Are you a Non Resident Indian struggling to keep your taxes in check? We can help with our tried and tested tax saving strategies for NRIs
Discover with us some of the most effective ways you can save on the taxes you pay in India and keep the most of what you earn in your pocket.
17 Smart Tax Saving Strategies for NRIs
NRIs can use various strategies to save taxes in India. Some of the most essential ones include:
1.
Benefit from NRO, NRE & FCNR Account
As an NRI, you can choose to put your money in any of the following accounts based on the benefits they provide:
2.
Claim Tax Deduction at Source (TDS) Credit
Often, TDS is deducted at a higher flat rate, and NRIs can reclaim the difference if their total tax liability is lower than the deducted amount.
By filing income tax returns in India, NRIs can claim credit for TDS deducted on their Indian income. This can result in significant savings if excess TDS was deducted.
3.
Use Home Loan Tax Benefits
NRIs can claim tax deductions on home loans similar to resident Indians in two ways:
- Interest Deduction: Claim a deduction of up to INR 2 lakh per year on the interest paid on home loans for a self-occupied property. For a let-out property, the entire interest paid on the home loan can be deducted.
- Principal Repayment: The principal repayment of the home loan is eligible for deduction under Section 80C, up to INR 1.5 lakh annually.
4.
Claim House Rent Allowance (HRA) Exemptions
This exemption is available to NRIs who receive HRA as part of their salary income in India.
They can claim HRA exemptions under Section 10(13A), provided they meet the necessary conditions and can furnish proof of rent paid.
5.
Utilize Exemptions on Long Term Capital Gains
For NRIs earning capital gains, there are ways to lower capital gains tax through various exemptions such as:
- There is an exemption on long-term capital gains available from the sale of residential property if reinvested in another residential property.
- If they invest in specified bonds (Eg. National Highways Authority of India or Rural Electrification Corporation) within six months of the sale, they can claim exemptions on capital gains.
- LTCG exemption is also available from the sale of any asset (other than residential property) if invested in a new residential property in India.
6.
Invest in Public Provident Fund (PPF)
Although NRIs cannot open new PPF accounts, existing accounts can continue to earn interest tax-free until maturity.
The interest earned here is exempt from tax.
7.
Invest in Unit-Linked Insurance Plan
This option combines the double advantage of insurance coverage and wealth accumulation with tax advantages.
The premiums paid are deductible up to INR 1.5 lakh. Also, the maturity proceeds are tax-free, subject to conditions.
8.
Investments in Equity Linked Savings Schemes (ELSS)
This is a tax-saving mutual funds option with a focus on equities. Here investments of up to INR 1.5 lakh qualify for deductions.
You benefit from the potential for higher returns due to equity exposure, with the added advantage of tax savings and portfolio diversification.
9.
Invest in Tax Saving Fixed Deposits (FDs)
FDs with a lock-in period of 5 years is another great strategy for saving tax for NRIs as they offer deductions. These can be opened in your NRO, NRE or FCNR accounts.
These FDs are safe investment options with guaranteed returns and tax benefits, suitable for risk-averse NRIs.
10.
Invest in Tax Free Bonds
You can also invest in certain bonds issued by government-backed entities like RBI, NHFC, IRFC, etc.
They provide tax-free interest income, making them an attractive option for steady returns without tax implications.
11.
Utilize Deductions on Educational Expenses & Loans
Interest paid on loans taken for higher education (for self, spouse, or children) qualifies for deduction as well.
It provides tax relief on the interest component of education loans without any upper limit on the deduction.
12.
Seek Expert Opinion
Tax laws may vary based on the country of residence for the NRIs.
Therefore, you should consider seeking advice from trusted tax professionals like PKC Management Consulting to understand specific provisions and optimize their tax savings in both countries.
13.
Claim Health Insurance Premium Deductions
Claiming deductions on health insurance premiums can reduce taxable income while ensuring adequate health coverage for self and family.
Section 80D allows for this:
- Self, Spouse, Children: Deduction up to INR 25,000
- Parents: Additional deduction up to INR 25,000 (INR 50,000 if parents are senior citizens)
14.
Ulitize Deductions on Life Insurance Premiums
Similarly, premiums paid towards life insurance policies are eligible for deductions, contributing to overall tax savings.
Premiums up to INR 1.5 lakh for self, spouse, or children are eligible for these deductions.
15.
Make Use of National Pension Scheme Deductions
Contributions to the National Pension Scheme (NPS) allow NRIs to claim additional deductions up to INR 50,000.
This is beyond the INR 1.5 lakhs limit under Section 80C.
16.
Deduction on House Property Income
NRIs can claim a deduction for interest paid along with a standard deduction of 30% on rental income from properties.
This lowers taxable income from property sources, making real estate investments more attractive.
17.
Plan Remittances Strategically
Lastly, if possible plan the timing and amount of income repatriation to optimize tax benefits.
Use methods that minimize tax liabilities, such as transferring from NRE or FCNR accounts where interest is tax-free.
Frequently Asked Questions
- How much NRI is tax-free in India?
The basic exemption limit for NRIs in India is currently INR 2.5 lakhs; income below this threshold is not taxable.
- Is NRI FD interest taxable?
Interest earned on Non-Resident Ordinary (NRO) accounts is taxable in India, while interest from Non-Resident External (NRE) accounts is tax-free23. Therefore, NRIs should consider where they hold their funds to optimize tax outcomes.
- Is it mandatory for NRI to file ITR?
Yes, it is mandatory for NRIs to file an Income Tax Return (ITR) in India if their total income exceeds INR 2.5 lakhs or if they need to claim a refund for TDS deducted
- Can NRIs claim deductions under Section 80C of the Income Tax Act?
Yes, NRIs can claim deductions under Section 80C for investments made in India. However, the specific investments eligible for deductions may vary.
- Can NRIs invest in Public Provident Fund (PPF)?
Existing PPF accounts can be maintained by NRIs, but they cannot open a new PPF account. Contributions to PPF are tax-deductible under Section 80C.
- What are some popular tax-saving investments for NRIs?
Some popular tax-saving investments for NRIs include ELSS, NPS, Life and Health Insurance Premiums, Home Loans, etc.
