The part of an individual’s income that is considered for the calculation of the tax they have to pay the Government in a fiscal year is known as taxable income. Income Tax is a direct tax levied by the government on the income of its citizens. According to the Income Tax Act, 1961, the central government collects the tax. The income slabs and the tax rates can be modified by the government every year during the Union budget. It adds up to a major part of the revenue collected by the Government. The levying of Income Tax is inevitable as it is used to provide funds for the Defence and development plans of the country. When Non-resident Indians invest in various assets in India, their income also becomes taxable under the Income Tax Act if the amount exceeds the limit of exemption. In this article we will discuss the residential status to know if a citizen is an NRI, provide you details of NRI income taxable in India, exemptions and deductions, the income tax rules and policies for NRIs, ITR for NRI, and other important information.
Did you know? NRIs even though not residing in the country are liable to pay income tax to the Indian Govt.
Defining Residential Status
The residential status of an individual is determined according to the duration of time he/she has stayed in India for a consistent time-frame of five years. This helps in determining the income tax liability of the taxpayer in that particular financial year because the time period of the financial year plus the preceding four years is considered while determining the residential status.
Who is a Non-resident Indian (NRI )?
Given below are the conditions that define the residential status of an NRI:
- An individual who stayed in India for less than 182 days during the financial year.
- An individual who stayed in India for less than 120 days during the financial year (applicable only when the total Indian income of such a visiting individual during the financial year is more than ₹ 15 lakhs.)
- An Indian citizen who is residing abroad for employment or business purposes is also known as an NRI.
Understanding NRI Taxation:
In India, NRIs have to pay taxes only when they come under the jurisdiction of the Income Tax Act. So, NRIs have to pay tax in India on capital gains, mutual funds, income from property, and term deposits, if it exceeds the provided exemption limit.
Defining income earned:
It includes the following incomes:
- Income from Salary
- Income from Business/ Profession
- Income from House Property
- Income from Capital Gains
- Income from Other Sources
Calculating Taxable Income
Step 1: Determining the tax filing status
Step 2: collecting documents for all sources of income.
Step 3: Calculation of Adjusted Gross Income
Step 4: Calculation of Deductions (Standard/ Itemised)
Step 5: Calculation of Taxable Income
Income Tax for NRIs
According to the Foreign Exchange Management Act (FEMA) an Indian citizen can be considered an NRI if he/she has spent a certain number of days out of the country (India). The income of an NRI which has been earned abroad is not taxable in India. If the NRI receives income through capital gains by investing in shares, mutual funds, income from property, and term deposits in India and if it crosses the limit of exemption then the income becomes taxable under the Income Tax Act. Under such a scenario when tax is imposed on the income of the Non-residents through their earnings in India, Tax Deductible at Source (TDS) is charged at very high rates. Due to this mostly filing of NRI income tax returns are not necessary as the balance is neutralised. Sometimes the total TDS exceeds the tax liability making filing of tax returns necessary to claim the refund.
Income Tax Rules for NRIs:
Tax rules in India for resident Indians differ from those applicable to NRIs. Following are the tax rules for NRIs in India:
- Income tax slabs for Non-residents are based on the income of the individual. The gender and age are not taken into consideration.
- Nominal deductions are not applicable on earnings from the investment.
- For TDS, incomes from all sources are charged.
- In case the income falls U/s 115G of the IT Act, tax filing is not needed.
Special Provisions for NRIs
Special provisions for NRIs are included in the Income Tax Act. They are given below:
Section 115D-Computation of Tax:
- No deductions are allowed in the computation of income from investments
- No deduction permissible on gross total income (Gross total income showing earnings from investment and long-term capital gains)
- Under Chapter VI-A deductions are provided if long-term capital gains and earnings from investments are only a part of the gross total income.
Section 115E - Income from investment and long-term capital gains:
If the total income includes:
(a) Any earnings from investment or income from long-term capital gains (from an asset).
(b) In the latter case, the tax payable will be the aggregate of:
- the income tax amount estimated on income from investments referred under clause (a), will be calculated at the rate of 20%
- the income tax amount estimated on income from long term investments referred under clause (b), will be calculated at the rate of 10%
- the income tax chargeable if clauses (a) and (b) are deducted from the total income of the NRI.
