Last updated: September 19th, 2024 10:52 AM

NRI Taxation in India

Many Indians spend a significant part of the year abroad. You might wonder, are such individuals required to pay taxes in India? The answer depends on several factors. The Indian Income Tax Act of 1961 applies not only to residents but also to those earning income outside the country. However, the tax rules and benefits for Non-Resident Indians (NRIs) differ from those for resident Indians. This guide will walk you through the provisions, rules, and regulations of NRI taxation in india, helping you better understand your tax obligations and benefits. For expert assistance with all your income tax needs in India, turn to IndiaFilings. Whether you're navigating complex tax slabs, seeking exemptions, or simply need help filing your returns, our team of specialists is equipped to provide you with top-notch guidance and support. [shortcode_37]

Definition of a Non-Resident Indian (NRI) as per the Income Tax Act

According to the Income Tax Act, a Non-resident Indian (NRI) is an individual who does not meet the criteria for tax residency in India. An individual's residency status is determined based on their physical presence in the country during a financial year. To qualify as a resident, one must either be in India for 182 days or more during the financial year or for 60 days or more in a year and a total of 365 days or more over the preceding four years. However, there is an exception for Indian citizens and Persons of Indian Origin (PIOs) living abroad, considered residents only if they stay in India for 182 days or more in a year.

Determining Residential Status for NRI Taxation in India

To determine whether you are a resident or non-resident of NRI Taxation in India, it's essential to understand the criteria for residency as defined under Indian law.

Resident Status Criteria

You are a Resident if you meet either of the following conditions within a financial year:

• Presence in India for 182 days or more.
• Presence in India for 60 days or more during the financial year and 365 days or more during the four preceding years.

Exceptions to the 60-Day Rule

• The 60-day threshold is extended to 182 days for:
  • Indian citizens departing India for employment abroad or as crew on an Indian ship during the financial year.
  • Persons of Indian Origin (PIOs) or Indian citizens visiting India.

In these cases, you are only considered a resident if you stay in India for 182 days or more during the financial year.

Non-Resident Status

You are considered a Non-Resident if you do not meet any of the residency conditions mentioned above.

Resident but Not Ordinarily Resident (RNOR) Status:

You qualify as an RNOR if:

• You were a non-resident in India for nine out of the ten years preceding the current year.
• You stayed in India for 729 days or less during the seven years preceding the current year.
• Additional criteria for PIOs or Indian citizens under the RNOR category if:
  • Your total income, excluding foreign income, exceeds ₹15 lakh.
  • You were in India for more than 120 days but less than 182 days in the previous year.
  • You spent 365 days or more in India during the four years preceding the previous year.

Once you establish your status as a Non-Resident Indian (NRI) for any financial year, you must file tax returns in India if your income—before deductions and exemptions—exceeds the basic exemption limits. As an NRI, you are taxed solely on the income that is earned, accrued, or received within India. Also read: Tax Residency Certificate

NRI Taxation in India: Tax Filing Requirements for NRIs in India

Non-resident Indians (NRIs) must file income tax returns in India if they earn income that originates within the country. This includes various forms of income that accrue, arise, or are deemed to accrue or arise in India. Any money received or deemed received in India also falls under taxable income. Here are the types of income for which NRIs are liable for NRI Taxation in India:

• Salary received for services rendered in India.
• Income received directly in India.
• Earnings from the sale or rental of property located in India.
• Income generated outside of India but transferred to or received in India.

Filing tax returns can be complex, and proper guidance is advisable to ensure compliance and avoid legal complications.   Consult with IndiaFilings tax experts to streamline the NRI Income tax return filing process. [shortcode_102 ]

NRI Taxation in India: Taxable Income 

India employs the "source rule" for taxation, meaning income that accrues, arises, or is derived from any source within India is subject to taxation. Therefore, pinpointing the source of income is crucial for tax purposes. If income is identified as having its source in India, whether directly or indirectly, it becomes taxable. Here’s a list of incomes that are typically taxable for Non-Resident Indians (NRIs):

• Salary Received in India: This includes any salary paid for services rendered within the country.
• Salary for Services Rendered in India: Even if received abroad, salary for services performed in India is taxable.
• Rental Income: Income from properties located in India.
• Capital Gains: This includes gains from the sale or transfer of property or other assets situated in India.
• Income from Deposits: Interest earned on fixed deposits or any other type of deposits held in Indian financial institutions.
• Interest from Savings Accounts: Interest received on savings bank accounts held in India.

For NRIs, understanding and complying with these taxation rules is essential to ensure legal and financial propriety while dealing with incomes sourced from India.

