NRI Taxation: What Every NRI Should Know

 Taxation for Non-Resident Indians (NRIs) is an essential yet often complicated subject. As NRIs live and work abroad, they must understand the tax laws of both their country of residence and India. Taxation in India for NRIs largely depends on the type and source of income earned in the country. This blog outlines the fundamental aspects of NRI taxation to help you navigate your tax responsibilities in India.



Who Qualifies as an NRI?

An individual is considered an NRI if they are an Indian citizen or a person of Indian origin who stays outside India for more than 182 days during a financial year. The status determines the NRI taxation implications and reporting obligations in India.

Taxable Income for NRIs

  1. Income from Salary:
    NRIs working in India are liable to pay taxes on their income. If the work is performed outside India, the salary earned is not taxable in India, unless the NRI has a permanent establishment in India.

  2. Income from Property:
    Income generated from property in India is taxable for NRIs under the head “Income from House Property.” NRIs must report rental income and can claim deductions for municipal taxes and home loan interest.

  3. Income from Investments:
    Interest income from Indian savings accounts, fixed deposits, and bonds is subject to tax. While dividends from Indian companies are exempt from tax, they are still subject to TDS (Tax Deducted at Source).

  4. Capital Gains Tax:
    When an NRI sells property, stocks, or bonds in India, they are subject to capital gains tax. Long-term capital gains (for property held for over 24 months) are taxed at 20%, while short-term gains are taxed at 30%.

  5. Business and Professional Income:
    Income earned through business or profession in India is taxable. If the NRI is operating a permanent establishment in India, even foreign income may be taxable in India.

Tax Exemptions and Deductions for NRIs

India provides several exemptions and deductions that can help reduce an NRI’s taxable income:

  1. Section 80C Deductions:
    NRIs can claim deductions for investments in life insurance premiums, Public Provident Fund (PPF), and children's tuition fees, subject to a limit of ₹1.5 lakh per year.

  2. Tax Relief under DTAA (Double Taxation Avoidance Agreement):
    India has signed treaties with various countries to prevent double taxation. These treaties allow NRIs to claim tax relief for taxes paid in their country of residence, thus reducing the tax burden.

  3. Tax on Dividend Income:
    Dividend income from Indian companies is exempt from tax in the hands of NRIs, but it is subject to TDS at the rate of 20%. However, the rates may vary depending on the treaty between India and the NRI’s country of residence.

TDS on NRI Income

Tax Deducted at Source (TDS) is a critical component for NRIs when it comes to income from India. TDS is deducted at the time the income is received, ensuring tax compliance. Some of the key TDS rates applicable to NRIs are:

  • Interest Income: TDS at 30% on interest earned from Indian banks or financial institutions.
  • Rental Income: TDS at 30% on rental income from properties in India.
  • Capital Gains: TDS at 20% on long-term capital gains and 30% on short-term capital gains from the sale of property or assets.
  • Dividend Income: TDS at 20% on dividends earned from Indian companies.

NRIs may be eligible for a reduction in TDS through a lower deduction certificate by applying to the Income Tax Department using Form 13.

Filing Income Tax Returns for NRIs

Even though NRIs reside abroad, they are still required to file income tax returns in India if their total income exceeds the basic exemption limit (₹2.5 lakh). Filing income tax returns helps NRIs claim refunds on excess TDS or pay any additional taxes due. The process is similar to that for residents, but NRIs must also declare income earned abroad and claim exemptions for taxes paid abroad.

NRIs should file their income tax returns online, which requires filling out the appropriate ITR form (usually ITR-2 or ITR-3).

Repatriation of Funds from India

NRIs often wish to repatriate funds from India to their country of residence. The Reserve Bank of India (RBI) permits repatriation of income and capital gains, but this is subject to certain conditions, including the payment of applicable taxes. A Tax Clearance Certificate (TCC) may be required before repatriating large amounts.

Conclusion

NRI taxation in India is a multifaceted issue that requires careful planning and compliance. Understanding the tax implications of income sourced from India, the exemptions available, and the TDS provisions will help NRIs minimize their tax liabilities. Consulting with a tax expert can further simplify this process and ensure full compliance with Indian tax laws.

For assistance with NRI taxation matters and tax return filing, contact Dinesh Aarjav & Associates, experts in NRI tax compliance and advisory services.

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