All you need to know about Taxation of Non-Resident Indians (NRI’s) in India

Before 2020, Non-Resident Indian(NRI) and persons of Indian origin included people who have visited India for less than 182 days in a financial year.  But this was reduced to 120 days for all Non-residents. This reduced period only applies if the income generated in India is more than Rs. 15 lakh in India. India has an explicit taxation system, where the taxes are levied for improving the products and services. We have goods and service tax, property taxes, and taxes which are deducted at the source. Here we will expressly deal with the taxation of Non-Resident Indians for Assessment Year 2021-2022.

Table of Content:

Understanding Income Tax Return Filing for Non-Resident Indians (NRI’s)

NRIs often face questions about filing income tax returns in India. NRI are liable to pay taxes when their income falls under the jurisdiction of tax laws in India. If an NRI’s income exceeds Rs.2,50,000 then he has to file an income tax return in India.  NRIs have to pay advance tax also if the tax liability exceeds Rs. 10,000 in the current financial year.

How to Determine NRI residential status of an Individual?

There are clear guidelines issues by Foreign Exchange Management Act to ascertain the residential status of a person. As per the Income Tax Act, a person will be considered an Indian resident if he has lived in India for a period of 182 days in a financial year or if he has lived in India for a period of 60 days in a year and 365 days or more in the preceding 4 years.

  • A person of Indian origin is someone whose parents or grandparents were born in undivided India.
  • He will be deemed to be a non-resident if he lives in India for a period of 182 days.

If the person satisfies both conditions, he is an Indian Resident but he does not qualify for both the conditions, then he is deemed to be a Non-Resident Indian.

Whether income earned out of India is taxable?

The income tax of NRIs will depend on the residential status of the individual. If someone is a Resident, then the global income will be taxable in India. But if the person or individual is Non-Resident, the income-generating in India or accrued in India is taxable. Some of the examples of income which is termed as earned or accrues in India are

  • salary received in India or
  • salary for the services which are provided in India,
  • the income from any house property in India,
  • the capital gains on the transfer of an asset, income from any FDs, etc.

Income which is earned or accrued by NRI outside India  is not taxable in India. The interest which is earned on an NRE and FCNR account is also tax-free. But interest on the NRO account is taxable under the Income Tax Act.

Taxation of Non-Resident Indians: Tax Slab for 2021

Income received or earned or accrued in India is taxable if someone comes under the ROR(resident and ordinarily resident), RNOR(The resident but not ordinarily resident), and Non-Resident category. If the income accrues outside India and the business is controlled in India, then it is taxable if someone is ROR and RNOR and non-taxable if Non-Resident.

Here are new income tax slabs for Non-Resident Indians for Assessment Year 2021-22/ AY 22-23:

Income Tax Slab Rate
If income up to Rs. 2.50 Lakh Nil
If the income generated is between Rs. 2.50 Lakh to Rs 5 Lakh 5% of the taxable income is Rs. 2.50 lakh and when the taxable income is up to Rs. 5 lakh, the tax payable is nil according to Tax Relief under Section 87A.
If the income is above Rs. 5 Lakh to Rs. 7.5 Lakh Rs. 12,500 + 10% of (total income – Rs. 5 lakh)
When income is above Rs. 7.5 lakh to Rs. 10 lakh Rs. 37, 500  + 15% of (total income – Rs. 7.5 lakh)
Between Rs. 10 lakh to Rs. 12.50 lakh Rs. 75,000 + 20% of (total income – Rs. 10 lakh)
Income Rs. 12.50 lakh to Rs. 15 lakh Rs. 125,000 + 25% of (total income – Rs. 12,50,000)
Above Rs. 15 lakh Rs. 187, 500 + 30% of (total income – Rs. 15,00,000)
Surcharge (subject to Marginal Relief) 10% of income tax for taxable income above Rs. 50 lakh

– 15% of income tax for taxable income above Rs. 1 cr

– 25% of income tax for taxable income above Rs. 2 cr

– 37% of income tax for taxable income above Rs. 5 cr

Taxation of salary received by NRI for services provided in India

Salary received by a Non-Resident for the services which are provided in India is taxable. If salary is paid by the Indian government for the services rendered outside India, then also it is considered as an Indian income and taxed. If someone is a government employee like diplomats and ambassadors then their income is exempt from tax. So even if you are an NRI, the salary paid towards the services provided in India is taxable in India irrespective of where the person is receiving it.