Taxation of NRI in India

Non-resident Indians (NRIs) are required to file income tax returns in India if their annual income before deductions and exemptions exceeds the basic exemption limit of ₹2.5 lakh. The deadline for filing returns is typically July 31 of the assessment year. Below are the taxable Income for NRIs:

Income from Salary

NRIs are taxed on salary income under two specific conditions:

• Situation A: Received in India - If you, as an NRI, receive your salary directly into an Indian account or if someone receives it on your behalf within India, this income is taxable in India.
• Situation B: Earned in India - If your salary is earned through services rendered in India, it is taxable in India, regardless of where it is received.

The applicable tax rates will depend on the income slab under which your total income falls.

Taxation on Income from House Property for NRIs

For Non-Resident Indians (NRIs), income derived from property located in India is taxable, whether the property is rented out or lying vacant.

• Standard Deduction: NRIs can claim a standard deduction of 30% on rental income, which helps reduce the taxable amount.
• Property Tax Deduction: Taxes paid to local authorities on the property can be deducted from the rental income.
• Interest Deduction: If there is a home loan on the property, the interest paid on the loan is deductible from the rental income, reducing the tax liability.
• Principal Repayment: The principal amount repaid on the home loan can be claimed as a deduction under Section 80C of the Income Tax Act. This also includes stamp duty and registration charges paid at the time of purchasing the property.

Important Considerations: The location of the property determines taxability. Therefore, even if the rental income or proceeds from the property are received directly into a non-resident's account outside India or in an NRE (Non-Resident External) account, the income remains taxable in India.

Tax Deduction at Source (TDS):

• Rate of NRI TDS: When a resident pays rent to an NRI, a TDS of 30% must be deducted before transferring the funds to the non-resident’s account.
• Regulatory Requirements: The payer must also submit Form 15CA and, depending on the transaction, Form 15CB online to the Income Tax Department. These forms help in providing details of the payments applicable to non-residents and ensure compliance with tax regulations.

Taxation of Income from Other Sources for NRIs

Non-resident Indians (NRIs) are subject to Indian tax laws for income generated from various sources within India. Here’s a breakdown of how interest income is taxed:

• Interest on Fixed Deposits and Savings Accounts: Any interest earned from fixed deposits and savings accounts held in Indian banks is taxable in India. This income must be reported, and taxes must be paid according to the applicable income tax slabs.
• Interest on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) Accounts: Interest earned on these accounts is exempt from tax in India. NRE accounts are rupee-denominated accounts, whereas FCNR accounts are maintained in foreign currency. The tax exemption on these accounts makes them attractive for NRIs looking to maintain savings in India without incurring tax liabilities.
• Interest on NRO (Non-Resident Ordinary) Accounts: Unlike NRE and FCNR accounts, interest earned on NRO accounts is fully taxable. NRO accounts are used by NRIs to manage income earned in India, such as rents or dividends, and the interest from these accounts is taxed at the individual's applicable income tax rate.

NRIs should ensure they understand these distinctions and manage their bank accounts accordingly to optimize tax implications. Additionally, declaring this income and paying the necessary taxes in India is crucial for compliance with Indian tax regulations.

Taxation on Capital Gains for Non-Resident Indians (NRIs)

When Non-Resident Indians (NRIs) transfer capital assets located in India, they incur capital gains, which are taxable under Indian law. This applies to assets like real estate and investments in shares and securities. Tax Deduction at Source (TDS) on Capital Gains:

• Long-Term Capital Gains: When selling a capital asset held for more than three years, a TDS of 20% is applicable.
• Short-Term Capital Gains: For assets held for less than three years, a TDS of 30% is applicable.

Responsibilities of the Buyer:

• The buyer, irrespective of whether they are individuals or companies, is responsible for deducting the applicable TDS and depositing it with the Indian government.
• The buyer must obtain a Tax Deduction Account Number (TAN) and issue a TDS certificate to the NRI seller.

Exemptions Available to NRIs

NRIs can claim specific exemptions on long-term capital gains under Sections 54, 54EC, and 54F of the Income Tax Act, as follows:

• Section 54: Exemptions on gains from the sale of residential property if the gains are reinvested in another residential property in India within specified timeframes. The new property must not be sold within three years of purchase or construction.
• Section 54F: Exemptions on gains from the sale of any capital asset other than residential house property, provided the entire sale proceeds are reinvested into purchasing or constructing one residential house in India under conditions similar to Section 54.
• Section 54EC: Exemptions on reinvestment of gains into bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC) within six months of the asset's sale. The investment limit is ₹50 lakhs, and the bonds cannot be sold for three years.

