Understanding Income Tax Regulations for Non-Resident Indians (NRIs) in India

Income tax is a fundamental component of any country’s revenue system. India is no exception to this rule. Income Tax Regulations for NRIs is a complex topic as it involves several considerations such as their residential status, the source of income, and the Double Taxation Avoidance Agreement (DTAA) between India and the country where they reside. In this article, we will discuss Income Tax Regulations for NRIs in India in detail.

Short Glimpse

Income tax is a tax levied by the Indian Government on the income earned by individuals and entities in India. NRI’s are individuals who reside outside India, but they may have income or financial interests in India.

NRI’s are subject to Indian income tax laws if they earn income in India. The income earned or received in India is taxable in India, even if the NRI resides outside India. However, income earned outside India is not taxable in India, even if it is remitted to India.

The income tax laws in India have provisions for calculating and paying income tax for NRI’s. The tax rates for NRI’s are the same as those for residents, but there are different rules for calculating the taxable income of an NRI. NRI’s cannot claim certain deductions that are available to residents, such as deductions under Section 80C or Section 80D of the Income Tax Act, 1961.

Income Tax for NRI in India

The income tax laws in India apply to both residents and non-residents of India. For NRI’s (Non-Resident Indians), income tax in India depends on their residential status, i.e., whether they are considered resident or non-resident for income tax purposes. 

If an NRI’s total income, which includes income earned in India and outside India, exceeds the basic exemption limit of INR 2.5 lakh (for the financial year 2022-23), they are liable to pay income tax in India. However, NRI’s are taxed only on the income earned or received in India. Income earned outside India is not taxable in India, even if it is remitted to India. 

The tax rates for NRI’s are the same as those for residents. However, there are different rules for calculating the taxable income of an NRI. For example, NRI’s cannot claim certain deductions that are available to residents, such as deductions under Section 80C (for investments in specified instruments like PPF, NSC, etc.) or Section 80D (for payment of medical insurance premiums).

Residential Status of NRI’s for Income Tax Purposes

The residential status of an NRI determines the tax liability they have in India. An individual is considered an NRI if they have stayed outside India for more than 182 days in a financial year. NRI’s are not taxed on their foreign income in India. However, they are taxed on their income earned or received in India, such as rent, salary, and interest.

The following are the three categories of residential status for NRI’s:

• Resident: An NRI is considered a resident in India for income tax purposes if they stay in India for more than 182 days in a financial year. In this case, their worldwide income is taxable in India.
• Non-Resident: An NRI is considered a non-resident in India for income tax purposes if they stay in India for less than 182 days in a financial year. In this case, only the income earned or received in India is taxable in India.
• Resident but Not Ordinarily Resident (RNOR): An NRI who has returned to India and has become a resident but does not qualify as an ordinarily resident is considered an RNOR. For an individual to be an RNOR, they must satisfy either of the following conditions:
• They should have been an NRI in 9 out of 10 previous years immediately preceding the financial year, or
• They should have stayed in India for less than 729 days in the preceding 7 financial years.
• In this case, their worldwide income is taxable in India, except for income from foreign sources.

Taxable Income for NRI’s in India

The income tax rules for NRI’s in India vary depending on the source of income. Income earned in India is taxable in India, whereas income earned outside India is not taxable in India. NRI’s are required to file their tax returns if their income exceeds the exemption limit of INR 2.5 lakhs. In addition, if an NRI earns more than INR 50 lakhs in a year, they are required to disclose the details of their assets and liabilities in their tax returns.

The following are the types of income that are taxable for NRI’s in India:

• Income earned in India: Any income earned in India, such as salary, rental income, business income, capital gains, and interest income, is taxable in India.
• Income received in India: Any income received in India, such as interest on NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) accounts, is taxable in India.
• Income from a business controlled or set up in India: If an NRI controls or sets up a business in India, the income earned by the business is taxable in India.
• Capital gains from the sale of assets in India: Any capital gains earned from the sale of assets in India, such as property, shares, or mutual funds, is taxable in India.
• Royalties and fees for technical services received in India: Any income earned from royalties or a fee for technical services received in India is taxable in India.
• NRI’s can claim deductions on certain expenses incurred for earning taxable income in India, such as rent, repairs, and maintenance. They cannot claim certain deductions that are available to residents, such as deductions under Section 80C or Section 80D of the Income Tax Act.

Tax Rates for NRI’s in India

The tax rates for NRI’s in India are the same as those for residents, but the tax liability varies depending on the residential status of the individual for income tax purposes and the source of the income. For NRI’s who are residents in India for income tax purposes, the tax rates for the financial year 2022-23 are as follows:

• Income up to Rs. 2.5 lakhs: No tax
• Income between Rs. 2.5 lakhs and Rs. 5 lakhs: 5% of the amount exceeding Rs. 2.5 lakhs
• Income between Rs. 5 lakhs and Rs. 7.5 lakhs: Rs. 12,500 plus 10% of the amount exceeding Rs. 5 lakhs
• Income between Rs. 7.5 lakhs and Rs. 10 lakhs: Rs. 37,500 plus 15% of the amount exceeding Rs. 7.5 lakhs
• Income between Rs. 10 lakhs and Rs. 12.5 lakhs: Rs. 75,000 plus 20% of the amount exceeding Rs. 10 lakhs
• Income between Rs. 12.5 lakhs and Rs. 15 lakhs: Rs. 1,25,000 plus 25% of the amount exceeding Rs. 12.5 lakhs
• Income above Rs. 15 lakhs: Rs. 1,87,500 plus 30% of the amount exceeding Rs. 15 lakhs

For NRI’s who are non-residents or RNOR, only the income earned or received in India is taxable in India. The tax rates for such NRI’s are the same as those for residents, but they are applicable only on the income earned or received in India. 

