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Income Tax for NRI: Taxable Income, Deductions and Exemptions

How to Determine Residential Status

An Indian is considered a resident for a financial year when he or she is in India for at least 6 months (exactly 182 days) during the financial year or he or she has been in India for 2 months (60 days) for the year in the previous year and have also lived for one whole year in the country in the last four years.

If the individual is an Indian citizen working abroad or is a member of a crew on an Indian ship, then only the first condition is applicable. This means that the resident has spent at least 182 days in India. The same applies to a PIO or a Person of Origin who visits India. The second condition is also not applicable to these individuals.

It is important to note that a PIO is an individual whose parents or grandparents were born in an India that was undivided.

If the individual does not meet any of the requirements posted above, then he or she is definitely an NRI or a Non-Resident Indian.

Is an NRI’s Income Earned Abroad Taxable?

An NRI’s income taxes in India depends primarily upon his or her residential status for that given financial year. If the status is ‘resident’, then the global income is definitely taxable in India. If the status is ‘NRI’, then the income that has been earned or accrued in India is taxable in terms of Indian taxation.

The salary that has been received in India or salary for services that were provided wile in India, income from a house property located in India and capital gains on transfer of assets that are situated in India are also considered taxable. This also covers the income from fixed deposits, interests on bank account savings and other examples of income earned and accrued.

All that have been mentioned above are taxable for the non-resident Indian. Income that has been earned outside India is also not taxable in India. Interest that was earned on an NRE account as well as an FCNR account is definitely tax-free. The interest on the NRO account is also made taxable for the NRI.

Are NRIs Required to File Income Tax Return in India?

Whether the individual is an NRI or not, he or she with an income that exceed 2500 Rupees for the financial year must submit an income tax return in India.

NRIs must also file the returns when they:

* Want to get a refund
* Have a loss that they wish to carry forward

Note that a refund can only be claimed when filing an income tax return for that given financial year. If capital gains from selling assets in the individual’s income in the financial year has been deducted, then he or she is not required to file the income tax return for that given year.

If capital gains from selling the asset is the only income incurred in that financial year, then the TDS has been deducted on that and the individual is not required to file the income tax return for that given year.

When is the Last Date to File the Income Tax Return in India?

It is always on the last day of July or July 31st. This is the last date that individuals are expected to file their income tax return.

Do Non-Resident Indians Pay Advance Tax?

If tax liability exceeds 10,000 Rupees in the financial year, then they are required to pay tax in advance. The interest as written under Section 234B and Section 234C is only applicable when you don’t pay your advance tax.

Taxable Income of Non-Resident Indians

  1. Income from Salary

The salary from the NRI’s income is taxable when he or she receives the salary in India or another person does this on his or her behalf. Therefore, NRIs who receive the salary directed to an Indian account will be subject to Indian tax laws. This income is also taxed at the slab rate that the individual falls under.

Income from salary is considered to arise in India if the services are rendered in India. So even though the non-resident Indian has that status but the salary is paid towards the services that have been provided in India, then India taxation will be followed.

In case the employer is the Government of India and the NRI is the citizen of India, then the income from salary which includes the services rendered outside India is also taxed within India taxation. It is important to note that the salaries of ambassadors and diplomats are exempted from tax.

  1. Income from House Property

Income from property that is located in India is taxable for NRI. The calculation of this income must be in the same manner as that of the resident. The property may either be lying vacant or rented out.

An NRI is only allowed to claim the standard deduction of 30%, also deduct property taxes and then take benefit of the deduction in interest once there is a home loan. The NRI is then allowed deduction for the principal repayment as stated under Section 80C. The stamp duty along with the registration charges that have been paid on the purchase of the property must be claimed under Section 80C. Income from the house property is also taxed at the slab rates that are applicable.

  1. Rental Payments to the NRI

The tenant who pays the rent to an NRI owner must remember to decrease TDS at 30%. The income can also be received in the account that is located in India or the account of the non-resident Indian in the country that he or she is currently living in.

A person that makes a remittance or payment to the NRI also must submit Form 15CA. This form also must be submitted online. In some cases, the certificate from the chartered accountant as stated in Form 15CB is also required before the Form 15CA online has been uploaded. in Form 15CB, the CA certifies all the details of the payment, TDS deduction and TDS rate as what is stated on the Income Tax Act Section 195. This is the Double Tax Avoidance Agreement or the DTAA and other details of the purpose and nature of the remittance are written here.

