Taxation of NRI

According to the Income Tax Act, NRIs are those individuals who are born or brought up outside India but possess an Indian origin or individuals who are born in India but currently reside in some foreign country.When it comes to filing income taxes, the rules and regulations for NRI taxation are completely different from those applicable to regular residents.

NRI individuals can not only avail a series of privileges provided by the Reserve Bank of India (RBI) and Foreign Exchange Regulation Act (FERA) but they can also benefit from the schemes which fall under the Income Tax Act. Go through following points to know more about tax guidelines applicable on NRIs in
India –

• NRIs don’t need to pay tax on any interest earned on Foreign Currency Non Resident (FCNR) and Non Resident External (NRE) accounts. But NRIs have to be careful about the taxes they file in a foreign country, as income which is exempted in India may be taxed abroad.
• If NRIs don’t have any income source in India then there is hardly any need to file tax returns. However, if income accumulated from dividend, capital gain, interest and other products in India exceeds the threshold limit then NRIs have to file tax returns. NRIs are always entitled to claim deductions when filing their tax returns.
• If an individual has made some investment as an Indian resident and wants to redeem them after becoming NRI or PIO then tax structure for these investments will be treated differently. For example, NRIs are not allowed to extend the tenure of their Public Provident Fund (PPF) account.
• Capitals gains taxes are also applicable when an NRI decides to liquidate his previous investments. In case an NRI holds stocks which are listed on the Indian stock exchanges and wants to sell them after carrying them for more than one year then he doesn’t need to pay any taxes on any of the profit earned, provided he has paid securities transaction tax (STT) on each transaction.
• NRIs can save significant amount on their taxes by investing in tax saving mutual fund plans, life insurance policies and pension plans in India. Any repayment done towards principal amount of NRI’s home loan is also entitled for deduction of up to Rs 1 lakh. Apart from this, NRIs can also claim deduction on interest paid towards their home loan.
• NRIs can also purchase health insurance policy for themselves and their dependent family members to claim tax deduction for amount as high as Rs35,000 for the yearly premium payment. In case, an NRI is repaying his education loan then any interest paid on such a loan is also eligible for deduction.
• NRIs are allowed to keep their funds in tax-savings bonds as well. Capital gains earned from liquidation of capital assets can be invested in bonds of Rural Electrification Corporation (REC) or National Highways Authority of India (NHAI). The investment cap for these kinds of bond investments from capital gains earnings is 50 lakh.
• Any income earned from foreign currency bonds is also subject to tax rate of 20 percent. NRIs are allowed to invest in such types of investment products and can get benefits from lower rates. NRIs can also avail minimum tax rates on income earned in the form of interest.
• Individuals who are tax resident of India are liable to pay taxes on their global income as well. The income also covers losses which an NRI individual incurs globally. Any kind of losses incurred in a foreign country will be set-off against the income earned under the same category subject to regulations mentioned in the Income Tax Act.
• The Income Tax Act not only covers some important tax laws but also several treaties signed under Model Tax Convention of the Organization for Economic Co-operation and Development and Authority for Advance Rulings.
• Usually, NRIs can avail tax deduction at maximum tax rate. The tax will be deducted even if the income or payment received by NRI is not subject to tax. The Double Taxation Avoidance Treaty is also available for NRIs to help them in getting relief from higher income taxes.

Here are some specific details on NRI tax structure and TDS charged on profits earned from various financial products –

• Indian residents who receive interest on amounts in their Indian bank account are subject to pay TDS on amount over Rs. 10,000. However, NRIs can’t avail this benefit on their Non Resident Ordinary (NRO) Savings Account. Any interest earned by NRIs in their NRO account will be subject to a TDS rate of 30 percent.
• Any interest earned by NRIs on deposits such as bonds are liable to TDS of 20 percent. However, dividend earned from equity mutual funds, debt mutual fund and equity shares is not subject to TDS.
• As far as capital gains are concerned, any profit or income made from sale of equity mutual fund or equity shares after one year are exempted from tax and therefore TDS will be not applicable on such income. However, any profits made from sale of assets within one year are considered as short term capital gains and 15 percent TDS will be applicable on such profits.
• Long term capital gains obtained from corporate debentures and mutual funds which are liquidated in secondary market are subject to 10 percent TDS. On the other hand, short term capital gains received by NRIs on these products will be liable to 30 percent TDS.
• Long term capital gains obtained from gold and real estate products are subject to 20 percent TDS. On the other hand, short term capital gains received by NRIs on these products will be liable to 30 percent TDS.