Taxation for NRIs

Taxation in India is a crucial element for the economy of the nation. Various taxes are levied on services and products being availed by the citizens of India. Taxes are meant to add a better shade to the services and products that are used by consumers. Income tax, service tax, property tax and tax deducted at source are some of the commonly known forms of taxation and will be familiar terms for most of the people residing in India. But then arises the question of how taxation in India affects people who do not stay in India but are of Indian origin, in other words, non-resident Indians.

Non-resident Indians also need to pay appropriate taxes as and when they fall under the jurisdiction of the Income Tax Act of 1961. The details of what the taxes for an NRI are and how they should be dealt with, fall under the category of NRI taxation. NRI taxation covers aspects of income tax, wealth tax and property tax, among others.

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Income Tax for NRIs

It is imperative to understand clearly how an NRI becomes liable to pay tax in India. By definitions laid down by FEMA (Foreign Exchange Management Act), a citizen of Indian origin can be termed as an NRI only if a specific number of days have been spent abroad and consequently, a relative period of absence has been maintained in India.

By default, income earned by an NRI abroad is not taxable in India. But if the income in India through aspects like capital gains from investments in shares, mutual funds, property rental and term deposits exceed the basic exemption limit as defined in the Income Tax Act, an NRI would have to file a tax return.

Considering the taxation imposed on the income of NRIs through sources based in India, TDS is levied at the highest rate on the interest earned on capital gains from term deposits, shares and mutual funds. Most of the time, that negates the need for any filing of tax returns. But on the flipside, it may also happen that the total TDS exceeds the basic tax liability of the NRI. That makes filing of tax returns the only way to claim a tax refund.

Taxation Rules for NRIs

Tax rules in India for NRIs vary by a significant degree when compared to the rules that are applicable for resident Indians. Some of the important points to note are –

1. Income tax slabs for NRIs are based only on the income barring any gender, age or other specification
2. In case of TDS, all incomes of NRIs are charged irrespective of any threshold value
3. No nominal deductions are applicable on investment income except under specific situations
4. Tax filing isn’t normally required for NRIs if the income is subject to clauses under Section 115G of the Income Tax Act

Special provisions for NRIs included in the Income Tax Act fall under the following sections –

1. Computation of Tax (Section 115D) –

• No deduction allowed in the computation of investment income of an NRI
• If the assessee is an NRI
  • No deduction is allowed on the gross total income (including only income from investment and long-term capital gains)
  • If income from investment and long-term capital gains form only a part of the gross total income, such income will be reduced and the remaining amount might be eligible for availing deductions under Chapter VI-A

• Tax on income from investment and long term capital gains (Section 115E) -If the total income of an NRI includes
  • Income from investments or long-term capital gains of an asset other than shares in an Indian company, debentures issued by or deposits with a non-private Indian company, any security of the Central Government or assets further specified by the Central Government
  • Income by way of long term capital gainsThen the tax payable by the NRI will be the aggregate of –
    • Income tax calculated at the rate of 20% on the investment income portion as mentioned in 2(a)
    • Income tax calculated at the rate of 10% on the long-term capital gains income portion as mentioned in 2(b)
    • Income tax chargeable if clauses 2(a) and (b) had been reduced from total income
• Non chargeable capital gains on transfer of foreign exchange assets in certain cases (Section 115F) – This basically entails the exceptions where the transfer of a foreign exchange asset will not incur any tax

• If an NRI has invested part of whole of the proceeds of the capital gains from a transfer of a foreign exchange asset into assets specified by the Central Government within a period of 6 months and the cost of acquisition of new asset is equivalent to the value of the earlier asset, such capital gains will not be charged
• If a foreign exchange asset is transferred or converted into money within 3 years from the date of acquisition, the capital gain not charged from the transfer of the asset on the basis of cost of the new asset will be a chargeable income

• Non-filing of returns of income in specific cases (Section 115G) –
  • In case total income during the previous year is only through income from investment and/or long-term capital gains
  • TDS has been deducted from the above mentioned income
• Benefits of taxation after an NRI becomes a resident (Section 115H) – This relates that if an individual was an NRI in the previous year and becomes a resident in any subsequent year which makes him assessable differently under tax laws, his return of income from investment on foreign exchange assets need to be declared thus. That will allow the provisions of taxation to remain intact until the asset is converted into a monetary amount
• Non-application of provisions for NRI taxation (Section 115I) – This is an exclusion rule wherein an NRI can choose if he/she wants his income to be considered from investment or capital gains. If one chooses not to, then all income from sources in India are considered taxable

All the above rules are subject to change as per the discretion and direction of the Central Government and the Income Tax Department of India.