Form 15CB is not required in these situations:

* The remittance does not go over 50,000 Rupees in a single transaction. If that is the case, then it is only Form 15CA that must be submitted.
* If the lower TDS has to be deducted and the certificate is received under Section 197 because of the lower TDS and was ordered by AO
* Neither of the transaction that falls under Rule 37BB of the Income Tax is required

Along with these cases mentioned, if the remittance is done outside India, then the person making this will take a CA’s certificate in Form 15CB. After receiving this, they must submit the Form 15CA to the website of the government.

  1. Income from Other Sources

The interest income from savings account and fixed deposits that are held in Indian bank accounts is regarded taxable in India. The interest on FCNR and NRE are all considered tax-free. The interest on the NRO account is also considered fully taxable.

  1. Income from Business and Profession

Any income that has been earned by the Non-Resident Indian from a business that is set up or controlled and operated in India is also taxable to the NRI.

  1. Income from Capital Gains

Any capital gain on the transfer of capital asset which is then situated in India must be taxable in India. The capital gains on investments in India are shares and securities that are also taxable in India.

If the NRI sells the house property and have received a long-term capital gain then the buyer must deduct the TDS at 20%. However, the NRI is also allowed to claim capital gains exemption by investing the house property for Section 54 and invests these in capital gain bonds as mentioned in Section 54 EC.

  1. Special Provision Related to Investment Income

When the NRI invests in some Indian assets, he is then taxed at 20%. If the special investment income is the sole income that the NI has during the given financial year then TDS is deducted on that. Therefore, NRI is not actually required to file an income tax return.

What are the Investments That Are Considered Special Treatment

The income derived from these Indian assets must be acquired in foreign currency:

* Shares in private or public Indian company
* Deposits with the public companies and banks
* Other assets of the central government that is specified for this purpose
* Any security of the central government
* Debentures that have been issued by the publicly-listed Indian company, and not the private companies

There is no deduction stated under Section 80 that is allowed when calculating the investment income.

Special Provision Related to the Long Term Capital Gains

As for long-term capital gains that have been made from the transfer of foreign assets, there is no indexation and no deduction that is allowed under Section 80. Is it possible for NRIs to avail an exemption on the profit as stated in Section 115 though?

* Shares in a company in India
* Deposits with the banks and Indian public companies
* NSC VI and VII issues
* Central Government Securities
* Debentures of the Indian public company

In this situation, capital gains are primarily exempted proportionately if the cost of the new asset is less than the net consideration. It is very important to remember that the new asset is purchased and then transferred and sold back in a span of 3 years. This makes the profit definitely exempted and it will even be added to the income of the year that the sale or the transfer has been done.

The benefits above can also be made available to the NRI even when the individual becomes a resident. Until then, the asset is then converted to money. Upon this submission, the declaration for the application of these special provisions will be assessed by the officer.

The non-resident Indian can then choose to opt out of these provisions and in that scenario, the LTCG and the investment income will eventually be charged to tax under the provisions of the Income Tax Act.

Deductions and Exemptions for NRIs

Deductions Under Section 80C

A number of the deductions stated under Section 80 are available to Non-Resident Indians. Of the deductions that are listed, these are allowed as exemptions for NRIs:

* Life Insurance Premium Payment – The policy must be under the name of the NRI or in the name of their spouse or any of their child. The child may be an independent, dependent, major, minor, unmarried, married. The premium must also be lower than 10% of the assured sum.

* Children’s Tuition Fee Payment – Tuition fees that are paid to any college, school, university or other educational institution that has been situated within India for the very purpose of full time education of any two children. This includes payments for nursery, pre-nursey and daycare.

* Principal repayments on loan for the purchase of house property: Deduction is also allowed for repayment of the loan taken to buy or construct residential house property. Stamp duty, registration fees and stamp duties are also other expenses that are allowed for exemption because this serves as the purpose of transfer for the NRI’s property.

* Unit-linked Insurance Plan (ULIPS) – this is sold with life insurance cover for the deduction under Section 80C. This also includes the contribution to the unit-linked insurance plan of the LIC mutual fund and the contribution to the other unit-linked insurance plan of the UTI.

* Investments in ELSS

These deductions may also have some clarifications and adjustments made just in case the need for it arises. This has to be explained thoroughly so that NRIs know what will be deducted.