NRI Taxation 101 (Article 01)

Series: NRI101 Article: 01

NRIs find it very challenging to manage their taxes in India. To name a few: Excess TDS deductions, double taxation, unclaimed refunds, hundreds of hours spent on answering bank queries, fear of investing in India or selling a property in India. NRIs understand very little about Indian tax laws and it is not practically possible for an NRI to understand every tax provision because there are countless number of provisions and high complexity involved in tax laws. But there are few basic concepts of Indian taxation that every NRI must understand to manage their taxes better.

The series “NRI Taxation 101” is launched to educate NRIs on the important aspects of Indian tax law. Without further ado, let’s get into the first article.

Table of Contents

1. Who is a Non-Resident Indian (NRI)?
2. When & on how much income do you need to pay tax in India?
3. How do you determine if you are a Non-Resident?
   1. Deemed Resident
4. Taxable Income for an NRI
   1. Income under the head salary
   2. Income from property or asset in India
   3. Income from business or profession
   4. Income from capital gains
   5. Taxability of property transferred through inheritance
   6. Interest Income
   7. Dividend
   8. Taxability of gifts
5. Special provisions related to certain incomes of an NRI
6. When is an NRI required to file an Income Tax Return in India?
7. What is the due date for filing Income Tax Return?
8. Do NRIs need to pay advance tax?

1. Who is a Non-Resident Indian (NRI)?

Let’s first understand who is an NRI as per Indian Income Tax Act.

NRI is an individual being, a citizen of India or a person of Indian Origin, who is not a ‘resident’.

A person is deemed to be a person of Indian Origin if he or either of his parents or any of his grandparents was born in undivided India.

You are an NRI when you are not a resident of India but you are a citizen of India or a person of Indian origin. Now, your next question would be why it is important to know if you are a resident or a non-resident.

Your residential status determines how much of your entire global income is taxable in India.

2. When & on how much income do you need to pay tax in India?

If you are a resident of India in any particular year, all the global income irrespective of where it was earned will be taxable in India. If you are a non-resident (i.e. NRI), then only the income that is earned or accrued in India will be taxable in India. You need not pay tax in India for the income earned or accrued outside India.

A non-resident’s total income includes :

1. Income received or deemed to be received in India during the previous year.
2. Income which accrues or arises or deemed to accrue or arise in India during the previous year.

So based on the above explanation, income earned outside India will not be included in the taxable income of the assesse.

Now, you need to understand two things :

• How to determine if you are a non-resident?
• What income is considered as “income earned or accrued in India”?

3. How do you determine if you are a Non-Resident?

Your residential status is very important to determine if a certain income earned by you is taxable in India or not. We will understand more about it in later part of the article.

The residential status of an individual must be ascertained with respect to each previous year. That means, you may be a non-resident this year but may become a resident next year if conditions to be classified as a non-resident is not met for that year.

An individual is treated as a non-resident Indian if he satisfies the below conditions :

Indian Citizen	Who leaves India during the relevant previous year as a member of the crew of an Indian ship or for employment outside India.	If stay in India for less than 182 days shall be treated as Non-Resident Indian (NRI).
Indian citizen or person of Indian origin	In case of such person having a total income, other than the income from foreign sources, not exceeding ₹15 lakhs during the previous year	If stay in India for less than 182 days shall be treated as Non-Resident Indian (NRI).
Indian citizen or  Person of Indian origin	In case of such person having a total income, other than the income from foreign sources, exceeding ₹ 15 lakhs during the previous year	(i)  Stay in India for less than 182 days, shall be treated as Non-Resident Indian (NRI). Or (ii) He has been in India during the 4 years immediately preceding the relevant previous for a total period of less than 365 days and stayed in India for less than 120 days in the relevant previous year.

Note: For the purpose of counting the number of days stayed in India, both the date of departure and the date of arrival are considered to be in India.

Apart from not satisfying above conditions, you may also be treated as resident if you come under Deemed Resident clause.

3.1 Deemed Resident

An individual who is an Indian citizen, having a total income, other than the income from foreign sources, exceeding 15 lakhs during the previous year shall be deemed to be a resident of India in the previous year if he is not liable to pay tax in any other country or territory by reason of domicile or residence or any other criteria of the similar nature.

If you are a deemed resident, you need to pay tax in India on your entire global income.

4. Taxable Income for an NRI

One of the main criteria for determining if an income is taxed in India or not is understanding if that income is earned or accrued in India. Determining this is tricky, but, let’s discuss few most frequent income cases and understand when they are labelled as an “income earned or accrued in India” as per the Income Tax Act.