Documentation and Claims:

• NRIs should provide the buyer with relevant proof to ensure the correct TDS deduction.
• If TDS is deducted, NRIs can claim these exemptions during their tax return filing and potentially receive refunds for over-deducted TDS.

Rental Payments to an NRI: TDS Obligations

When a tenant pays rent to a Non-Resident Indian (NRI) property owner, the tenant is required to deduct TDS at 30% on the rental amount before transferring the payment, whether to an Indian account or an NRI account.

TDS Compliance Steps:

• Form 15CA: The tenant must fill and submit Form 15CA online to the Income Tax Department. This form provides details about the payments made to a non-resident and ensures that the tax deducted at source (TDS) is in compliance with Indian tax laws.
• Form 15CB: In certain cases, the tenant may also need to submit Form 15CB, which is a Chartered Accountant-certified form. Form 15CB certifies that the tax has been correctly deducted and provides details about the remittance. However, Form 15CB is not required:
  • If the annual remittance is less than ₹5,00,000.
  • If the Assessing Officer (AO) orders a lower deduction of TDS.
• If the transaction falls under Rule 37BB of the Income Tax Act, which specifies certain transactions exempt from Form 15CB.

By ensuring proper TDS deduction and submitting the required forms, tenants can fulfil their tax obligations while making rental payments to NRI property owners.

Is Income Earned Abroad by NRIs Taxable in India?

No, income that accrues or arises outside India is not taxable for Non-Resident Indians (NRIs) in India. NRIs are only taxed on income that is either earned or received in India or income deemed to be earned in India. This includes:

• Income from assets or investments located in India.
• Salary received for services rendered in India.
• Income from a business established in India.
• Capital gains from the sale of assets situated in India.

NRIs are not required to pay tax in India on their foreign income unless it is received in India or has a direct source in India. This distinction ensures that only Indian-sourced income is subject to Indian taxation for NRIs.

Special Provision for NRI Investment Income

Non-resident Indians (NRIs) can benefit from a special provision related to their investment income in India. When an NRI invests in certain specified assets in India, the income from these investments is taxed at a flat rate of 20%. Additionally, NRIs are not required to file an income tax return if:

• Their income consists solely of investment income from the specified assets and
• Tax Deducted at Source (TDS) has been properly deducted from that income.

This provision simplifies tax compliance for NRIs who primarily earn from investments in India, provided the necessary taxes have already been withheld at the source.

Eligible Investments for Special Treatment

Income from the following assets qualifies for special treatment under this provision:

• Shares in Indian companies (public or private).
• Debentures issued by publicly-listed Indian companies.
• Deposits with banks and public companies.
• Securities of the Central Government.
• Other assets specified by the Central Government in the official gazette.

Note: No deductions under Section 80 are allowed when calculating investment income under this provision.

Special Provision for Long-Term Capital Gains (LTCG)

For NRIs, long-term capital gains arising from the sale or transfer of these specified assets are not eligible for indexation benefits or deductions under Section 80. However, NRIs can reduce their tax liability by availing exemptions under Section 115F, provided the net consideration from the sale is reinvested in the following assets:

• Shares in an Indian company.
• Debentures of an Indian public company.
• Deposits with banks or Indian public companies.
• Central Government securities.
• NSC (National Savings Certificates) VI and VII issues.

Exemption Rules:

• Full Exemption: If the entire net consideration is reinvested, the entire capital gain will be exempt from tax.
• Proportional Exemption: If only a portion of the net consideration is reinvested, the capital gain will be exempt proportionally, calculated as follows:

Important Note: The exemption will be withdrawn if the newly purchased asset is sold or converted into money within three years from the date of purchase. NRIs can opt out of this special provision, in which case their investment income and long-term capital gains will be taxed under the general provisions of the Income Tax Act.

Tax Deductions Available for NRIs

While Non-Resident Indians (NRIs) are eligible for several tax deductions under Indian tax laws, certain deductions that are available to resident individuals are not available to NRIs. Below is a breakdown of the deductions that are allowed and not allowed for NRIs:

Section 80C:

Life Insurance Premium: Deduction is available for policies in the NRI’s name, spouse, or children, provided the premium is less than 10% of the sum assured.

• Tuition Fees: Deduction is allowed for tuition fees paid to schools, colleges, or universities in India for full-time education of children.
• Principal Repayment of Home Loans: NRIs can claim deductions for the principal repayment of loans taken for purchasing or constructing a residential property, including related expenses such as stamp duty and registration fees.
• Unit Linked Insurance Plan (ULIP): Investments in ULIPs qualify for deduction under Section 80C. It combines insurance and investment, with a lock-in period of 5 years.
• Equity Linked Tax Saving Scheme (ELSS): Investments in ELSS are eligible for tax deductions under Section 80C, with a lock-in period of three years. The maximum deduction allowed is ₹1.5 lakh per financial year.

