NRIs must be aware: Income generated in India is taxable here

Many deductions available to resident Indians are not available to NRIs

While non-resident Indians (NRIs) live abroad, many of them retain strong connections with India. If they continue to generate income in this country, they have an obligation to pay taxes and file their income-tax returns.

Who is an NRI for tax purposes?

Specific rules determine whether a person is an NRI for tax purposes. Ankit Jain, partner, Ved Jain & Associates, says, “A person is considered an NRI if he has spent less than 182 days in India during the financial year, or if he has spent less than 60 days in India during the financial year and less than 365 days during the preceding four financial years.”

NRIs’ taxable income

An NRI’s taxable income in India includes income received or deemed to have been received in India; income that accrues or arises, or is deemed to have accrued or arisen in India.

Naveen Wadhwa, deputy general manager, Taxmann, says, “An income is generally deemed to accrue or arise in India if its source is situated in India, like rental income from a property, dividends from an Indian company etc.”  

Atul Puri, managing partner & co-founder, SW India, says, “There is one exception to the nexus rule. Interest earned from a non-residential external (NRE) account, although having a nexus with India, is exempt from taxation in India.”

An NRI’s global income is not taxed in India.

Deductions available

NRIs can avail of most of the Section 80C deductions up to Rs 1.5 lakh. These include life insurance premiums, contributions to the National Pension System, medical insurance premiums, preventive health check-ups and medical expenditures, interest paid on education loans, etc.

Pallav Pradyumn Narang, partner, CNK says, “Deductions can be claimed on the interest income earned from a savings account, up to a maximum limit of Rs 10,000, held with an Indian bank, co-operative society, or post office.”

NRIs can also earn tax-exempt interest income from notified bonds and Foreign Currency Non-Resident (FCNR) bank deposits.

Deductions not available

NRIs can’t avail of several other deductions allowed to resident Indians. Sameer Jain, managing partner, PSL Advocates & Solicitors, says, “NRIs are not allowed to invest money in tax-saving schemes like Senior Citizens Savings Scheme, National Savings Certificate, Public Provident Fund, and Post Office Deposit Scheme.”

Other deductions not allowed are deductions for medical expenses incurred on a family member suffering from a disability, expenses on medical treatment of specified diseases, and Section 80TTB deduction on interest income allowed to senior citizens.

Who needs to file a return?

An NRI needs to file a return in India if his total income in the country exceeds Rs 2.5 lakh. NRIs can also opt for the old or the new tax regime.

Narang says, “If an NRI’s total income consists only of income under Section 115A (royalty, fees for technical services, dividends, and interest), or of investment income on which TDS (tax deducted at source) has been deducted, it is not mandatory for him to file a return of income under Section 139.”

Taxation of property transactions

A person who purchases a property in India from an NRI must deduct TDS, which can go up to 24 per cent of the property’s sale value. Jain from Ved Jain, adds, “If the cost of the property is considered, then the tax amount payable is lower. An NRI can approach the tax office and ask it to issue a certificate. Based on it, the buyer can deduct TDS at a lower rate.” NRIs can thus avoid getting their money blocked.

Chopra adds that NRIs must also pay capital gains tax when they sell a property in India and they must also deduct TDS on rent received from a property in India.

Avail DTAA benefit
 

NRIs can reduce their tax burden by taking advantage of the Double Taxation Avoidance Agreements (DTAAs) signed between India and other countries. Aditya Chopra, managing partner, Victoriam Legalis-Advocates & Solicitors, says, “They can either claim credit for taxes paid in India in their country of residence, or claim exemption from tax in India, depending on the provisions of the DTAA.”  

Essential points to know about DTAA

• Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between countries to help taxpayers avoid paying taxes twice on the same income
   
• It becomes applicable when an individual is a resident of one nation but earns income in another
   
• DTAA provisions can apply to income from services provided and salary received in India; interest earned on fixed deposits and savings bank accounts held in India; income from house property in India; and capital gains from the transfer of assets in India
   
• If an NRI makes use of DTAA provisions, then tax is deducted at a lower rate on the above-mentioned incomes