4.1 Income under the head salary

Income from salary is taxable (i.e earned or accrued) in India if

• If your services are rendered in India

(Ex: Salary paid by USA Company for a project work you have done by staying in Chennai for two months – This income is Taxable even if you stayed in India for only two months and you are non-resident in India)

• If your employer is Government of India and you are a citizen of India

(Ex: You are an employee of Indian Government Company in USA and receive income from GOI – Income is taxable in India)

However, allowances and perquisites paid or allowed by the government to Indian citizen for services rendered outside India is exempt

4.2 Income from property or Asset in India

Any income which arises from any property in India whether movable, immovable, tangible, or intangible will be deemed to accrue or arise in India.

Rental Income

Any rent or hire charges received for the use of any assets like plant & machinery building, furniture, etc. will be taxed in India even if rent is paid or received outside India because the property is situated in India.

Rent from House property will be calculated in the same manner as applicable to residents.

Any person responsible to pay rent or hire charges to NRI is liable to deduct a tax of @30%.

4.3 Income from business or profession

Any income from business or profession from business/profession controlled or set up in India is taxable in the hands of a non-resident.

4.4 Income from Capital gains

Capital gain arising on transfer of capital assets situated in India is taxable in the hands of non–resident Indian. The amount of tax payable will depend on whether it is a short-term capital gain or long-term capital gain.

long-term capital gain is taxed at the rate of 20% and short-term capital gain is taxed at normal slab rates. 

However, NRI can claim an exemption under section 54 by investing the sale proceeds in House property or in specified bonds under Section 54EC.

Capital gain on the transfer of investments in Indian shares or securities is also taxable in the hands of a non-resident.

4.5 Taxability of property transferred through inheritance

There is no capital gain if the property is transferred through inheritance. However, any income generated out of these inherited assets will be taxable in the hands of a non-resident. if the Non –resident sells inherited property then the capital gain will be taxable in his hands. For this purpose, the cost of acquisition of the previous owner is taken as the cost of acquisition for non-resident.

4.6 Interest Income

Any income from any source in India is deemed to accrue or arise in India. So Interest income from fixed deposits, saving accounts, NRO (non-resident ordinary accounts), etc. in any banks in India are fully taxable. However, Interest Income from an NRE account is exempt from tax.

4.7 Dividend

Dividend paid by an Indian company in India or outside India is taxable in the hands of NRI.

4.8 Taxability of gifts

Money

The gift received in cash will be taxable in the hands of the NRI recipient (if exceeding INR 50,000) under the Income Tax Act.

Immovable property

If any immovable property is received as a gift without consideration the stamp duty value of such property will be taxable if it exceeds INR 50,000.

In case the immovable property is received for inadequate consideration then the difference between stamp duty value and consideration will be taxable in the hands of the Non-Resident if the difference is more than the higher of INR 50,000 or 10% of the consideration paid.

Movable property

If any movable property is received as a gift without consideration is taxable in the hands of NRI if the fair market value exceeds INR 50,000. In case the same is received for inadequate consideration then it is taxable if the difference between fair market value and consideration is more than INR 50,000.

5. Special provisions relating to certain incomes of an NRI

Special provisions were prescribed for a non-resident Indian who derives income from a foreign exchange asset and /or long-term capital gains in respect thereof.

Foreign exchange asset:

“Foreign exchange asset (FEA)” means any of the following specified assets that which assessee has acquired or subscribed to in convertible foreign exchange: –

1. Shares in an Indian Public Company or Private Company
2. Debentures issued by an Indian company which is not a private company (i.e., Public Indian Company)
3. Deposits with an Indian Public company
4. Any security of the Central Government
5. Such other assets as the Central Government may specify.

As per the special provisions, the following are the tax rates applicable to Non-resident Indian.

Non-resident Indian has given the option to opt-out of these special provisions. In case of opt-out, his total income for that year will be charged to tax as per general provisions of the Income Tax Act,1961.

6. When an NRI is required to file an Income Tax Return in India?

Return of income is the format in which the assesse furnishes information of his total income and tax payable.

If income exceeds the basic exemption limit of Rs. 2,50,000 (before claiming exemptions and deductions), an individual is required to file his Income Tax Return in India.

Note: Above basic exemption limit is applicable to senior citizens and super senior citizens as well.

If an NRI satisfies the following conditions, he need not file his return of income :

1. His total income consists only of investment income or income by way of long-term capital gains or both; and
2. TDS has been deducted from such income.

7. What is the due date for filing Income Tax Return?

8. Do NRIs need to pay advance tax?

An obligation to pay advance tax arises when advance tax payable is Rs. 10,000/- or more. Interest under Section 234B and Section 234C will be levied if advance tax is not paid.

Above concepts lay out the ground rules for income computation, filing of returns and payment of advance tax in India.

In the next article of “NRI Taxation 101”, we will discuss the following concepts of Indian Taxation :

Deductions allowed for a NRI – These deductions are helpful to reduce your tax amount.

Deductions that are normally provided to residents but that are not available for NRIs

How to avoid double taxation by the Indian government and the government of the country in which you reside?