In the context of the Income Tax Act of 1961, the provisions of the law are applicable to Indian residents as well as Non-Resident Indians (NRIs). However, the guidelines and regulations applicable to the latter differ to various extents from those of resident Indians.
This article highlights all the key aspects explaining the structure of income tax for NRI in India.
Who Is a Non-Resident Indian?
An NRI is a person of Indian origin/Indian citizen who stays outside India for the purpose of employment, or for carrying on business or vocation outside India, or for any other purpose indicating his intention to stay outside India for an uncertain period.
According to the residential status mentioned in Section 6 of the Income Tax Act, 1961, an assessee can be of two types- Resident in India and Non-Resident in India. An assessee is said to be a non-resident Indian if he/she is not residing in India for a certain period of time, as mentioned in the law. Therefore, to understand whether a residential status of a taxpayer is resident or non-resident, one needs to comprehend the process of determining the residential status every year.
How Is the Residential Status of an Indian Determined?
The residential status of an individual is assessed for the previous year on account of the number of days that individual has stayed in India. To assess whether a taxpayer is a non-resident in India, Section 6(1) of the Income Tax Act has laid down a few provisions. It states that a person is said to be a resident of India if they:
- Has stayed in India in the previous year for a span of 182 days or more; or
- Has stayed in India for a period of 60 days in the previous year and has been in India for at least 365 days during the four years that came before the previous year
If a person does not fulfil any of the above-mentioned clauses, they are a non-resident in India and are entitled under regulations of income tax for NRI.
However, if you are an Indian citizen working abroad or a crew member on an Indian ship only the first condition is applicable to you. You will be considered a resident when you spend at least 182 days in India. This also applies to a Person of Indian Origin (PIO), whose parents or grandparents were born in undivided India, visiting India.
Resident but Not-Ordinary Resident (RNOR)
Individuals will be considered as Residents but Not-Ordinary Residents (RNOR) for the year if they meet either of the following conditions:
- If you’ve not been a resident in India for 9 out of 10 previous years preceding the year of consideration, or
- If you have stayed in India for less than 729 days during 7 previous years preceding the year of consideration
Further, according to the Finance Act 2020, an Indian Citizen/Person of Indian Origin, who comes to visit India shall now be considered as RNOR if:
- Total income other than foreign income is over Rs 15 lakh,
- They have stayed in India for more than 120 days but less than 182 days in the previous year, or
- They have stayed in India for 365 days or more in four years before the previous year
According to the concept of ‘Deemed residency’, introduced by the Finance Act 2020, Indian citizens who are earning more than Rs 15 lakh from Indian sources shall be deemed a resident of India if they are not liable for payment of taxes in any other country.
The deemed residents shall be classified as RNOR with effect from the financial year 2020-21. This amendment was brought into force to tax the incomes of Indian citizens who are not liable to pay tax in any country.
Taxable Income for NRIs
Any NRI receiving income in India, whether in the form of salary, house rent, or profit from a business, is taxable per the rules and regulations laid down by the IT Act. Let us understand them one by one based on the different heads of income:
Income from Salary
If an NRI has offered his or her service and earned a salary in respect of this service in India, it will be eligible for tax calculation in India. An NRI is entitled to pay taxes on a salaried income if he or she has received this salary for services performed for a company residing in India. In addition, a salaried income of an NRI is taxable even if it is earned for rendering services in India. Further, interest on NRO (Non-Resident Ordinary) accounts is taxable in the hands of an NRI. Taxes will be levied as per the tax slabs for the assessment year 2022-23. However, income which is earned outside India is not taxable in India.
Income from Capital Gains
An NRI with capital assets of Indian origin, like shares and securities or gold in his or her possession, will be entitled to pay taxes. In this case, most of the provisions will be similar to that of a resident. However, taxation on capital gains for property work differently for NRIs, which is explained in the section below.
Income from House Property
The amount of money earned from the rent of the property located in India is taxable in the hands of NRI. Though the calculation of the taxable income from house property for an NRI is similar to a resident, here are some of the provisions to be considered while computing:
- NRI can claim a standard deduction of 30% on the Net Annual Value of the property.
- They can claim to deduct property taxes
- He or she is eligible for a deduction of up to Rs.2 lakh on their home loan interest if the owner or their family reside in the house property. The same treatment applies when the house is vacant.
- Under Section 80C, if an NRI is following the existing tax structure, then he or she is eligible for a deduction on repayment of the principal amount
- Under the same section, an NRI is eligible for exemptions for stamp duty and other registration charges
- A tenant who pays rent to an NRI owner must deduct TDS at 30% while paying rent. The tenant also has to submit Form 15CA/15CB online to the Income tax department.
- Where NRI purchases any property from an Indian resident, the NRI is required to deduct TDS at 1% on the payments to be made to the seller of a property, provided the purchase amount is Rs 50 lakh or more.
- If an NRI sells property in India, the tax must be paid at 20% for long-term capital gains (property held for more than two years). And for short-term capital gains (property for less than two years), tax should be paid at normal tax slab rates.
Income from Business & Profession
All the income of an NRI derived from a business that has its existence in India will be considered as income accrued. The definition of income accrued or arising in India refers to any income that comes from any property, irrespective of being tangible or intangible and movable or immovable, which has its establishment in India.
