NRI Taxation in India

Taxation of NRIs (Non-Resident Indians) in India is to ensure their contribution to the nation’s coffers for its development and functioning. Under Income Tax Act of India, every resident is liable to pay tax irrespective of the age or gender on all sources of income. Regardless of the citizenship of an individual, the residential status is important to determine if an individual is to be taxed as an NRI or as a Resident.

The NRI taxability rules differ from that of Resident Indians in many aspects. An individual is classified as an NRI for tax purposes, provided the below rules are satisfied.

  1. Has resided outside India for a period of more than 182 days in the relevant financial year.
  2. Has not resided in India for 60 days or more during the last financial year and also for a combined total of 365 days or more during the last four financial year.

How are Returning NRIs taxed in India?

The most important aspect of NRI Taxation is that only the income earned in India is taxable irrespective of residential status. Any earnings abroad by an NRI is not taxable as it is beyond the scope of the Income Tax Act. It is crucial to understand that the residential status is determined only for tax purposes on income earned in India and does not indicate or influence the citizenship of an individual. However, the NRI tax rates are same as that for residents if they qualify as residents for tax purpose.

If an NRI or any citizen of other countries stays in India for a period less than 182 days and also earns an income in India during the stay, it is classified as a short term stay and the taxability of such incomes depends on the Tax Treaty signed between India and the country of residence of the individual.

The various heads of income for which taxes are applicable to NRIs are mentioned below:

  1. Salary – Any salary received in India is taxable at the applicable slab rates if a person qualifies as a resident.
  2. Properties and Assets – Any income arising out of, either sale or lease or rent of an asset or property will be taxed according to Indian Income tax rules.
  3. Securities and Investments – Any income or capital gains from the sale of securities and investments are subject either to LTCG (Long Term Capital Gains) Tax or STCG (Short Term Capital Gains) Tax depending on the holding period of the investment.
  4. Interest earned from Bank Accounts – Interest earned on NRO account is taxable and it is usually paid out after TDS (Tax Deducted at Source) at 30%. Interest earned on any Fixed Deposits (FDs) linked to NRO account or resident accounts are subject to income tax under the head “Income from Other Sources).

Since the NRIs tax slabs are same as that of Residents in case they qualify as a resident, NRIs have to pay tax if they fulfill either of the below conditions:

  1. Taxable income is more than the minimum tax exemption limit of 250,000* INR annually. (*This is the current exemption limit and may change depending on the government policies).
  2. Capital Gains arising from the sale of securities or investments or properties, even if the income is below the tax exemption limit.

For NRIs returning to India permanently after a long-term stint abroad, their residence status for tax purpose in considered as RONR (Resident but Not Ordinarily Resident). This status in assigned if an individual has spent more than 9 consecutive years abroad. The foreign income for NRIs classified as RONRs is not taxable for two years unless it is from a profession or business controlled from India. After 2 years, the RONR individual becomes a Resident and any income from abroad is taxed as ‘Global Income’. On turning into an Ordinary Resident, a returning NRI has to mandatorily disclose all the offshore assets and income when filing tax returns.

The tax slab rates for NRIs is always the applicable tax rates for resident individuals below 60 years of age. No special tax slab rates are applicable for NRIs who are senior citizens.

Tax Exemptions for NRIs:

The below sources of income are exempt from Tax for NRIs:

  1. Income earned outside India.
  2. Interest earned on NRE and FCNR accounts.
  3. Interest on Noted Relief Bonds.
  4. Dividends earned on shares of Indian companies or specified Mutual Funds
  5. Long Term Capital Gains on sale of shares of Indian companies or Equity Mutual Funds.

Since the tax slab rates for NRIs are same as residents, they are eligible to claim rebates and deductions from their taxable income in India under Section 80 of the Income Tax Act.

Filing of Tax Returns:

It is crucial for an NRI to understand the terms Financial Year and Assessment Year from Indian Income Tax Act perspective. Indian Financial Year is from April of a calendar year to March of the next calendar year. A person earning income in India is supposed to pay tax on all earnings from April until the next March either through TDS by the employer or as an advance tax payment. After the end of a Financial Year, an individual has to file a tax return to the Income Tax Office detailing the residency status for tax purpose, all sources of income, investments made for tax rebates, eligible tax exemption and tax deposited. This year in which the taxes are assessed in called as an Assessment Year.

Case Study:

Anita was working in India from June 2015 until February 2016 and her Indian income during the stay was 1,000,000 INR. Since her income was greater than INR250, 000 and her residency status for tax purpose was Ordinary Resident, the tax was deducted at source by her employer in the Financial Year 2015-16 (April 2015-March 2016) according to the applicable tax slab rates. She has to file her Income Tax Returns detailing all her sources of income in India, any exemptions claimed, any rebate claimed and tax deducted, so far in the Assessment Year 2016-17 (April 2016-March 2017).

Filing tax returns helps in claiming a refund, if eligible or to carry forward any losses to future assessment years.

How are NRIs residing abroad with investments in India, taxed?

With Indian economy poised for good growth, NRI investors are keen to invest in India for better growth prospects, however they must consider the NRI Tax issues arising out of any investment. Many NRIs also have properties or assets in India, which generate income which may or may not be taxed. According to the Income Tax Act of India, before subjecting any income to tax, the source of income has to be determined. An NRI’s income is taxable only if it is rising in India and the tax slab rates applicable, are same as that for Ordinary Residents.

Taxable Heads of Income for NRIs residing abroad:

  1. Income from House Property – For any house owned in India by an NRI, taxes will be applied at prevailing tax rates irrespective of whether the house is occupied by a tenant or lying vacant. The tenant has to deduct a TDS of 30% before making a payment to an NRI.
  2. Sale of House Property – For capital gains incurred by selling of house property, the buyer has to deduct a tax of 20% for long term gain and 30% for short term gain.
  3. Gifts Received – Any gift in excess of 50,000 INR received in India from a non-relative is taxable at applicable slab rates.
  4. Interest Income – Interest earned from an NRO account is taxable and the banks deduct TDS at 30% of the income earned.
  5. Capital Gains from Equities/Equity MFs – LTCG Tax is not applicable for equities or equity mutual fund units sold after a holding period of 12 months. STCG Tax of 15% is applicable if the equities or equity mutual fund units are sold before 12 months from the date of purchase.
  6. Capital Gains from Bonds/Debt MFs – LTCG Tax at the rate of 20% with indexation benefit or 10% without indexation benefit, is applicable for gains made from the sale of the Bonds or units of the Debt Mutual Fund over a holding period of 3 years. STCG Tax is applicable at the marginal rate/applicable tax rate if the Bonds or units of Debt MFs are sold within 3 years from the date of purchase.
  7. Dividends from non-Indian Companies – This is taxable at 20% of the gross
  8. Dividends from Global Depository Receipts (GDRs) and Interest from Foreign Currency Convertible Bonds (FCCB) – Taxable at 10% of the gross
  9. Long Term Capital Gains from the transfer of GDRs or FCCBs – Taxable at 10% of the gross

Special Tax Regime for NRIs

To encourage NRIs to invest in India, a special tax regime has been doled out for NRIs for income from specific assets bought with convertible foreign exchange. The assets specified are listed below:

  1. Shares of an Indian company.
  2. Debentures of Indian Public Sector companies.
  3. Deposits with Indian Public Sector companies.
  4. Central Government’s Securities.
  5. Any other asset notified under the special tax regime.

Income from these specified assets are taxable as below:

  • Investment Income – 20% of the gross amount
  • LTCG Tax – 10% without indexation