1. How do I Determine My Residential Status?
You are considered an Indian resident for a financial year:
- When you are in India for at least 6 months (182 days to be exact) during the financial year
- You are in India for 2 months (60 days) for the year in the previous year and have lived for one whole year (365 days) in the last four years.
If you are an Indian citizen working abroad or a member of a crew on an Indian ship, only the first condition is available to you – which means you are a resident when you spend at least 182 days in India. The same is applicable to a Person of Indian Origin (PIO) who is on a visit to India. The second condition is not applicable to these individuals. A PIO is a person whose parents, or any of his grandparents were born in undivided India.
You are an NRI if you do not meet any of these conditions.
Is My Income Earned Abroad Taxable?
An NRI’s in India will depend upon his residential status for the year. If your status is ‘resident,’ your global income is taxable in India. If your status is ‘NRI,’ your income which is earned or accrued in India is taxable in India.
Salary received in India or salary for service provided in India, income from a house property situated in India, capital gains on transfer of asset situated in India, income from fixed deposits or interest on savings bank account are all examples of income earned or accrued in India. These incomes are taxable for an NRI. Income which is earned outside India is not taxable in India. Interest earned on an NRE account and FCNR account is tax-free. Interest on NRO account is taxable for an NRI.
Am I Required to File My Income Tax Return in India?
NRI or not, any individual whose income exceeds Rs.2,50,000is required to file an income tax return in India.
NRIs must file their returns when they:
- Want to claim a refund
- Have a loss that they want to carry forward
Case Study: Srishti lives and works in the USA. She checked her Form 26AS online and found out that a TDS entry of Rs 20,000 is mentioned. This TDS had been deducted at 30% on interest earned by her in her NRO account. Srishti has no other income in India.
Does Srishti have to pay any tax in India, and is she required to file an income tax return?
Whether your income will be taxed in India or not, depends upon your residential status.
First, let’s find out Srishti’s residential status. She is an Indian citizen and has gone to the US for her job – she will be a resident if she spends 182 days or more in India. Srishti left India on 3rd July 2017 and came back to India on 15th March 2018. Therefore in the financial year that begins on 1st April 2017 and ends on 31st March 2018, Srishti has spent less than 182 days in India. Since she is an Indian citizen on an employment abroad, to qualify as a resident she must spend 182 days or more in India. Therefore, Srishti is an NRI for the purpose of income tax in India.
For Srishti, only her income which is earned or accrued in India shall be taxable in India. Her income in the USA is not taxable in India since she is an NRI. Interest earned in India is taxable for an NRI. (Do note that interest on NRO account is taxable whereas interest earned on NRE account is exempt from tax).
Srishti needs to add up all the income she has earned in India. The interest earned on the NRO account of Rs 70,000 is Srishti’s only income. For FY 2017-18, the minimum income which is exempt from tax is Rs 2.5 lakhs. Srishti’s total income in India is less than the minimum exempt amount, and therefore she does not have to pay any tax on it. In fact, since no tax is payable by her, she must claim a refund of the TDS deducted on her interest income.
A refund can only be claimed by filing an income tax return for that financial year.
When is the Last Date to File Income Tax Return in India?
July 31st is the last date to file income tax return in India for NRIs.
Do NRIs Have to Pay Advance Tax?
If your tax liability exceeds Rs 10,000 in a financial year, you are required to pay advance tax. Interest under Section 234B and Section 234C is applicable when you don’t pay your advance tax.
2. Taxable Income of an NRI
Income from Salary
Your salary income is taxable when you receive your salary in India or someone does on your behalf. Therefore, if you are an NRI and you receive your salary directly to an Indian account it will be subject to Indian tax laws. This income is taxed at the slab rate you belong to.
Income from salary will be considered to arise in India if your services are rendered in India. So even though you may be an NRI, but if your salary is paid towards services provided by you in India, it shall be taxed in India immaterial of where you are receiving the income. In case your employer is Government of India and you are the citizen of India, income from salary, if your service is rendered outside India is also taxed in India. Note that income of Diplomats, Ambassadors are exempt from tax.
Ajay was working in China on a project from an Indian company for a period of 3 years. Ajay needed the salary in India to take care of the needs of his family and make payments towards a housing loan. However, since salary received by Ajay in India would have been taxed as per Indian laws, Ajay decided to receive it in China.
Income from House Property
Income from a property which is situated in India is taxable for an NRI. The calculation of such income shall be in the same manner as for a resident. This property may be rented out or lying vacant.
