Non-Resident Indians are referred to as those who are of Indian origin or who are Indian citizens but are currently not residing in the country. To determine whether a person is a non-resident Indian or not, the residential status of the person in the past year or more is taken into consideration. The Income Tax Act 1961 provides information and guidelines on how to classify a person as a country resident.
An individual is considered a resident if,
If he/she stays in India for a minimum of 182 days
If he/she stays for 60 days or more in the previous year and 365 days or more in the last four years before the previous year.
Main Points Covered
Any money received in regular intervals by an individual is classified as income. The period could be weekly, monthly, bi-annually, or yearly. Income could be monetary or non-monetary. Income is taxable either on a receipt or on an accrual basis.
- There is no discrimination under the income tax act between illegal and legal income.
- It could be a permanent or temporary income.
- It could be received in installments or as a lump sum and will still be taxable.
- Revenue, capital gains, and even losses incurred are considered part of income.
- Any gift received above Rs. 50,000 is considered for taxation for HUF or an individual.
The Income Tax Act of 1961 clearly outlines the different types and sources of income. Types of income as per Income Tax Act 1961 are,
- Salary paid for any services rendered.
- Business gains and profits or any other profession
- Dividends received on investments in shares
- Contributions made voluntarily by charitable organizations, trusts, etc., for religious or charity purposes.
- Special allowances
- Capital gains
- Any interest paid by banks/companies to the assesses
- Income from other sources
Sources of Income according to The Income Tax Act 1961
1. Salary income: Any remuneration received by an individual for providing services under an employment contract in his/her name is classified as income from salary.
2. Income from the property: Also known as an income from house property, it does not just refer to income from a house but also includes income from all kinds of properties like houses, offices, buildings, shops, or any property appurtenant to land. Residential property and commercial property are not treated differently under Income Tax Act. The Tax applies only to the legal owner of the property.
3. Profits and Gains from business or any other profession: The income appearing under the profit/loss section of the account statement produced by the individual paying the Tax is classified under this section. The income is not just the profits but also the losses, recorded in the negative. The section covers all kinds of income, profit or loss, legal or illegal. Any income earned by business people in the previous year is considered for taxation the following year. The returns for the income tax should be filed by the 31st of July in the assessment year.
4. Capital gains income: If an investment/asset is transferred, the profit earned on the transfer is classified as income from capital gains. It could be on a long-term or a short-term asset. The resultant short-term or long-term gains will be considered a gain taxable under the Income Tax Act. The capital gains come into play only when the asset transferred is a capital asset. For instance, selling shares or a house and the income or profit made on the sale will be considered under this category.
5. Other sources: Dividends, savings account interest, Gifts received, etc., which cannot be classified into different income categories, are considered as income from other sources.
Taxability of income for Non-Resident Indians
For a resident taxpayer, the income, whether it was earned or accrued outside India, will be taxable in India. But for non-resident Indians, the income earned or accrued outside will not be considered for taxability in India.
Let us look at the five primary sources of income explained above and their taxability for Non-Resident Indians.
1. Income from salary: If the remuneration was received for services rendered in the country, then the same is taxable even if the receipt of the money is outside India. The salary paid to government officials like diplomats for their services outside India is also considered for taxability in India. This would mean all the salary components like perquisites, allowances, etc.
2. House property income: If the NRI owns a property in India, then any income received on the property like rent is taxable in India. There are, of course, deductions which they can avail on this income.
3. Income from businesses: This would come under the purview of taxation if the accrual of the revenue comes out of a business in India or through a connection in India. However, specific business categories are exempted from this. The business income becomes taxable only if the business has a permanent establishment in India. It could be a factory or a branch, or a construction site. Apart from companies, professional income for jobs like teachers, doctors, accountants, etc., are taxable if the income is accrued in India.
4. Capital gains income: If the income was received by transfer of capital assets in India, then the income from the transfer is taxable in India. For shares, if the sale includes companies incorporated outside the country but has a value dependent on assets in the country, then it is also taxable.
5. Royalty or Fee for Technical Services (FTS) income:Royalty is the income received by the person- creator, inventor, or developer for allowing his artwork, scientific invention or any other creation to be used commercially.
For Taxability of Royalty received by NRI, we have to refer to the Source Rule for taxation of Royalty or FTS in India.
Royalty is taxable in India.
- If it is paid by the Indian Government.
- If it is paid by the resident provided, the resident doesn’t make royalty payment for the rights used for any business carried by him outside India or for the purpose of earning income outside India.
- If it is paid by Non-Resident, provided the resident makes royalty payment for the rights used for any business carried by him inside India or for the purpose of earning income inside India.
If an income is accrued by royalty where it was accrued as part of services or products utilized in the country or for a profession or business that happened in the country, then the same is taxable. The income by royalty or Fees for Technical Services (FTS) becomes taxable for NRIs if the same is paid by any Indian organization or by the Indian Government.
6. Dividend and interest incomes: Dividends received by NRI from shares in an Indian Company will be taxable @ 20% under the provisions of Section 115 A and 115 E of the Income Tax Act.
NRI’s hold 2 types of bank accounts in India on which interest is
- Non Resident External (NRE)- Interest on NRE A/C’s or NRE Fixed Deposit is exempt from Tax as in NRE Accounts only foreign income of the NRI is held.
- Non Resident Ordinary (NRO)-Interest on NRO A/C is subject to Income tax as it holds Income earned by resident in India
What are the Special Provisions with regard to Investment Income?
