NRI Taxation -How is the Income taxed?

It is essential to determine the residential status of the taxpayer to determine the taxability of income earned by such taxpayer. However, in the case of a resident taxpayer, all his income would be taxable in India, irrespective of the fact that income is earned or has accrued to taxpayers outside India. However, in the case of a non-resident, all income which accrues or arises outside India would not be taxable in India. Let us know more about the rules of NRI taxation.

NRI Taxation

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NRI Taxation of income depends on the residential status of an Individual which is stated below:

Incomes taxable for an NRI

Below are the various incomes taxable in India for NRI-

  • Salary Income – 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.
  • House Property Income – 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. Income from house property is taxed at slab rates as applicable.
  • Business Income – Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.
  • Capital Gain Income – 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.
  • Other Income – Any other income arising in India is taxable for NRI.
  • Interest Income – from the fixed deposit, savings bank account, NRO account in Indian Banks is taxable.

Deductions available under NRI Taxation rules

  • Under Section 80C – Maximum limit of deduction that can be claimed is Rs. 1,50,000/-, below are the list of deduction that can be claimed-
    1. Life Insurance Premium payment for self, spouse dependent children, and parents.
    2. Children tuition fee payment
    3. Principal repayments on loan for the purchase of a house property
    4. Unit-linked insurance plans
    5. Investment in ELSS
  • Under Section 80D – Health insurance premium paid
    1. For parents – Rs. 25,000 (Rs.50,000 if parents are senior citizens)
    2. For self, spouse, and dependent children – Rs. 25,000.
  • Under Section 80E – NRIs can claim a deduction of interest paid on an education loan.
  • Under section 80TTA – NRI can claim a deduction on income from interest on savings bank account up to a maximum of Rs 10,000 like resident Indians.

Exemptions available for NRIs

  • Interest from NRE/FCNR Accounts
  • Interest earned on the government-issued notified bonds and saving certificates
  • Long-term capital gains from the listed equity-oriented mutual funds and equity shares
  • Dividends earned from the shares of domestic companies of India
  • Capital gains are exempted via section 54, 54F and 54EC

Special Provision for NRIs

a. 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:

  1. Shares in an Indian company
  2. Debentures of an Indian public company
  3. Deposits with banks and Indian public companies
  4. Central Government securities
  5. NSC VI and VII issues

b. NRIs get a concessional tax of 20% on their investment income and 10% on long term capital gains from specified assets that are obtained from convertible foreign exchange

Also read: NRI Real Estate Investment in India – What should you know?

Double Taxation

There are possibilities that NRI income is taxed twice, once in the country earned and also India. Hence to avoid double taxation by seeking relief from DTAA (Double tax avoidance agreement).

Filing of Income-tax return by NRI-

NRIs that have a taxable income in India more than the prescribed tax exemption limit of Rs.2.5 lakhs need to file ITR in India. However, if they have earned income from either of the following sources, they will be required to file ITR in India, irrespective of the fact whether their income is below the basic exemption limit:

  1. Income earned from Long-Term Capital Gains that are tax liable
  2. Income earned from Short-Term Capital Gain on equity or equity-related mutual fund shares

As an NRI, you may want to err on the side of caution when it comes to NRI taxation. The rules for you are slightly different compared to Resident Indians, and in some cases, you may end up paying double tax if you are unaware of the rules. It would be a good idea to understand tax policies and make the most of the tax benefits available to you.

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Illustration 1

Mrs.P, an engineer, is presently working in a company in India. She has received an offer for the post of manager from a company in Singapore. As per the offer letter, she should join the company at any time between 1st September 2018 and 31st October 2018. Following are the questions she has:

  1. Date by which she should leave India to join the company;
  2. Direct credit of part of her salary to her bank account in Kolkata maintained jointly with her mother to meet the requirement of her family
  3. Period for which she should stay in India when she comes on leave

The following category of individuals will be treated as resident in India only if the period of their stay in India during the relevant previous year is 182 days or more:

  • Indian citizens, who leave India in any previous year, inter alia, for purposes of employment outside India, or
  • An Indian citizen or person of Indian origin engaged outside India, inter alia, in employment, who comes on a visit to India in any previous year.

Since Mrs.P is leaving India for employment outside India, she will be treated as resident only if the period of her stay during the previous year amounts to 182 days or more. Therefore, Mrs.P should leave India on or before 28th September 2018, in which case, her stay in India during the previous year would be less than 182 days and she would become non-resident for taxability in India. In such a case, only the income which accrues or arises in India or which is deemed to accrue or arise in India or received or deemed to be received in India shall be taxable. The income earned by her in Singapore would not be chargeable to tax in India for A.Y. 2019-20, if she leaves India on or before 28th September 2018.

If any part of Mrs.P’s salary will be credited directly to her bank account in Kolkata then, that part of her salary would be considered as income received in India during the previous year under section 5 and would be chargeable to tax under Income-tax Act, 1961, even if she is a non-resident. Therefore, Mrs.P should receive her entire salary in Singapore and then remit the required amount to her bank account in Kolkata in which case, the salary earned by her in Singapore would not be subject to tax in India.

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In case Mrs.P visits India after taking up employment outside India, she would be covered in the exception provided in (b) above and she will be treated as resident only if the period of her stay during the relevant previous year amounts to 182 days or more. Therefore, when Mrs.P comes to India on leave, she should stay in India for less than 182 days during the relevant previous year so that her status remains as a non-resident for the relevant previous year. Moreover, she should not visit India again during the current previous year i.e. P.Y. 2018-19.

Illustration – 2

Following are the particulars of income furnished by Mr. Anirudh of the year ended 31.3.2019, Mr. Anirudh would like to know the total income for the assessment year 2019-20, if he is was:

  • Resident and ordinary resident;
  • Resident but not ordinarily resident;
  • Non-resident 

Also read: 11 Rules to know – Am I an NRI under FEMA and the Income Tax Act?

Below mentioned is the income earned:

  • Short term capital gains on the sale of shares in Indian Company received in Germany  – Rs.15,000
  • Dividend from a Japanese Company received in Japan – Rs.10,000
  • Rent from a property in London deposited in a bank in London, later on, remitted to India through approved banking channels – Rs. 75,000/-
  • Dividend from RP Ltd., an Indian Company –Rs.6,000/-
  • Agricultural income from lands in Gujarat – Rs.25,000/-

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Solution

Note 1 – It has been assumed that the rental income is the gross annual value of the property. Therefore, deduction @30% under section 24, has been provided and the net income so computed is taken into account for determining the total income of a resident and ordinarily resident.

Note 2 -Dividend received from Indian company upto 10 lakh is exempt under section 10(34)

Note 3 – Agricultural income is exempt under section 10(1)

Final Words

NRI Taxation rules are different from that of Resident Indians. Hence, it is better to understand what type of incomes are taxable, what special provisions are available, what deductions and exemptions can be claimed. It is better to avail the services of a Chartered Accountant(CA) who can help you to understand the tax implications according to your income, and make you utilize the provisions to the best levels.

At My MoneySage, we offer CA-assisted Tax filing services for NRIs. Please get in touch with us at support@mymoneysage.in for comprehensive advice on NRI Taxation.

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