An NRI is allowed to claim a standard deduction of 30%, deduct property taxes, and take benefit of an interest deduction if there is a home loan. The NRI is also allowed a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid on the purchase of a property can also be claimed under Section 80C. Income from house property is taxed at slab rates as applicable.
Ankita owns a house property in Goa and has rented it out while she lives in Bangkok. She has set up the rent payments to be received directly in her bank account in Bangkok. Ankita’s income from this house which is in India shall be taxable in India.
Rental Payments to an NRI
A tenant who pays rent to an NRI owner must remember to deduct TDS at 30%. The income can be received to an account in India or the NRI’s account in the country he is currently residing.
Maria pays a monthly rent of Rs30,000 to her NRI landlord. She must deduct 30% TDS or Rs 9,000 before transferring the money to the landlord’s account. Maria must also get a Form 15CA prepared and submit it online to the Income Tax Department.
A person making a remittance (a payment) to a Non-Resident Indian has to submit Form 15CA. This form has to be submitted online. In some cases, a certificate from a chartered accountant in Form 15CB is required before uploading Form 15CA online. In Form 15CB, a CA certifies details of the payment, TDS rate, and TDS deduction as per Section 195 of the Income Tax Act, if any DTAA (Double Tax Avoidance Agreement) is applicable, and other details of nature and purpose of the remittance.
Form 15CB is not required when:
- Remittance does not exceed Rs 50,000 (single transaction) and Rs 2,50,000 (in total in a financial year). Only Form 15CA has to be submitted in this case.
- If lower TDS has to be deducted and a certificate is received under Section 197 for it or 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 it lists 28 items..
In all other cases, if there is a remittance outside India, the person who is making the remittance will take a CA’s certificate in Form 15CB and after receiving the certificate submit Form 15CA to the government online.
Income from Other Sources
Interest income from fixed deposits and savings accounts held in Indian bank accounts is taxable in India. Interest on NRE and FCNR account is tax-free. Interest on NRO account is fully taxable.
Income from Business and Profession
Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.
Income from Capital Gains
Any capital gain on transfer of capital asset which is situated in India shall be taxable in India. Capital gains on investments in India in shares, securities shall also be taxable in India.
If you sell a house property and have a long-term capital gain, the buyer shall deduct TDS at 20%. However, you are allowed to claim capital gains exemption by investing in a house property as per Section 54 or investing in capital gain bonds as per Section 54EC.
Special Provision Related to Investment Income
When an NRI invests in certain Indian assets, he is taxed at 20%. If the special investment income is the only income the NI has during the financial year, and TDS has been deducted on that, then such an NRI is not required to file an income tax return.
What are the Investments that Qualify for Special Treatment?
Income derived from the following Indian assets acquired in foreign currency:
- Shares in a public or private Indian company
- Debentures issued by a publicly-listed Indian company (not private)
- Deposits with banks and public companies
- Any security of the central government
- Other assets of the central government as specified for this purpose in the official gazette.
No deduction under Section 80 is allowed while calculating investment income.
Special Provision Related to Long-Term Capital Gains
For long-term capital gains made from the sale of transfer of these foreign assets, there is no benefit of indexation and no deductions allowed under Section 80. But you can avail an exemption on the profit under Section 115 F when the profit is reinvested back into:
- Shares in an Indian company
- Debentures of an Indian public company
- Deposits with banks and Indian public companies
- Central Government securities
- NSC VI and VII issues
In this case, capital gains are exempt proportionately if the cost of the new asset is less than net consideration. Remember, if the new asset purchased is transferred or sold back within 3 years, then the profit exempted will be added to the income in the year of sale/transfer.
The benefits above may be available to the NRI even when he/she becomes a resident – until such an asset is converted to money, and upon submission of a declaration for the application of the special provisions to the assessing officer by the NRI.
The NRI may choose to opt out of these special provisions and in that case the income (investment income and LTCG) will be charged to tax under the usual provisions of the Income Tax Act.
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3.Deductions and Exemptions for NRIs
Deductions Under Section 80C
Most of the deductions under Section 80 are also available to NRIs. For FY 2017-18, a maximum deduction of up to Rs 1.5 lakhs is allowed under Section 80C from gross total income for an individual.
Of the Deductions Under Section 80C, those Allowed to NRIs are:
- 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 sum assured.
- Children’s tuition fee payment: Tuition fees paid to any school, college, university or other educational institution situated within India for the purpose of full-time education of any two children (including payments for play school, pre-nursery and nursery).