Income derived by NRI from
- Shares in an Indian Public or Private Company-Dividends
- Debentures of Indian Public Company-Interest
- Deposits with Banks and/or Public companies- Interest
- Any Security of the Central Government-Interest or Return for holding
- Any other asset of the Central Government as specified in the Official Gazette
Income from the above assets will be Taxable at the flat rate of 20% under the Income Tax Act 1961
No deduction is allowed under Section 80 with regard to the above Investment Income.
What happens if the above Investment assets are transferred, and Long Term Capital gains are earned?
The resultant capital gains will also be taxed @ 20%.
No indexation benefit will be available while calculating capital gain
No deduction under section 80 will be available
How can we claim exemption from Tax on the above Long Term Capital Gains?
Section 115F allows for the exemption of the Long Term Capital gains to NRI’s
If the profit is reinvested back into the special investments
I Shares in an Indian Public or Private Company
- Debentures of Indian Public Company
- Deposits with Banks and/or Public companies
- Any Security of the Central Government
- Any other asset of the Central Government as specified in the Official Gazette
II The reinvestment should be done within six months of the sale of special assets.
III The new assets should not be sold within three years from the date of acquisition
The exemption shall be given by the Tax Department proportionately if the reinvested amount is less than the net consideration.
Net Consideration is Gross consideration less expenses incurred wholly and exclusively for the purpose of the transfer.
The advantage of Section 115 F can be obtained by the NRI even after becoming a resident by submitting an application to the Income Tax Department.
Deductions available to NRIs
- Deductions from Rental Income- NRIs too can claim 30 % deduction ( standard deduction for repair and maintenance) from Annual rental Income. In addition that any property tax paid with regard to the rented property can also be claimed as a deduction. Also, deduction of interest on a loan obtained for the purchase of a rented property can also be claimed as a deduction under section 24.
- Repayment of the principal of Home Loan- Under Section 80C, NRIs can claim a deduction for principal repayments of home loans obtained in India for any house property located in India.
- Tuition Fees –Under Section 80C, NRIs can also avail of deductions in tuition fee payment for their children, provided the children are studying in a school located in India.
- Life Insurance Premium-NRI’s can also claim deduction under Section 80 C for payment of life insurance policy premium, ELSS, ULIP, etc.
- Payment of Mediclaim Premium Under section 80D- a deduction can be claimed for the premium paid on a health insurance policy in India. This can be availed up to INR 25,000 for themselves, their spouse, and/or dependent children. In addition, they can also claim a deduction of the same amount on the health insurance of their parents. Deduction for payments made for a preventive Health check-up to Rs 5,000 is also available.
- Donation-Section 80G allows for a deduction on donations made for charitable causes or social service activities.
- Interest paid on Education Loan- Section 80E gives a deduction on the interest on a loan for education. The deduction is not available on principal, and it is available for eight years or less until the interest component is paid off. The deduction is available for the education loan taken for the education of the NRI, NRI’s spouse, and children or for a student for whom the NRI is a legal guardian.
- Interest on Savings Bank Account- On the interest income received from the savings account, a deduction of up to Rs. 10,000 can be claimed under section 80TTA.
Important- Deductions not permissible to NRI’s
1. NRI’s cannot claim deduction under Section 80C for sums invested in
• PPF ( Public Provident Fund)
• Post Office 5-year Deposit Scheme
• NSC ( National Savings Certificate)
• SCSS ( Senior Citizen Savings Scheme)
2. NRI’s cannot claim deductions available to Differently abled under Section 80DD, 80DDB and 80U
3. NRIs cannot claim a deduction for the sum invested in RGESS( Rajiv Gandhi Equity Saving Scheme) under section 80CCG
TDS provisions for NRI
TDS or Tax deducted at source applies to certain scenarios for the NRIs as explained below:
- TDS on Rental Income- As we have already mentioned, the property owned by NRIs in India will fall under the purview of Income from House Property and will be subject to Income tax in India. Tenants residing in property owned by NRIs are required to deduct TDS @ 31.2% from the rental payments and deposit the same to the Tax Department. TDS is to be deducted by the tenant before remitting the rent to the NRI account outside India. The tenant is also required to submit Form 15CA for making remittances to an NRI account. In addition to this, form 15CB may have to be submitted in case the annual rental exceeds INR 5 Lacs, which is a certified letter from a certified CA confirming the details of the payment and the TDS.
- TDS on sale of Property-When a property situated in India is sold by an NRI, the buyer is required to deduct TDS @ 20% plus Surcharge and Health /Education cess from the payment of agreed Sale Consideration. An exemption to this can be made if you invest in property under section 54 or in bonds under section 54EC.
- TDS on Special Investments- TDS is deducted as per Section 195. If TDS has been deducted on an income from a special investment and this was the only income for the NRI through that financial year, then there is no need for the individual to file tax returns for that year.
Double Taxation Avoidance Agreements (DTAA)
In the case of NRIs, often, the income earned by them gets taxable in the source country and the land of residence. This leads to Double Taxation. Therefore, many countries’ governments enter into DTAA with other countries so that the NRI doesn’t end up paying taxes twice. The provisions of DTAA should be resorted to in such cases to minimize Tax Liability by taking Tax Credits.
It would be prudent to get in touch with a tax expert to know more about the taxability and the deductions available to NRIs in India.