independent, minor/major, or married/unmarried). The premium must be less than 10% of the sum assured.
ii. Children’s tuition fee payment:Tuition fees paid to any school, college, university or other educational institution situated within India for full-time education of any two children (including payments for play school, pre-nursery and nursery).
iii. Principal repayments on loan to purchase house property: Deduction is allowed to repay the loan taken for buying or constructing residential house property. The deduction is also allowed for stamp duty, registration fees and other expenses to transfer such property to the NRI.
iv. Unit-Linked Insurance Plan (ULIP):ULIP is sold with life insurance cover for deduction under Section 80C. It Includes contribution to the unit-linked insurance plan of LIC mutual fund, e.g. Dhanraksha 1989 and contribution to other units-linked insurance plans of UTI.
v. Investments in ELSS:ELSS has been the most preferred option in recent years as it allows you to claim a deduction under Section 80C up to Rs 1.5 lakh, it offers the EEE (Exempt-Exempt-Exempt) benefit to taxpayers and simultaneously offers an excellent opportunity to earn as these funds invest primarily in the equity market in a diversified manner.
- Other allowable deductions
Besides the deduction that an NRI can claim under Section 80C, they are also eligible to claim various other deductions under the income tax laws, which have been discussed here:
- Deduction from house property income for NRIs
NRIs can claim all the deductions available to a resident, including parents’ insurance deductions from income from house property for a house property purchased in India. Deduction towards property tax paid and interest on home loan deduction is also allowed. You can read about house property income in detail here.
- Deduction under Section 80D
NRIs are allowed to claim a deduction for the premium paid for health insurance. This deduction is available up to Rs 25,000 in the case for insurance of self, spouse, and dependent children and up to Rs 50,000 for senior citizens. Additionally, an NRI can also claim a deduction for parents’ insurance (father or mother or both) up to Rs 50,000 if their parents are senior citizens and Rs 25,000 if the parents are not senior citizens.
Within the existing limits allowed, a deduction of up to Rs 5,000 for preventive health check-ups are also available.
- Deduction under Section 80E
Under this section, NRIs can claim a deduction of interest paid on an education loan.
This loan may have been taken for higher education for the NRI, NRI’s spouse, children, or a student for whom the NRI is a legal guardian.
There is no limit on the amount which can be claimed as a deduction under this section. The deduction is available for a maximum of eight years or till the interest is paid, whichever is earlier. The deduction is not available on the principal repayment of the loan.
- Deduction under Section 80G
NRIs are allowed to claim a deduction for donations for social causes under Section 80G. Here are all the donations which NRI can claim under Section 80G.
- Deduction under Section 80TTA
Non-resident Indians can claim a deduction on income from interest on savings bank accounts up to a maximum of Rs 10,000 like resident Indians.
This is allowed on deposits in savings accounts (not time deposits) with a bank, co-operative society or post office and is available starting FY 2012-13.
Deductions not allowed to NRIs
NRIs are not allowed some investments under Section 80C:
- Investment in PPF is not allowed (NRIs are not allowed to open new PPF accounts. However, PPF accounts that are opened while they are a resident are allowed to be maintained)
- Investments in National Savings Certificates (NSCs)
- Post office 5-year deposit scheme
- Senior Citizen Savings Scheme (SCSS)
Taxation for expatriate employees in India
Residential Status: For an expat, the residential status is to be determined as per two views, that is, the Income Tax Act and the DTAA. There are certain instances where the expat may be a resident of both countries as per the relevant taxation laws. This gives rise to the ‘Tie Breaker Rule’. The factors to be considered for this are as follows:-
|(i) Permanent home||The country in which he/she has a permanent home available to him/her|
|(ii) Centre of vital interest||The country with which his/her personal and economic relations are closer|
|(iii) Habitual abode||The country in which he/she has a habitual abode|
|(iv) Nationality||Country of which he/ she is a national|
|(v) Competent authorities||As determined by mutual agreement between both the countries competent authorities|
The basic rule of taxation of salary income is that salary is taxable in the country where the employee is physically present while rendering services.
Deemed Tax Residents: An individual who is an Indian citizen shall be deemed to be a resident of India in the previous year if he is not liable to pay tax in any other country or territory.
Scope of Income taxable in India:
Depending on the residential status of an individual, below incomes would come under the ambit of Indian taxation and taxable in India:
|Resident||Not Ordinarily Resident (RNOR)||Non Resident (NR)|
|All income earned globally||Income received in India||Income received in India|
|Income sourced from India||Income sourced from India|
|Income from a business that is controlled from India|