Everything you want to know about NRI Taxation
With the due dates of filing Indian income tax returns fast approaching and if you have any Income in India, you might have questions as to whether you will be treated as an NRI, whether you need to file tax return in India, by when you need to file tax return, will you get any benefit under DTAA, so on and so forth. We understand it can be quite confusing to understand the above questions. This is why, we have this easy to understand guide to help you understand what may be applicable to you and how you can complete the process.
Who is a NRI?
Residential status needs to be determined for taxation of various kinds of Incomes earned in India. This residential status is different from what may be a person’s citizenship. This is governed by the provisions of the Income-tax Act, 1961 (the “Act”).
As per the tax laws in India, a person can be a Resident, Non-Resident and Resident but Not-ordinarily Resident. The tax implications for a Non resident and a Resident but Not-ordinarily Resident are largely similar.
A person is categorized as a ‘resident’ in a financial year if any one of the conditions below are satisfied:
if the above conditions aren’t met, the person becomes an NRI.
Whether Income Tax Return needs to be Filed in India by an NRI
Lets begin to understand when the tax return needs to be filed by first looking at the taxability of various kinds of income based on the determination of residential status above.
As per the tax laws, all incomes that are earned or accrued in India are taxable in India if a person is determined to be a NRI as per the above step. Some examples of this kind of income is salary received in India or for services that have been provided in India, income from a house property physically located in India, capital gains on transfer of assets situated in India, income earned on fixed deposits or interest on savings bank account balance. However, incomes which are earned outside India by the NRIs are not taxable in India. Also, if an NRI has an NRE account or a FCNR account with a bank in India, then interest earned on those accounts doesnt fall in purview of tax. However, interest earned on an NRO account is taxable.
Once a determination is made of the various kinds of Income that fall in purview of taxation in India, the next step is to club together all those incomes to determine if they are above the limit set by the Income Tax Act for filing a Tax Return in India for the NRI.
For the FY 2014-15 this limit has been set at Rs.2,50,000. This means that Income Tax Return must be filed in India by an NRI if the Total Income (before any deductions) is more than Rs.2,50,000. Apart from this, Income Tax Return must also be filed if:
By When to File Income Tax Return by NRI
The due date for filing Income Tax Return by an NRI is July 31. The NRI is also required to submit documents like passport copies to show the no. of days spent outside India.
NRIs can file tax returns online on the Income Tax Department e-filing portal. Alternatively, there are a no. of paid options available these days which offer easy one-click filing of the Tax Return online. These online portals also help in tracking the status of the tax returns and are easy to use.
DTAA Benefits
When a person is taxed in two countries separately for the same income, it is known as double taxation. To help in a situation like this and to avoid the burden on the taxpayer, Double Tax Avoidance Agreements (DTAA) are entered into with various countries by India. The benefit under the DTAA are claimed in the following two ways:
A no of deductions can be claimed by the NRIs on the income earned to help save on taxes. Deductions are available upon investing in various investment avenues eligible for Sec 80C. However, NRI aren’t permitted to invest in National Saving Certificates (NSC), Senior Citizens Savings Scheme, Post Office Time Deposits or open new PPF accounts or extend them.
Other taxation benefits under home loan, life insurance, pension plan, equity-linked savings schemes of mutual funds are allowed. Tuition fee paid for spouse or children in India too can be claimed for deduction.
Sec 80D benefits like Health insurance policies or health check-ups paid for parents or dependents in India can also be taken as a deduction.
If an NRI doesn’t buy another property using the sale amount to save taxes on capital gains, then long-term capital gains can be invested in tax-saving bonds such as those issued by NHAI or REC to save taxes. However, there is a cap for these amounting to Rs.50,00,000.
The above guidance and step by step determination of residential status, taxable incomes, deductions available and the tax filing process should be kept in mind as one embarks on tax filing process
With the due dates of filing Indian income tax returns fast approaching and if you have any Income in India, you might have questions as to whether you will be treated as an NRI, whether you need to file tax return in India, by when you need to file tax return, will you get any benefit under DTAA, so on and so forth. We understand it can be quite confusing to understand the above questions. This is why, we have this easy to understand guide to help you understand what may be applicable to you and how you can complete the process.