NRI’s are also required to pay a surcharge and cess on their income tax liability, depending on their income and other factors. The tax laws in India are subject to change, and it is advisable for NRI’s to seek professional tax advice to ensure that they comply with all the necessary tax requirements in India.

Deductions and Exemptions Available to NRI’s in India

NRI’s are eligible for certain deductions and exemptions under the Indian Income Tax Act which can help to reduce their taxable income and thereby their tax liability. The following are some of the deductions and exemptions available to NRI’s in India:

• Standard Deduction: NRI’s who are residents in India for income tax purposes are eligible for a standard deduction of Rs. 50,000 from their income.
• Deduction for Medical Insurance Premium: NRI’s who are residents in India can claim a deduction of up to Rs. 25,000 for the medical insurance premium paid for themselves, their spouse, and dependent children. An additional deduction of Rs. 25,000 is available for medical insurance premium paid for parents.
• Deduction for Interest on Home Loan: NRI’s who have taken a home loan in India can claim a deduction of up to Rs. 2 lakhs for the interest paid on the loan. This deduction is available for a self-occupied property.
• Deduction for Donations: NRI’s can claim a deduction for donations made to charitable institutions and organizations registered in India. The deduction is available for up to 50% of the donation amount.
• Exemption for Interest Income: NRI’s can claim an exemption from tax on interest income earned on NRE (Non-Resident External) accounts, FCNR (Foreign Currency Non-Resident) accounts, and NRO (Non-Resident Ordinary) accounts.
• Exemption for Long-Term Capital Gains: NRI’s can claim an exemption from tax on long-term capital gains earned from the sale of certain assets, such as equity shares and equity-oriented mutual funds, if the gains are reinvested in certain specified bonds or funds.

It is important to note that the eligibility for deductions and exemptions may vary depending on the residential status of the NRI and the type of income earned or received.

Electronic Filing of Tax Returns and Payment of Tax for NRI’s

NRI’s can file their Income Tax Returns electronically (e-filing) in India. The process of e-filing is simple and can be done through the Income Tax Department’s website or through authorized e-filing intermediaries. NRI’s can also pay their income tax online through the Income Tax Department’s website using net banking, debit card, or credit card. 

It is important to note that tax payments made from NRE or FCNR accounts are not allowed, and NRI’s must use funds from their NRO account or other sources to pay their tax liability.

To file their tax returns and make tax payments, NRI’s must first obtain a Permanent Account Number (PAN) from the Income Tax Department. NRI’s can apply for a PAN online, and the process typically takes 15-20 days to complete. NRI’s are required to file their tax returns in India if their taxable income in India exceeds the basic exemption limit. 

The due date for filing tax returns for NRI’s is July 31 of the assessment year (the year following the financial year in which the income was earned). For example, for income earned in the financial year 2022-23, the due date for filing tax returns for NRI’s would be July 31, 2023.

NRI’s should also keep in mind that they may be required to comply with other tax obligations in India, such as obtaining a Tax Deduction and Collection Account Number (TAN) if they have employees in India, or complying with the provisions of the Foreign Account Tax Compliance Act (FATCA) if they hold certain types of financial assets or accounts outside India. It is advisable for NRI’s to seek professional tax advice to ensure that they comply with all the necessary tax requirements in India.

PAN Requirement for NRI’s in India

PAN is a unique identification number that is issued by the Indian Income Tax Department to all taxpayers. NRI’s are also required to obtain a PAN if they have any taxable income in India. NRI’s can apply for a PAN by submitting the PAN application form (Form 49A) online or offline. 

The application can be submitted online through the NSDL or UTIITSL websites, or through authorized PAN Service centres located across India. The application can also be submitted by mail along with the required documents.

To apply for a PAN, NRI’s must provide their personal and contact information, such as name, date of birth, address, and contact details. They must also provide documents such as a copy of their passport or any other valid identity proof, and proof of their address in India, if any. 

Once the PAN application is submitted, the Income Tax Department will verify the details and issue a PAN to the applicant. The PAN card will be sent to the address provided in the application form.

It is important for NRI’s to have a PAN as it is required for several financial transactions in India, such as opening a bank account, investing in securities, buying or selling immovable property, and filing income tax returns. It is also mandatory for NRI’s to quote their PAN on all their tax-related transactions in India.

Professional Tax Advice for NRI’s in India

For the best professional tax advice contact with Legal window’s experts, which will be beneficial for the NRI’s to understand their tax obligations and to optimize their tax planning strategies. At Legal Window, our experts can help the NRI’s in the following manners: –

• Determining Residential Status: A tax professional can help NRI’s determine their residential status for income tax purposes, which is crucial in determining their tax liability and eligibility for deductions and exemptions.
• Tax Planning: A tax professional can assist NRI’s in developing a tax-efficient investment and income strategy to optimize their tax savings and reduce their tax liability.
• Compliance: A tax professional can help NRI’s comply with all the necessary tax requirements in India, such as filing tax returns, paying taxes, and complying with the provisions of the Foreign Account Tax Compliance Act (FATCA).
• Double Taxation: NRI’s may be subject to double taxation if they have income that is taxed both in India and in their country of residence. A tax professional can help NRI’s understand the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence and ensure that they do not pay taxes twice on the same income.
• Representation: In case of tax disputes or assessments, a tax professional can represent NRI’s before the Income Tax Department and assist them in resolving any tax issues.

Conclusion

In conclusion, Income Tax Regulations for NRIs are applicable on NRI’s who earn income in India . It is important for NRI’s to determine their tax residency status and identify their taxable income in India to comply with the Indian income tax laws. NRI’s can also benefit from certain tax benefits and exemptions, which can help reduce their tax liability in India.