Section 115F - Non-chargeable capital gains on transfer of foreign exchange assets:
- Capital gain will not be taxable if the proceeds of capital gains through the transfer of foreign exchange assets into Central Govt.’s specified assets is done within six months and the new asset’s acquisition amount is equal to the asset sold.
- In case a foreign exchange asset (within three years of acquisition) is converted into cash, it will be considered a chargeable income.
Section 115G - Non-filing of returns of income:
- If the total income of the previous year includes income only from investment and long-term capital gains
- If TDS has already been deducted from the above-mentioned income
Section 115H - Benefits of taxation when an NRI becomes a resident:
- Non-resident Indians (NRIs) who become resident Indian are taxed in a different manner. Most importantly, they have to declare the income earned from their various investments.
- Section 115I provides all details with respect to the non-application of provisions for taxing NRIs
- It is up to the discretion of NRIs to decide whether income earned should be considered as investments or capital gains. If they choose not to do so, their entire income becomes taxable.
Tax Exemptions for NRIs:
The incomes that are exempted from tax are mentioned below:
- Interest received on FCNR/ NRE accounts
- Interest received on Govt. savings certificates and bonds
- Dividends from shares of Indian companies
- Long term capital gains from listed equity shares
- Long term capital gains from equity-oriented mutual funds
- Capital gains can be exempted under the following sections:
- Section 54 – The capital gain is exempted when a house is sold after three or more years of acquisition, the proceeds are deposited in PSU/ other banks or is used to purchase another property.
- Section 54F – The capital gain is exempted when a property (other than a house) is sold and the proceeds used to purchase or construct a new house.
- Section 54EC – The capital gain is exempted if it is used to purchase Govt. bonds. These bonds must be sold only after 3 years of purchase.
All the exemptions provided above are subject to the tax laws prevalent at that time.
Tax Deductions for NRIs:
- Deductions under Section 80C:
- Life Insurance Premium: The Premium paid for the life insurance policy (for self, spouse, or child) should be less than 10 percent of the sum assured.
- Tuition fee: Tuition fee paid to an institution of the country. It should be for full-time education of 2 children
- Principal payment on loan for the purchase of house property: Payments of EMIs of housing loan, registration fees, stamp duty, and other expenses incurred for transfer of house property are applicable for tax deductions.
- Investment in ULIPs: Investment in Unit Linked Insurance Plan of LIC Mutual Fund (Dhanraksha 1989) or ULIPs of UTI
- Deduction from House Property Income: Tax deductions up to ₹ 2,00,000/- are allowed for interest paid on a home loan for a vacant house.
- Deductions under Section 80D:
- Premiums of health insurance policies of immediate family and the dependents
- Deduction of Rs.5,000/- (maximum) is allowed for health check-ups
- Deductions under Section 80E: The interest paid on an education loan for higher education of the immediate family or a dependent student for a period of eight years or the period till the interest is paid, whichever is lower.
- Deduction under Section 80G: Deduction is applicable if appropriate donations have been made mentioned under this section.
- Deductions under Section 80TTA: Deductions of ₹ 10,000/- (maximum) is applicable on interest earned through a savings bank account.
Non-Resident Indian Income Tax Return:
Although the income of an NRI earned abroad is not taxable in India but the earnings through capital gains by investing in shares, mutual funds, income from property and term deposits in India crossing the limit of exemption are taxable under the Income Tax Act.
When tax is imposed on the income of the Non-residents through their earnings in India, TDS is charged at very high rates. Sometimes the total TDS exceeds the tax liability making filing of tax returns necessary to claim the refund. NRIs can visit the online portal of the Income Tax Department of India to file their tax returns.
NRI Income Tax Slab Rates (New Regime):
Income Tax Slab
Below 2.5 Lakhs
2.5 Lacs- 5.0 Lacs
5.0 Lacs- 7.5 Lacs
7.5 Lacs – 10.0 Lacs
10.0 Lacs – 12.5 Lacs
12.5 Lacs – 15.0 Lacs
Above 15 Lacs
We hope this article has been able to provide you accurate details of NRI Income Tax in India. It has always been our endeavour to provide the most relevant and minute details and make our articles informative. We hope that you have understood how Income Tax is levied on the NRIs, the exemptions and deductions they receive, and other income tax-related details. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.