Taxes are an inexorable part of a salaried individual's life. And those who leave India to work in another country are faced with the prospect of being subject to two taxation regimes – that in India as well as in the country in which they are employed. With economic liberalization and globalization, more individuals are getting the opportunity to work abroad and thus acquiring NRI (Non Residential Indian) status. These NRIs may have left the geographical boundaries of India but may still come under the taxation purview of the country.
Just as the NRIs are taxed like other Indian citizens, so also they can enjoy the rebates and deductions provided for under Section 80 of the Income Tax Act. Thus, student loans, charitable donations etc will all enable the NRI to claim tax deductions.
An individual is considered an NRI if s/he is present in India for less than 60 days during the relevant tax year. Further, when a citizen of India residing outside India or an Indian citizen has left India for employment, he would be regarded as non-resident if his or her total stay in India is less than 182 days in the relevant tax year.
Essentially, while NRIs are subject to taxes as per Indian laws, these are based on a "source rule", which indicates that only income that accrues in India is taxed in India.
Thus, the income that is typically taxable for NRIs in India is as follows:
- Salary received in India or salary for service provided in/from India. The NRI is taxed according to the tax bracket they fall in.
- Income from a house property situated in India. The property may be rented or lying vacant and tax will apply as per prevailing rates. Also, if the property is rented the tenant has to deduct 30% as TDS before making a payment to the NRI.
- Capital gains on transfer of assets situated in India. Capital gains on investments in the country in shares, securities shall also be taxable in India.
- If you sell a house property and have a capital gain, the buyer shall deduct TDS at 20% for long-term gain and at 30% for short-term gain.
- Income from Fixed Deposits or interest on Savings Bank Account
- Interest on NRO account is taxable for an NRI and the bank will usually deduct taxes at 30%.
- Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.
- Any gift in excess of ₹50K per annum received in India from a non-relative.
Those incomes which are not taxable in India include:
- Income which is earned outside India is not taxable in India.
- Interest earned on an NRE account and FCNR account is tax free.
While all individuals who have an income exceeding ₹2.5 lakh are required to file taxes, NRIs can benefit from filing their returns especially if they want to claim a refund or they have a loss that they want to carry forward.
Just as NRIs may be taxed like other Indian citizens, they can also enjoy the rebates and deductions provided for under Section 80 of the Income Tax Act. Thus, student loans, charitable donations etc will all enable the NRI to claim tax deductions.
In addition to the above, there are facilities for Double Tax Avoidance Agreements (DTAAs) so that the NRI does not wind up paying dual taxes in the country of residence and also in India. Such tax benefits can be availed of under a DTAA provided the NRI is able to present a Tax Residency Certificate issued by the country in which the individual breaks his residency.
NRIs could also opt for special tax rates under Indian tax laws for their investments in shares, debentures or deposits with a non-private Indian company, government security, etc. which were acquired with or in convertible foreign exchange. In such case, the long-term capital gain will be taxed at 10% and any other investment income will be taxable at 20%. The NRI can continue to take the benefit of these special rates even after becoming a resident of India. This can be done by filing a declaration with the tax return of the year in which s/he becomes resident in India. This benefit can continue till the asset is transferred or converted in money. Further, an NRI may also be exempted from filing tax return if the total income for the year consists of only investment income or long-term gain from such specified assets.
Knowledge of all the permutations possible under tax laws is essential for NRIs to plan their income and investments judiciously so as to gain maximum benefits and not pay dual taxes in both countries.