As we all know tax collections are underpinning for any country’s economy. The gross collection of direct taxes for the financial year 2021-22 stands at stupendous amount of Rs. 6,45,679 crore (before adjusting for refunds) and taxes collected from NRIs contributes a major portion in the gross collected amount every year. However problems arise when inaccurate deductions from incomes of NRIs happen and even double taxes are levied often times on NRIs. Income tax rules as well as exceptions for NRIs vary dramatically when compared with income tax rules for Indian resident. Before delineating income tax rules and regulations for NRIs lets first understand how to determine your residential status first.

There are 3 types of classifications for residential status which are as follows:

  1. Residents: Any citizen of India who has lived for 6 months or 182 days in India or if anyone has been in India for 2 months or 60 days in the previous year and have lived for one whole year or 365 days in the last four years will be considered as Indian resident.
  2. Non Residents: If some fails to fulfil upper mentioned criteria then they are considered as a Non Resident Indian or NRIs.
  3. Resident but not ordinary residents: Those peoples who have not been residents of India for 9 out of 10 years prior to year of consideration or those peoples who have stayed in India for 729 days or less during last 7 years prior to the year of consideration are recognised as RNOR (Resident but Not Ordinary Resident)

The Finance Act of 2020 has recently amended residency provisions due to which those residents who come to visit India will now be considered as RNOR (Resident but Not Ordinary Resident) subject to following criteria:

  1.  Total income from all the sources other than foreign sources is Rs 15 lakhs or more.
  2. Whether the particular individual in previous year has stayed in India for more than 120 days but less than 182 days.
  3. Whether the particular individual in previous four years prior to the year of consideration has stayed in India for 365 days.

Before the amendments made by Finance Act of 2020 such individuals were recognised as non residents but now such can be classified as RNOR (Resident but Not Ordinary Residents) Furthermore the amendments made also mandates that any individual staying in India for more than 182 days irrespective of that individual’s income in the previous year shall be considered as a resident. The concept of “deemed residency” was also introduced by the Finance Act 2020. The concept of deemed resident was introduced to target individuals who do not stay for considerable time in any country so that they cannot be treated as tax residents of any foreign country. Any citizen earning more than Rs 15 lakhs from all the sources in India should be deemed as residents of India if they are not liable for paying taxes in any other country. Income tax deductions on NRIs are dependent upon their residential status If the status of any individual NRIs is resident for the year then his global income will be taxed in India and if the status is non resident or NRI then income earned from the sources in India and income accumulated or received in India would be taxable in India. Salary received in India, income from rent collected from property situated in India, capital gains on asset situated in India, income from fixed deposits, interest on a savings bank account etc are all examples of income earned and arising in India. All such incomes of a NRI are taxable under Income Tax laws of India. However income earned outside India is not taxable in India and interests earned on an NRE (Non-Residential External) account and FCNR (Foreign Currency Non Resident) account is tax-free. On the other hand interest on NRO (Non Resident Ordinary) accounts is taxable.

Tax implications for NRIs can be broadly divided into two categories:

  1. Short Term Capital Gain (STCG)
  2. Long Term Capital Gain (LTCG)

As a general rule tax payable on Long Term Capital Gains (LTCG) is less as compared to Short Term Capital Gains (STCG). However duration of holding period for qualifying as long term or short term gains differ in different types of investments or capital gains in the following manner.

Type of Investment/ Capital gains Duration for STCG Duration for LTCG Tax percentage Indexation or other benefits
Listed shares, equity oriented funds, business trust and zero-coupon bond Less than 12 months More than 12 months 15%
(After Rs. 1 lakhs)
10% No
Unlisted shares and immovable property Less than 24 months More than 24 months As per tax slab of the individual NRI 20% Yes
Debt oriented funds and Unlisted securities Less than 36 months More than 36 months As per tax slab of the Individual NRI 20% Yes + cess of 4% for education

Tax exemptions available to NRIs. Tax exemptions available to NRI are as follows:

  1.  When a residential property which was held for a long term are sold Capital gain from such sales can be claimed as an exemption under section 54 of Income Tax Act, 1961 by purchasing a new residential house in India. Section 54 also allows a one-time option to invest in two different houses on the sale of residential property, provided that the capital gain is not more than Rs2 crore.
  2. Capital gains from sale of any capital assets other than residential property held for long term can be claimed under section 54F of Income Tax Act, 1961.However under section 54, only the capital gain needs to be invested again to claim the exemption. On the other hand, the entire sale receipt is required to be invested otherwise only proportionate exemption will be allowed under section 54F.
  3. Under section 54EC, NRI can also claim exemption by reinvesting the amount again in specified bonds within six months from the date of transfer of property. A maximum exemption ofRs.50 lakhs can be claimed.
  4. Most of the tax benefits provided under sec 80 of Income Tax Act are also available for NRIs such as NPS, ELSS, Life insurance, loan payment etc.
  5. NRIs can also claim deduction for Health insurance under sec 80D,education loan under sec 80E,

India has signed tax treaties with many countries if a person’s country of residence has also signed tax treaty with India, the person is liable to pay tax in one country and can seek the waiver for tax subject to DTTA.