Who is an NRI?
An NRI or Non-Resident Indian is an individual who is a citizen of India or a Person of Indian Origin (PIO), but resides abroad. The reasons for residing overseas are diverse and could range from landing the dream job, going for higher education or getting married to a foreign national. It is pertinent to determine one’s residential status in order to contemplate his/her tax liabilities and whether they have any in India or not. No clear cut definition of NRI is available in Indian laws but interpretation can be drawn from the Income Tax Act, 1961 and the Foreign Exchange Management Act, 1999. While the IT Act definition is based on the number of days a person resides in India, FEMA’s definition circles around the intent of the individual for which she/he resides in or outside India. IT Act’s definition prescribes the tax liabilities that accrue from the income earned by an NRI, whereas FEMA deals with whether the NRI can make investments in India or what would be the terms and conditions of opening a Non-Resident External (NRE) or Non-Resident Ordinary Account ( NRO) in India.
Why should an NRI pay taxes?
Whether or not an NRI should pay taxes involves the principle of ethics as well as the effect on our economy, both intricately connected with each other. Indian population has reached a gigantic 1.3 billion in number and the functionality of this country largely depends on the taxes paid by our citizens. The Indian government derives mammoth support from tax revenue generated via collection of direct and indirect taxes1. Tax frauds, money laundering and embezzlement cost our economy heavily, while Indian laws are holding up against this malice. As per the latest 2020 statistics, only a miniscule 1.43 crore Indians pay taxes on their income, as stated by the Income Tax Department. To put a cherry on top of the cake, a 2018 Ministry of External Affairs report has revealed that at present, over 32 million Indians reside overseas3, forming the Indian Diaspora, which indicates a huge population and their compliance with tax regulations is highly significant. The money transferred to friends, family or relatives by Indians residing outside is known as remittance and India falls amongst the top remittances receivers in the world4. In fact, this year’s crumbling news bit is that, India’s remittances will decline sharply from $83 billion in 2019 to $64 billion, a 24% fall5. Due to Covid-19, the stringent lockdowns and the ensuing loss of jobs of many NRIs, has deprived them of a source of income, cutting down the rate of remittances to India. All these factors indicate the fact that India needs high tax compliance, and it is only justified for an Indian national, born an brought up Indian soil and by consuming Indian resources to repay the country. All significant rules pertinent to tax liabilities of an NRI are provided under the Indian Tax Act of 1969. These regulations differ radically from the ones applicable to resident Indians.
NRI under the IT Act
Under the IT Act, three classifications of residents are provided for:
- Resident and Ordinarily Resident (ROR)
- Resident and Non-Ordinarily Resident (RNOR)
- Non-Resident Indian (NRI)
As per Section 6 of the Act an individual is a resident of India in any previous year, if he/she:
- In that year has resided in India for 182 days or more; OR
- In the four years preceding that year, has resided in India for 365 days or more and in that year for 60 days or more.
However, the following conditions constitute an exception to the above provisions if a citizen or PIO:
- Leaves India for employment purposes or boards an Indian ship as a crew member, in that year 60 days mandated under the second condition shall be substituted with 182 days;
- Being outside India comes on a visit to India, in that year 60 days mandated under the second condition shall be substituted with 182 days;
- Having total income, other than foreign income, exceeding INR 15 lakh in the previous year, 60 days mandated under the second condition shall be substituted with 120 days.
The first two situations automatically nullify the validity of the second condition and if the 182 days time period is not complied with, the individual is deemed not a resident of India. The third condition was introduced via the Finance Bill of 2020, and builds significant pressure on certain classes of people to pay taxes. The persons who do fall under the above definition of Resident Indian are deemed to be an NRI.
Tax Liabilities of NRIs as per IT Act
For a Resident, his/her global income is taxable in India while for an NRI, whatever income is earned in India will only be taxable in India. The income which is earned outside India will not be taxed by the Indian government. Taxable income of NRIs generally includes income from house properties in India, capital gains accrued on the transfer of assets located in India, income derived from the fixed deposits/interests on savings bank accounts in India or salary earned on services rendered in India. Any individual, earning income in India exceeding INR 2.5 lakhs, NRI or not, has to file income tax return (ITR) in India. The last date for NRIs to do the same is 31st July every year. Further, if the tax liability exceeds INR 10,000 the individual must pay advance tax, otherwise he will be accountable to pay interests under Sections 234B and 234C of the Act.
Income from House Properties in India
For any NRI, income earned on any property situated in India is taxable as per the current slab rates, subject to enlisted deductions. The tax implications are generally in consonance with those of the residents, while NRIs can claim standard 30% deductions, in case of a home loan claim deduction on prescribed interest, a deduction for principal repayment; stamp duty plus registration costs incurred on the purchase of a property under Section 80C and deduct various other property taxes. When any tenant pays rent to an NRI owner, he/she must deduct 30% TDS before making the payment.
Income from Capital Gains
Any income gained by transfer of capital assets in India shall be considered as capital gains and shall be taxable in India. If an NRI sells any property located in India, he/she will receive the long-term capital gain after deduction, i.e., Tax Deducted at Source (TDS) by the buyer. Gains on share, debenture and security investments in India shall also be taxable in India. An NRI although has the liberty to claim exemption under Section 54 by investing in a house property and under Section 45EC by investing in capital gain bonds.
Income from Other Sources
All the payments received in any accounts like savings or fixed deposit accounts, opened by an NRI in India, shall be taxable in India. Interest on income received in an NRE or Foreign Currency Non-Resident (FCNR) Account is exempt from taxes, while the same received in an NRO account is taxable.
Income from Salary
Any income earned by an NRI in India will be taxed in India. If an individual is earning income on services rendered in India, it becomes irrelevant if he/she is an NRI. Further, if the employer of an NRI, who is a citizen of India and who has been deputed elsewhere for work, constitutes part of government of India, then also the income will be taxed in India, even if services rendered by the individual is outside India. Income of diplomats, ambassadors etc. is exempt from taxes though.
Income from Business and Profession
Any income earned by an NRI in India through a profession or business set up or controlled in India, is taxable.
Specific Provisions related to Investment Income
If an NRI has made investments in certain Indian assets, his income from the same is to be taxed at 20%. However, if that special investment is his only source of income in that financial year, and TDS has already been deducted from the same, he shall not be liable to file ITR.
Deductions and Exemptions for NRIs under Section 80C
Provisions related to deductions are mentioned under Section 80C, and the same for NRIs are also available here only. Under this Section, deductions are available for life insurance premium payment policy; unit linked insurance plans, children’s tuition fee, investments in Equity Linked Savings Scheme and principal payments on loans taken to purchase house property.
Other allowable deductions
Enlisted below are the other deductions NRIs can claim under this Act:
- Deduction from House Property income
- Section 80D – Deduction on premium paid for health insurance
- Section 80E – Deduction of interest paid on an education loan
- Section 80G – Deduction on donations done for social causes
- Section 80TTA – Deduction on income from interest received in savings bank account
This is the brief overview of the provisions under which NRIs are taxed and under which they can claim deductions.