- Principal repayments on loan for the purchase of a house property: Deduction is allowed for repayment of loan taken for buying or constructing residential house property. Also allowed for stamp duty, registration fees and other expenses for purpose of transfer of such property to the NRI.
- Unit-linked insurance plan (ULIPS): ULIPS is sold with life insurance cover for deduction under Section 80C. Includes contribution to unit-linked insurance plan of LIC mutual fund e.g. Dhanraksha 1989 and contribution to other unit -linked insurance plan of UTI.
- Investments in ELSS
4. Other Allowable Deductions
Deduction from House Property Income for NRIs
NRIs can claim all the deductions available to a resident from income from house property for a house purchased in India. Deduction towards property tax paid and interest on home loan deduction is also allowed.
Deduction under Section 80D
NRIs are allowed to claim a deduction for premium paid for health insurance. This deduction is available up to Rs 30,000 ( increased to Rs 50,000 effective 1 April 2018) for senior citizens and up to Rs 25,000 in other cases for insurance of self, spouse, and dependent children. Additionally, an NRI can also claim a deduction for insurance of parents (father or mother or both) up to Rs30,000 (raised to Rs 50,000 effective 1 April 2018) if their parents are senior citizens, and Rs 25,000 if the parents are not senior citizens. Beginning FY 2012-13, within the existing limit 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, or NRI’s spouse or children or for 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 8 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.
Deduction under Section 80TTA
Non-resident Indians can claim a deduction on income from interest on savings bank account up to a maximum of Rs 10,000 like resident Indians. This is allowed on deposits in savings account (not time deposits) with a bank, co-operative society or post office and is available starting FY 2012-13.
Deductions not Allowed to NRIs
Some Investments under Section 80C:
- Investment in PPF is not allowed
(NRIs are not allowed to open new PPF accounts, however, PPF accounts which are opened while they are a resident are allowed to be maintained.)
- Investments in NSCs
- Post office 5-year deposit scheme
- Senior citizen savings scheme
Investment under RGESS (Section 80CCG)
Deduction under Section 80CCG or Rajiv Gandhi Equity Savings Scheme was introduced in effective assessment year 2013-14. The main purpose behind this deduction was to increase retail investor participation in equity markets. Upon satisfaction of certain conditions the deduction allowed is lower of 50% of the amount invested in equity shares or Rs 25,000. This deduction is not available to NRIs.
Deduction for the Differently-Abled under Section 80DD
Deduction under this Section is allowed for maintenance including medical treatment of a handicapped dependent (a person with a disability as defined in this Section) is not available to NRIs.
Deduction for the Differently-Abled under Section 80DDB
Deduction under this Section towards medical treatment for a dependent who is disabled (as certified by a prescribed specialist) is available only to residents.
Deduction for the Differently-Abled under Section 80U
Deduction for disability where the taxpayer himself suffers from a disability as defined in the Section is allowed only to resident Indians.
Exemption on Sale of Property for an NRI
Long-term capital gains (when property is held for more than 3 years) is taxed at 20%. Do note that long-term capital gains earned by NRIs are subject to a TDS of 20%.
NRIs are allowed to claim exemptions under Section 54, Section 54 EC, and Section 54F on long-term capital gains. Therefore, 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.
Exemption under Section 54 is available on long-term capital gains on sale of a house property. Exemption under Section 54F is available on sale of any asset other than a house property.
Exemption is also available under Section 54EC when capital gains from sale of the first property is reinvested into specific bonds.
- If you are not very keen to reinvest your profit from sale of your first property into another one, then you can invest them in bonds for up to Rs.50 lakhs issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
- The homeowner has 6 months’ time to invest the profit in these bonds, although to be able to claim this exemption, you will have to invest before the tax filing deadline.
- The money invested can be redeemed after 3 years, but cannot be sold before the lapse of 3 years from the date of sale.
The NRI must make these investments and show relevant proof to the buyer to get no TDS deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.
How are You Taxed When You are a…
Resident Individual on a Temporary Foreign Assignment
Rahul worked out of Singapore on a temporary assignment for 4 months and earned in Singaporean Dollars during that time. He got this income credited to a bank account here in India. He has returned back home now. How should he file his income tax return?
Rahul’s taxes for this year will depend on his residential status. Since Rahul has not been outside of India for more than 182 days, he will be considered a resident.
He will be required to file his income taxes in India this year. This will also include his salary earned during the foreign assignment in Singapore.
If the assignment extends to more than 182 days, Rahul’s residential status will change and he will be required to pay taxes only on the Indian income earned thus far. Here, note that Rahul’s foreign income credited to an Indian bank account is taxable in India.