Income generated from House property

  • If a Non-Resident Indian has a house property in India, then the rental income generated is taxable in the same manner as a resident.  If there is the sale of property, then the capital gains generated is subject to tax.
  • In Total NRIs can claim a standard deduction of 30%. Deductions can be claimed under section 80C for the principal repayment. The registration or stamp duty on the purchase of the property can also be claimed under section 80C. He can claim a deduction of up to Rs. 1.5 Lakh on the interest which is paid on the home loan during the current financial year.
  • It is the responsibility of the tenet to submit the TDS deduction at 30% under section 195 in form 15CA.

Capital gains income

  • If an NRI has capital gains income from any sale of listed short-term or long-term securities or mutual funds, then it is taxable.
  • If NRI has a capital gain on the shares which are held in India, then also it is subject to tax.
  • When there is any capital gain or transfer of capital asset it is taxable as per Indian Tax Laws.
  • If an NRI house owner sells the house property, the buyer has to deduct TDS at 20%. However, NRIs are allowed to claim an exemption in capital gains by investing in a house property according to section 54 or by investment in capital gains bonds under section 54EC.

Income from other sources

  • The interest generated from FDs and saving bank accounts are also taxable.
  • The interest generated on NRO, or NRE account is taxable whereas interest on the FCNR account is exempt from taxes.

Income generated from Business and Profession

If income is generated from a business which is established in India, then it is taxable.

Deductions available to Non-Resident Indians

Non-Resident Indians can claim various deductions and exemptions. Here is the list of deductions available on non-resident Indian income tax-

Particulars Deductions Available
Section 80C Some of the deductions which are available under this section include investment in ULIPs, premium payment of a life insurance policy, investment in ELSS, principal repayment of a home loan in India

and lastly payment of tuition fees of children.

Section 80D If any premium is paid towards the health insurance policy.
Section 80E If the NRI has paid interest on the education loan.
Section 80G When the NRI gives donations for social service activities.
Section 80TTA Non-Residents can also claim deductions up to Rs. 10,000/- on the income generated from the interests on the saving bank account.

Deduction unavailable to Non-Residents Indian

NRIs cannot avail deductions for investments done under RGESS (Rajiv Gandhi Equity Savings Scheme) under Section 80CCG in Income Tax Act, and deductions for the differently-abled under Section 80U, Section 80DD, and Section 80DDB of the same Act. Some investments are not available to NRIs, for example, National Savings Certificate, public provident fund, senior citizen saving scheme, and post office deposit scheme.

Double Taxation Avoidance Agreement (DTAA)

India has Double Taxation Avoidance Agreement with more than 90 countries. Under this, the NRIs can pay tax in either of the countries. They can avoid getting double tax on the same income in India and their resident country. There are two methods to claim relief under DTAA, exemption and tax credit method. According to exemption mode, the income of NRI is taxed in one country and exempted in another. According to the tax credit method, the income is generally taxed in both countries and the exemption can be claimed by the person in the country of residence.

New Criteria for taxation of Non-Resident Indians

Earlier NRIs residing outside India until 31st March 2020 and who have visited India for up to 181 days and still could maintain non-resident status.

The government has made many amendments amid covid during 2020 and 2021. They have made changes in determining the residential status of Non-Residents for the 2021-2022 period.  Section 6 now provides for the reduced period of 120 days to be applicable where the total income accruing in India is more than 15 Lakh. So we can say alternatively that NRI who have total income up to Rs. 15 Lakh will continue to be NRIs if their stay does not exceed 181 days.

Global Non-Resident deemed Residential Status

The government has relaxed the status of Indian citizens and global Non-Resident deemed residential status on the basis of income. They have also widened the horizon of RNOR. An individual who is an Indian citizen will be deemed to be resident in India if he is not liable to tax in any country because of any conditions laid down by that country.

Conclusion

Taxation of Non-Resident Indians is a little complicated, one needs to understand the tax slabs which is applicable to NRIs and may claim deductions and benefits accordingly. NRIs should always consult experts for filing taxes to avoid any discrepancy.

CategoryIncome Tax

CA Rohit Goyal has experience in multiple spheres including general functions in the field of Auditing, Accounting, and handling Scrutiny Assessments, Taxation Matters along with the specialized functions including Finance, Banking and also handles the field of Stock Audit, Internal Audit and other Various Assignments of Banks.

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