Section 80D:

NRIs can claim deductions on premiums paid for health insurance for themselves, spouses, children, and parents. The deduction limits are as follows:

• Self, spouse, children & parents below 60: ₹25,000 + ₹25,000 = ₹50,000
• Self, spouse, children below 60 & parents above 60: ₹25,000 + ₹30,000 = ₹55,000
• Self, spouse & children above 60 & parents above 60: ₹30,000 + ₹30,000 = ₹60,000

Section 80E:

NRIs can claim a deduction on interest paid for an education loan taken for higher education for themselves, spouses, children, or students for whom they are legal guardians. There is no limit on the amount claimed for interest repayment, but the deduction is only available for 8 years or until the interest is fully repaid.

Section 80G:

Donations made to eligible charitable organizations as per Section 80G of the Income Tax Act are deductible for NRIs.

Section 80TTA:

NRIs can claim a deduction on interest income from savings accounts up to ₹10,000.

Deductions Not Allowed for NRIs

Public Provident Fund (PPF): NRIs cannot open new PPF accounts, but they can maintain existing ones.

• National Savings Certificate (NSC): Investments in NSCs are not eligible for deductions.
• Post Office 5-Year Deposit Scheme: Not eligible for NRIs.
• Senior Citizen Savings Scheme (SCSS): Not allowed for NRIs.
• Section 80CCG (Rajiv Gandhi Equity Saving Scheme): NRIs cannot claim deductions under this section.
• Section 80DD (Maintenance of a Dependent with Disability): Deductions for medical treatment and maintenance of dependents with disabilities are not allowed.
• Section 80DDB (Medical Treatment of Specified Diseases): Deductions for medical treatment of specific diseases for dependents are not available.
• Section 80U (Self Disability Deduction): NRIs cannot claim this deduction.

NRI Income Tax Slab Rates for FY 2023-24: NRI Taxation in India

Unlike resident individuals, the tax slab rates for Non-Resident Indians (NRIs) are not classified by age. All NRIs, regardless of age, are taxed uniformly.

Tax Slab Rates for NRIs:

Old Tax Regime

Income Tax Slab	Income Tax Rate
Up to 2,50,000	Nil
2,50,001 - 5,00,000	5% above 2,50,000
5,00,001 - 10,00,000	INR 12,500 + 20% of income above 5,00,000
Above 10,00,000	INR 1,12,500 + 30% of income above 10,00,000

New Tax Regime (Section 115BAC)

Income Tax Slab	Income Tax Rate
Up to 2,50,000	Nil
2,50,001 - 5,00,000	5% above 2,50,000
5,00,001 - 7,50,000	INR 12,500 + 10% of income above 5,00,000
7,50,001 - 10,00,000	INR 37,500 + 15% of income above 7,50,000
10,00,001 - 12,50,000	INR 75,000 + 20% of income above 10,00,000
12,50,001 - 15,00,000	INR 1,25,000 + 25% of income above 12,50,000
Above 15,00,000	INR 1,87,500 + 30% of income above 15,00,000

Revised Income Tax Slabs for New Tax Regime (Default):

• Up to ₹3 lakh: Nil
• ₹3 lakh to ₹6 lakh: 5%
• ₹6 lakh to ₹9 lakh: 10%
• ₹9 lakh to ₹12 lakh: 15%
• ₹12 lakh to ₹15 lakh: 20%
• Above ₹15 lakh: 30%

Surcharge Rates for NRIs:

• 10% surcharge on income exceeding ₹50 lakh but up to ₹ one crore.
• 15% surcharge on income exceeding ₹1 crore but up to ₹ two crore.
• 25% surcharge on income exceeding ₹2 crore but up to ₹ five crore.
• 37% surcharge on income exceeding ₹5 crore.

Rebate u/s 87A:

• The rebate under Section 87A (up to ₹12,500) is not available to NRIs.

For more detailed information on how to file an NRI income tax return in India, refer to our comprehensive article.

NRI Taxation in India: Expert Services at IndiaFilings

For comprehensive assistance and expert guidance on NRI taxation in India, consider connecting with IndiaFilings. We offer specialized services tailored to the unique financial and regulatory needs of Non-Resident Indians. Whether it's understanding tax liabilities, filing returns, or navigating through the complexities of Indian tax laws, IndiaFilings has the expertise to help you ensure compliance and optimize your tax strategies. Connect with IndiaFilings now for expert NRI taxation guidance! [shortcode_37]