Non – Resident Indian is an individual who is a Citizen of India or a Person of Indian origin and who is not a Resident of India. Non-Resident is defined in Section 2 (30) as a person who is not a Resident. It is crucial to determine one’s Residential Status in order to contemplate his/ her tax liabilities and whether they have any in India or not. Thus, under Section 6 of the Income Tax Act of 1961, an individual’s Residential Status must be assessed in order to determine whether or not he is a non-resident Indian.Whether or whether an NRI should pay taxes is a question of ethics as well as the impact on our economy, all of which are intertwined. The Indian Government derives mammoth support from tax revenue generated via collection of Direct and Indirect taxes. As per Latest 2020 statistics, only a miniscule 1.43 Crore Indians pay taxes on their income, as stated by the Income Tax Department. To add icing to the cake, Ministry of External Affairs report 2018 stated that over 32 million Indians currently reside outside of India, forming the Indian Diaspora, indicating a sizable population and a high level of compliance with tax requirements. Every Non – Resident that receives Income from India is required to obtain PAN from the Indian Income Tax Act Department and provide it to Indian payer. Payer is required to deduct the taxes at the minimum of 20 % of the value. However, an NRI can make an advance application to the Income Tax authorities to determine in advance the appropriate withholding tax rates.
Double Taxation Avoidance Agreement (DTAA) or Tax Treaty and its role to Non – Residents in India
The Double Tax Avoidance Agreement (DTAA)allows NRIs to Pay tax only in one jurisdiction and not pay double taxes. According to the Finance Act of 2013, unless a Tax Residency Certificate is provided to the deductor, an individual will not be eligible to claim any benefit of relief under the Double Taxation Avoidance Agreement.
Tax Liabilities of NRIs as per Income Tax Act
A Resident’s global income is taxable in India, whereas an NRI’s income generated in India is taxable exclusively in India. The Indian Government will not tax income earned outside of the country. Income from Home Properties in India, Capital Gains acquired on the transfer of assets located in India, Income received from fixed deposits/interest on savings bank accounts in India, and remuneration earned on services given in India are all examples of taxable income for NRIs.Any individual earning more than INR 2.5 lakhs in India, whether an NRI or not, is required to file an Income Tax Return (ITR) in India. The deadline for NRIs to do so is every July 31st.
- Salary received for services provided in India
An NRI’s salary or income for services provided in India is taxable regardless of where it comes from. Even if the individual’s status is Non-Resident, the remuneration paid by the Indian Government for services rendered outside of India is considered Indian Income and is taxed accordingly.
- Income from House Properties in India
The Rental Income from a house in India is taxed for an NRI who owns the house. Income from House Property is taxed under Sections 22 to 27 of the Income Tax Act of 1961.The calculation of income shall be in the same manner as applicable to a resident. Under Section 80C of the Income Tax Act of 1961, an NRI can claim a 30% basic deduction, deduct property taxes, and take advantage of a house loan interest deduction as well as a deduction for principal repayment. When an individual buys a residence, they can deduct stamp duty and registration costs paid under Section 80C of the Income Tax Act. When any tenant pays rent to an NRI owner, he/she must deduct 30% TDS before making the payment.
- Income from Capital Gains
Any Capital Gain arising from the transfer of a capital asset located in India is taxable in India. Capital gains on investments in Indian stocks and securities would be taxed in India as well. Long term capital gains that are profits made on sale after one year from date of purchase, on Equity shares and equity mutual funds are exempt from tax. There will be no TDS applicable.TDS of 10% will be applied to long-term capital gains from debt mutual funds and corporate debentures
Short-term Capital Gains are profit on a sale made within one year of purchase and are subject to a 15% TDS.TDS of 30% will be applied to Short-Term Capital Gains from debt Mutual Funds and Corporate Debentures.
For Long – Term Capital Gains made from the sale or transfer of foreign assets, there is no benefit of indexation and no deductions allowed under Section 80 of Income Tax, 1961.However, under Section 115F, a person can claim a profit exemption if the profit is reinvested in:
Indian company shares
Indian Public company debentures
Deposits with banks and Indian public enterprises
Central Government securities
NSC VI and VII issues
- Income from Other Sources
In India, any payments made to an NRI in any account, such as a savings or fixed deposit account, are taxable. In India, interest earned in a Non-Resident External (NRE) Account or a Foreign Currency Non-Resident (FCNR) Account is tax-free. In any case, interest on a Non-Resident Ordinary Account (NRO) is taxable and subject to a 30% TDS.The number of exemptions that can be claimed has no upper limit.TDS will be deducted at a rate of 20% on all other investments, such as corporate deposits and bonds. In the hands of the share or unit holder, dividends from equity shares, equity mutual funds, and debt mutual funds are tax-free.
- Income from Business and Profession
An NRI’s income obtained in India through a profession or a business established or controlled in India is taxed.
Deductions and Exemptions for NRIs under Section 80
Section 80 of the Income Tax Act contain provisions relating to deductions. NRIs are eligible for the majority of deductions under Section 80 of the Income Tax Act. Deductions are provided under Section 80 for life insurance premium payments, unit linked insurance plans, children’s tuition fees, investments in the Equity Linked Savings Scheme, and principal payments on home loans. Section 80C of the Income Tax Act allows an individual to deduct up to Rs 1.5 Lakh from his total income for the financial year 2020-21. NRIs are eligible for all deductions available to residents, including insurance deductions from income from a home purchased in India. There is also a deduction for paid property taxes and interest on home loan.
Section 80D allows NRIs to claim a tax deduction for health insurance premiums paid. This deduction is available for insurance of self, spouse, and dependent children up to Rs 25,000/- and up to Rs 50,000/- for senior persons. Moreover, an NRI can also claim a deduction for parents’ insurance up to Rs 50,000 if their parents are senior citizens and Rs 25,000 if the parents are not senior citizens.NRIs can claim a deduction for interest paid on an education loan under Section 80E. The amount that can be claimed as a deduction under this clause has no limit. The deduction is valid for up to eight years or until the interest is paid, whichever comes earlier.NRIs can claim a deduction for donations to social causes under Section 80G.
Legal Help NRI has an exclusive and dedicated team looking after the Income Tax for NRIs.Our team works all over India to assist clients with filing their Income Tax Returns based on their residency status. Our legal term in a plethora of cases have dealt with issues relating to Double Taxation Avoidance Agreement (DTAA), Calculation of Growth Capital, representing clients before tax authorities, Income Tax Appellate Tribunal and High Court. Our endeavor is to provide services to our clients that meet their specific needs.