NRIs are required to file income tax return in India if they have income arising in India during a particular financial year. But Income tax for NRIs come with certain regulations which differs from that of Indian residents.
NRIs need to manage dual responsibilities. Though they earn their living abroad, their tax obligation in India doesn’t end. NRIs are required to file their income tax return if they have income in India that exceeds the basic exemption limit.
How to determine tax residency status?
As an NRI, first, you need to determine your tax residency status, whether you fall in the category of Resident of India or NRI (Non-resident Indian).
There may be no ambiguity regarding the resident status of an NRI who has lived abroad for a long time. Those who have returned to India after an extended stay abroad or have moved abroad recently need to ascertain their residency status for taxation purpose.
If you have moved out but stayed more than 182 days in India in the last financial year, you need to be concerned about tax implications on income earned in India. The number of days of stay in India decides residency status for taxation purpose during a financial year. According to Indian taxation law, an individual is considered to be an NRI if he/she meets the below-mentioned criteria.
- A person should have been physically present in India for less than 182 days in a financial year, or
- A person should have been present in India for not more than 60 days in a year or cumulatively not more than 365 days in the last four years.
Hence, to calculate the exact time as required above, check your passport and immigration stamps date. It is important to note that the date of departure and arrival is also included in the calculation for a stay in India.
It is important to note that NRIs do not get tax benefits of differential exemption limits based on gender or age that is available to residents of India. Moreover, with respect to income tax for NRIs, certain long term and short-term capital gains from the sale of assets and investments are taxed, even if their total income is below the exempted limit.
What is taxable income in India?
Any income earned by NRI that originated or received in India is taxable in India. Such income includes, but is not limited to
- Salary earned in India
- Rental income from property owned in India
- Income from the sale of financial securities and assets held in India
- Interest income
- Capital gains
Different types of accounts NRIs can open in India and tax implications on such accounts.
NRIs can open different types of accounts in banks in India. These accounts include
- Non-Resident External Account (NRE)
- Foreign Currency Non-Resident Account (FCNR)
- Non-resident Ordinary Account (NRO)
The taxability in India from accounts held by NRIs depend on two factors:
- The interest amount earned
- The type of account
The FCNR and NRE accounts are tax-free accounts in India. Interest amount earned on these two bank accounts is tax-free. However, if you become an Indian resident, then the interest earned on these accounts is taxable in India.
Taxation on NRO interest income in India
Income tax for NRIs comes in the picture when you earn interest on your NRO account. 30.9% of TDS on such income is charged, irrespective of the amount you earn. The TDS gets reflected in your Form 26AS.
Income tax deductions available to NRIs
Income tax for NRIs are subject to certain tax deductions, these are
Tax deduction is applicable under Section 80C of the Income Tax Act, 1961. Under this section, the investment made in a life insurance policy, ULIP (Unit-linked Insurance plan), tuition fees paid for school-going children, etc. is allowed as deduction up to a maximum of Rs. 1.5 lakh in each financial year.
Deduction under Section 80D of the Income Tax Act: Under this section, a health insurance policy taken for self, spouse, and children is eligible for a tax deduction. Tax benefits allowed amounting to Rs. 25,000 if the policyholder is below 60 years of age. Up to Rs. 50,000 can be availed as a tax benefit for senior citizens above 60 years of age. Moreover, preventive health check-up deduction can be claimed up to Rs. 5000 per year.
Deduction for a mortgage can be availed for principle and interest repayment for housing or education loan taken in India.
According to Section 80G of the Income Tax Act, any qualifying donations made in India are eligible for tax deduction from the income taxable in India.
NRIs, holding saving bank account in India, are eligible to receive a tax deduction under Section 80TTA. As per this section, the interest earned up to Rs. 10,000 during a financial year can be claimed for a tax deduction.
Any interest credited to NRI individuals, irrespective of the amount, is the net amount (post TDS deducted amount). This means that an NRI earning interest income from NRO account as the only source of income, can avail income tax refund for income up to Rs. 10,000 earned in India.
It is also important to note that some of the tax-saving instruments are prohibited for NRIs. These are
- Public Provident Fund
- National Saving Certificate
- Senior Citizen Saving Scheme
- 5-year deposit with a post office
- Tax deduction under Section 80DD, 80DDB and 80U.
Do NRIs earn interest income from NRO account? Is it required to be filed as income tax return in India?
The minimum requirement for ITR filing in India is set to Rs. 2.5 lakhs in the financial year. NRIs having income earned in India above this limit are required to file an income tax return in India. Rs. 2.5 lakh is known as the basic exempted limit. Income tax for NRIs deducted till this limit shall be refunded back to the NRI taxpayer. Thus, NRIs earning up to this limit in India should file an income tax return to get TDS refund amount.
In case an NRI individual is not willing to get the TDS refund, and has income earned in India below Rs. 2.5 lakhs, no consequences have been prescribed in the tax law. For NRIs who do not earn income India, there is no such liability to file an income tax return for the relevant financial year.