Income from Other Sources
The majority of the income from other sources, like interest received from fixed deposits and dividends, is taxable in the hands of an NRI. However, interest received from NRE and FCNR accounts is exempted from tax.
The tax structures for NRIs in India have been made in a way that they do not have to face the cascading effect of double taxation.
Tax slabs applicable for NRIs for Assessment Year 2022-23
The Income Tax Act allows non-resident Indians to file tax as per the existing or new tax regime; however, an NRI choosing new tax rates u/s 115BAC will not be eligible for a few specific exemptions and deductions like 80C, 80D, etc., which is available under the existing tax structure. The existing and new tax structures are given below:
|Existing Tax Regime|
|Income Tax Slab||Tax Rate|
|Up to Rs. 2,50,000||Nil|
|Rs. 2,50,001 – Rs. 5,00,000||5% above Rs. 2,50,000|
|Rs. 5,00,001 – Rs. 10,00,000||Rs. 12,500 + 20% above Rs. 5,00,000|
|Above Rs. 10,00,000||Rs. 1,12,500 + 30% above Rs. 10,00,000|
|New Tax Regime u/s 115BAC|
|Income Tax Slab||Tax Rate|
|Up to Rs. 2,50,000||Nil|
|Rs. 2,50,001 – Rs. 5,00,000||5% above Rs. 2,50,000|
|Rs. 5,00,001 – Rs. 7,50,000||Rs. 12,500 + 10% above Rs. 5,00,000|
|Rs. 7,50,001 – Rs. 10,00,000||Rs. 37,500 + 15% above Rs. 7,50,000|
|Rs. 10,00,001 – Rs. 12,50,000||Rs. 75,000 + 20% above Rs. 10,00,000|
|Rs. 12,50,001 – Rs. 15,00,000||Rs. 1,25,000 + 25% above Rs. 12,50,000|
|Above Rs. 15,00,000||Rs. 1,87,500 + 30% above Rs. 15,00,000|
While computing tax on the income of a salaried NRI, it is pivotal to note that income earned by Diplomats and Ambassadors is exempted from tax.
What Is Double Taxation Relief?
Before understanding how deductions in the taxable income of the NRI work, it is recommended to comprehend the essence of double taxation relief. The Double Tax Avoidance Agreement (DTAA) is made to ensure that NRIs do not have to pay double taxes for the services rendered in India as well as the country of residence.
When an NRI is taxed under both the nations, country of residence and India, tax relief is offered as per the regulations of DTAA. This relief can be assessed through the Exemption and Tax Credit Methods. With the exemption method, you will be taxed in only one country and exempted in another. In the tax credit method, tax relief can be claimed in the land of the current residence.
What Are the Deductions on the Income of NRIs?
Here are some of the pivotal deductions that an NRI is eligible to obtain on the income tax:
- Deductions under Section 80C
- Exemptions are available on the Life Insurance premium payment only if the policy is in the name of the NRI or his/her spouse; however, the premium of the policy must be 10% less than the sum assured.
- A tax deduction is available on the principal repayment of home loans.
- Deductions are available from the income received from Unit Linked Insurance Plan and Equity Linked Tax Saving Scheme.
- Tuition fees are paid to any school, college, university or educational institution situated within India for the full-time education of any two children.
Deductions not allowed to NRIs under Section 80C:
- Investment in PPF is not allowed (NRIs are not allowed to open new PPF accounts)
- Investments in National Savings Certificates (NSCs)
- Post office 5-year deposit scheme
- Senior Citizen Savings Scheme (SCSS)
Additional deductions are available on:
- Medical insurance under Section 80D. This deduction is available up to Rs 25,000 in for insurance of self, spouse, and dependent children and up to Rs 50,000 for senior citizens.
- Interest paid on educational loans under Section 80E. This loan may have been taken for higher education for self, spouse, children, or a student for whom you are a legal guardian.
- Payments made for donations to social causes under Section 80G
- Interests received in a savings bank account under Section 80TTA. The maximum limit is Rs 10,000.
Computation of income tax for NRI may be a daunting task; however, proper guidelines and regulations followed as per the latest law will help to add clarity. Moreover, the correctness and timely submission of income tax can keep legal litigations and other complications at bay.
FAQs about Income Tax for NRI
What are the special provisions in the investment income of an NRI?
As per the provisions prescribed in the Act, there is a tax rate of 20% on the investment of specific assets. However, filing an income tax return will not be required if the individual’s income is related to a special investment and there is a deduction of TDS on it. Some examples of income that are derived from certain investments and require special treatment are:
> Shares in Private or Public Companies of Indian origin
> Debentures issued by a public-listed company situated in India
> Deposits available with public companies
> Any bonds or securities of the Central Government
What is the deduction available to NRIs from house property income?
An NRI is eligible for almost all the deductions that are applicable to a resident. This includes parent’s insurance deductions for a residential property purchased in India. In addition to this, a deduction is also available for the amount of property tax payment and interest paid on a home loan.
Is an NRI eligible for availing benefits of Section 80C?
An NRI is eligible for availing benefits of Section 80C up to a limit of Rs. 1.5 lakh; however, in this case, the income must be earned, accrued or received with India as its location.