Who is a NRI?
Residential status needs to be determined for taxation of various kinds of Incomes earned in India. This residential status is different from what may be a person’s citizenship. This is governed by the provisions of the Income-tax Act, 1961 (the “Act”).
As per the tax laws in India, a person can be a Resident, Non-Resident and Resident but Not-ordinarily Resident. The tax implications for a Non resident and a Resident but Not-ordinarily Resident are largely similar.
A person is categorized as a ‘resident’ in a financial year if any one of the conditions below are satisfied:
- A person has physically stayed in India for 182 days or more during that financial year
- A person has stayed physically in India for 60 days or more during that financial year AND has stayed in India for at least 365 days during the 4 years preceding that financial year.
if the above conditions aren’t met, the person becomes an NRI.
Whether Income Tax Return needs to be Filed in India by an NRI
Lets begin to understand when the tax return needs to be filed by first looking at the taxability of various kinds of income based on the determination of residential status above.
As per the tax laws, all incomes that are earned or accrued in India are taxable in India if a person is determined to be a NRI as per the above step. Some examples of this kind of income is salary received in India or for services that have been provided in India, income from a house property physically located in India, capital gains on transfer of assets situated in India, income earned on fixed deposits or interest on savings bank account balance. However, incomes which are earned outside India by the NRIs are not taxable in India. Also, if an NRI has an NRE account or a FCNR account with a bank in India, then interest earned on those accounts doesnt fall in purview of tax. However, interest earned on an NRO account is taxable.
Once a determination is made of the various kinds of Income that fall in purview of taxation in India, the next step is to club together all those incomes to determine if they are above the limit set by the Income Tax Act for filing a Tax Return in India for the NRI.
For the FY 2014-15 this limit has been set at Rs.2,50,000. This means that Income Tax Return must be filed in India by an NRI if the Total Income (before any deductions) is more than Rs.2,50,000. Apart from this, Income Tax Return must also be filed if:
- NRI has short term or long term capital gains from any investments or assets (even if the gains were otherwise less than the limit of Rs.2,50,000 above)
- To get a tax refund
- To take benefit of carrying forward tax losses so they can be adjusted against future incomes as per the provisions of the Act.
By When to File Income Tax Return by NRI
The due date for filing Income Tax Return by an NRI is July 31. The NRI is also required to submit documents like passport copies to show the no. of days spent outside India.
NRIs can file tax returns online on the Income Tax Department e-filing portal. Alternatively, there are a no. of paid options available these days which offer easy one-click filing of the Tax Return online. These online portals also help in tracking the status of the tax returns and are easy to use.
DTAA Benefits
When a person is taxed in two countries separately for the same income, it is known as double taxation. To help in a situation like this and to avoid the burden on the taxpayer, Double Tax Avoidance Agreements (DTAA) are entered into with various countries by India. The benefit under the DTAA are claimed in the following two ways:
- Exemption Method: NRIs are taxed in only one country and exempted in another
- Tax Credit Method: Income is taxed in both countries, tax relief can be claimed in the country of residence.
A no of deductions can be claimed by the NRIs on the income earned to help save on taxes. Deductions are available upon investing in various investment avenues eligible for Sec 80C. However, NRI aren’t permitted to invest in National Saving Certificates (NSC), Senior Citizens Savings Scheme, Post Office Time Deposits or open new PPF accounts or extend them.
Other taxation benefits under home loan, life insurance, pension plan, equity-linked savings schemes of mutual funds are allowed. Tuition fee paid for spouse or children in India too can be claimed for deduction.
Sec 80D benefits like Health insurance policies or health check-ups paid for parents or dependents in India can also be taken as a deduction.
If an NRI doesn’t buy another property using the sale amount to save taxes on capital gains, then long-term capital gains can be invested in tax-saving bonds such as those issued by NHAI or REC to save taxes. However, there is a cap for these amounting to Rs.50,00,000.
The above guidance and step by step determination of residential status, taxable incomes, deductions available and the tax filing process should be kept in mind as one embarks on tax filing process
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