The income types that are exempted from tax are as follows –

1. Interest earned on NRE/FCNR accounts
2. Interest earned on government issued savings certificates and notified bonds
3. Dividends earned from shares of domestic Indian companies
4. Long term capital gains from listed equity shares and equity-oriented mutual funds
5. Capital gains can be exempted through the sections and conditions as-
   1. Section 54 – In case a house property held for 3 or more years is sold and the proceeds or part thereof are used to purchase another property or deposited in a PSU or other banks as per the Capital Gains Account Scheme of 1988
   2. Section 54F – In case any property other than a house is sold and capital gains are incurred, this exemption can be claimed on the construction or purchase of a new house in proportion to how much of the sale proceeds have been spent on the new asset
   3. Section 54EC – If long term capital gains are invested in bonds like the ones issued by the National Highway Authority of India and Rural Electrification Corporation. These have a redemption value after 3 years and shouldn’t be sold before that. In such cases, as per the budget of 2014, a maximum of INR 50 lakhs can be invested in a financial year

All the above exemptions are subject to the tax laws prevalent at that time.

Tax Deductions for NRIs

Taxation for NRIs happens in a more strict way than for residents. The means that can be accommodated under tax deductions are as follows –

1. Allowed deductions for NRIs under Section 80C
   1. Life Insurance premium payment – Premium must be less than 10% of sum assured and the insured must be the NRI, spouse or an offspring
   2. Tuition fee payment – Fees paid to any institution in India for the full time education of any 2 children
   3. Principal payment on loan for purchase of house property – Payment of EMI of a loan for a house property as well as stamp duty, registration fees and other expenses incurred in the transfer of a house property to an NRI will be allowed for tax deductions
   4. Investment in ULIPs – Investment in Unit Linked Insurance Plan of LIC Mutual Fund (Dhanraksha 1989) or ULIPs of UTI
   5. Deduction from House Property Income – Deduction up to a maximum of INR 2,00,000 for interest paid on a home loan for a house which is vacant
2. Allowed deductions for NRIs under Section 80D
   1. Premiums of health insurance of the immediate family and dependents
   2. Up to a maximum of INR 5000 for preventive health check-ups
3. Allowed deductions for NRIs under Section 80E – Deduction of interest paid on an education loan for the higher education of self, spouse, children or a dependent student subject to the earlier of a period of 8 years or till the interest is paid. There is no cap for the interest amount
4. Allowed deductions for NRIs under Section 80G – Applicable only if appropriate donations have been made as per Section 80G of the Income Tax Act
5. Allowed deductions for NRIs under Section 80TTA – Deductions up to a maximum of INR 10,000 on interest earned on savings bank account
6. Long term capital gains for property held for over 36 months can be taxable but an exemption can be availed by investing the proceeds of the sale in another house property or specific bonds. If the value of the new bonds or property is less than the proceeds, an exemption instead will be availed

As explained in the section above, the taxable income of an NRI will not necessarily include certain incomes from investments and long term capital gains. Those aspects of income have tax deducted at sources. In case there are sources of income apart from the prior mentioned sources, they would need to be declared and would be taxable as per the prevailing tax rules.

However, in certain cases, the TDS incurred on income from investment and long term capital gains amounts to more than the tax liability of the individual. To have a tax refund or claim an exemption, filing of tax return becomes necessary.

NRIs can visit the online portal of Income Tax Department of India to file their tax returns and it is a preferred way of filing tax returns.

It is crucial to understand whether one is actually termed an NRI according to the guidelines put forth by FEMA. Post that, the above exemptions and deductions need to be taken into account so that one doesn’t have to pay excess taxes in any condition. NRIs cannot use forms 15G and 15H to avoid TDS, so in case the TDS exceeds their tax liability, they would need to file a tax return along with proof of investment and income in order to avail a tax refund.

One should note the fact that NRIs can face double taxation too, so they need to understand and gather proper proof of tax paid in India so that they can avail the benefit of Double Taxation Avoidance Agreement treaty that is signed between India and many other nations.