Resident Individual recently moved abroad
Prashant moves to the US on a new assignment. He gets his US income credited to an NRE account in India. He continues with his FD investments and has some money put away in a savings account in India. He just received from his Indian employer. Should he file his returns this year in India?
NRI or not, every individual must file a tax return if their income exceeds Rs 2,50,000. But note that NRIs are only taxed for income earned/collected in India. So, Rahul will pay taxes on income earned while in India, and income accrued from FDs and savings account.
|Prashant’s income from India|
|Income from Indian employer||Rs 3,00,000|
|Interest income from FDs||Rs 25,000|
|Bank account savings interest||Rs 4,500|
|Gross total income||Rs 3,29,500|
|Section 80C – PPF investments||Rs 20,000|
|Section 80TTA exemption||Rs 4,500|
|Taxable income||Rs 3,05,000|
|Tax slab at 10%||Rs 5,500|
|Cess at 3%||Rs 165|
|TDS deducted by employer||Rs 4,000|
|TDS deducted by bank||Rs 4,500|
|Tax Refund||Rs 2835|
Living in a Foreign Country
It’s been 3 years since Arjun moved to the US. He is paid in US dollars. He has his money invested in a savings account and FDs in India. He has bought an apartment and gave it on rent for Rs.35,000 per month. He gifts his parents a car and transfers Rs.10,000 every month to their account to help with their household expenses during the year. He also transfers Rs 20,000 in his father’s account to meet the cost of the insurance policy he has purchased for his parents. 1
|Rental Income||Rs 4,20,000|
|Less: Standard 30% deduction under Section 24||Rs 1,26,000|
|Income from house property||Rs 2,94,000|
|Income from FDs and bank account||Rs 30,000|
|Gross total income||Rs 3,24,000|
|Deduction under Section 80D||Rs 20,000|
|Taxable income||Rs 3,04,000|
1 Arjun’s gift to his father and money transfer of Rs 10,000 to his mother are exempt from tax. Regarding the insurance expenses on his parents, Rahul can claim a deduction under Section 80D of Rs 20,000, since his father is over 65 years of age.
He will be required to file a ax return in India as his gross income exceeds Rs 2,50,000.
NRI Recently Moved Back to India
Returning NRIs assume RNOR status when:
- You have been an NRI in 9 of the 10 financial years preceding the year of your return
- You have lived in India for 2 years or less (729 days or less) in the last 7 financial years
The IT Department allows RNORs to continue to enjoy exemptions available to NRIs for a period of 2 years after their return. Therefore, deposits held in foreign currency, which are exempt for an NRI, shall be exempt to returning NRIs for 2 years.
After these 2 years, returning NRIs are treated as resident individuals.
Resident with Global Income
If you are a resident Indian, your global income is taxable in India. This income may have been earned or received outside – but it shall be taxed in India. In case this income is also taxable in another country, you can take benefit of DTAA (Double Tax Avoidance Agreement).
Shreya returned to India in 2010 after living in London for more than 5 years. The French company she worked for has retained her as a consultant and sends her fees in pounds. Her salary is credited to a bank account there, and Shreya pays tax on it in the UK.
Does Shreya Have to Pay Tax on this Income or Include it in Her Income Tax Return in India?
Shreya is a resident in India. Taxability of income in India depends upon residential status. A resident has to pay tax on their global income. The resident must disclose all the income earned by them from all sources and all countries in their income tax return and pay tax on it in India. (An NRI pays tax only on income earned or accrued in India).
Therefore, all of Shreya’s income, including the fee that she earns in foreign currency will be taxable in India.
Her income in pounds shall be converted to Indian rupees for the purpose of income tax calculation and added to her total income, which will be taxed at slab rates prescribed by the tax department.
If Shreya has already paid tax on the foreign income in the UK, she can claim the benefit under DTAA. Based on the relevant provisions of the DTAA between the two countries, Shreya will be saved from getting taxed twice.
If you are a resident and have earned any income from abroad, remember to disclose it in your income tax return.
Income Tax Filing for Foreign Nationals
An expatriate in India is someone who comes to live in India but is not a citizen of India.
5. How can NRIs Avoid Double Taxation?
NRIs can avoid double taxation (meaning: getting taxed on the same income twice in the country of residence and India) by seeking relief from DTAA between the two countries.
Under DTAA, there are two methods to claim tax relief – exemption method and tax credit method.
By exemption method, NRIs are taxed in only one country and exempted in another. In tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.