Income Tax for NRI – Taxation, Deductions, and Exemptions in India

How To Determine NRI Status for an Individual?

The income tax for NRI depends on their residential status and accrual of income from India.

By definition, an NRI is a person of Indian origin or a citizen who does not reside in India. Hence, the entire residential status depends on how many days the person spends in India during the respective financial year. 

A person is a resident of India if he or she satisfies the following conditions:

1. He or she spends at least 182 days or more in India during the financial year
2. He or she spends at least 60 days or more in India during the financial year and more than 365 during the 4 financial years immediately preceding the relevant financial year. Here the relevant financial year is the year for which the income tax is being calculated.

Other Conditions for Income Tax For NRI:

1. For a citizen of India working overseas and a crew member of an Indian ship, only the first condition is applicable. These individuals are considered to be a resident if they spend 182 days or more in India during the year.
2. The above condition is applicable to a Person of Indian Origin as well. Moreover, an individual is considered a POI only if their parents or grandparents were born in an undivided India.

Resident but Not Ordinary Resident

A resident but not an ordinary resident is neither an NRI nor a resident. The tax treatment differs. There will be no DTAA benefit, lower tax deductions, lesser scope for tax exemptions, and higher taxable income. An individual is an RNOR if he or she satisfies the following conditions:

1. The individual is an NRI for 9 years out of 10 years immediately preceding the relevant financial year. 
2. The individual stays for 729 days or less during the past 7 years immediately preceding the relevant financial year.
3. Here the relevant financial year is the year for which the income tax is being calculated.

Other Conditions For Deemed Residency of Indian Citizen or POI:

If an Indian citizen or POI satisfies the following conditions then that will be known as RNOR as well:

1. He or she spends more than 120 days but less than 182 days during the financial year
2. He or she spends more than 365 days during the past 4 financial years
3. The total income is more than Rs 15 lakhs. This total income excludes any foreign income which accrues outside of India.
4. The individual is not liable to pay tax in any other country or jurisdiction due to any reason.

List of Taxable Income for Income Tax For NRI

The income tax for NRI is on the basis of the occurrence and accrual of the income in India. Hence, an individual pays income tax on income if the income accrues or occurs in India.

1. Income From Salary

Income from salary is taxable in India for an NRI if the services are rendered in India. The place of residence for an individual is irrelevant here for this matter. Even if the individual stays in a foreign country the salary income will be taxable in India since the services are rendered in India. Moreover, if an employee of the Government of India provides their services outside India, the income is chargeable in India. For instance, when a Diplomat or Ambassador renders services overseas their salary income is chargeable to tax in India. However, this salary income for Diplomat or Ambassador is exempt from tax in India.

2. Income From House Property

Any income from a house property located in India is subject to income tax for NRI. Moreover, the NRI is eligible to claim the standard deduction. The taxability is similar to a resident in India. The income from house property is chargeable at slab rates and the basic exemption limit applies as well. It is very common for an NRI to receive rental income from a house property located in India. The rental income is subject to income tax for NRI at slab rates. 

3. Income From Other Sources

Income from other sources is taxable if the income is received and accrued in India. For instance, the interest income on FD, savings bank accounts, and NRO accounts are taxable in India. Similarly, any income from any other source is taxable in India for an NRI.

4. Income From Business or Profession

An individual may manage their business from another country and receive payments in India in their Indian bank accounts. An individual may carry on a profession and earn some professional income against their services. Both of the income is chargeable to income tax for NRI. The taxability is very similar to that of a resident of India. 

5. Income Under Capital Gains

In agreement with the rule of taxation, capital gains are no exception. Any capital gain arising from an investment or a capital asset is subject to tax. The capital asset must be located in India, or the gains must arise from a source in India. For instance, the sale of a house property is chargeable to tax in India for an NRI. Similarly, a capital gain from the sale or redemption of the units of a mutual fund or shares and stocks is subject to income tax for NRI. 

Tax Deduction From Income Tax for NRIs

Similar to a Resident taxpayer, income tax for NRIs allows tax deductions. The following deductions are applicable without any additional conditions:

1. The Income Tax Act provides the benefits of Section 80C against LIC premiums, tuition fee payment, principal repayment on a home loan, investment in ULIP, and ELSS.
2. Section 80D deduction against premium payment for health insurance as well as a deduction against preventive health check-up
3. Section 80E deduction against repayment of educational loan taken for the education of self, spouse, and dependent children
4. Tax deduction for donations under section 80G
5. Exemption from income tax on the interest income from a savings bank account

Disallowed Tax Deduction on Income Tax For NRI

The following deduction is not allowed while calculating income tax for NRI:

• Under section 80C an investment in post office schemes is not eligible for a tax deduction. These schemes are PPF, SCSS, NSC, and term deposit.
• Section 80DD– Any medical treatment expenses made by an NRI for a disabled dependant
• Section 80U– the NRI is suffering from a disability and incurs expenses

Exemptions on Income Tax For NRI

The following income is exempted from income tax for NRI in India:

1. Income on NRE/ FCNR accounts held in India
2. Income from government savings bonds and securities
3. Dividend income from shares of domestic company in India
4. Long term capital gains from shares of listed companies and equity oriented mutual funds
5. Section 54– If an NRI sells a property which is owned for three or more years is sold and proceeds are invested in accordance with the Capital Gains Account Scheme, or used to buy another property.
6. Exemption can be claimed if any property other than a house property is sold under section 54F. The NRI must invest the capital gains in buying or constructing a new house property. The exemption is limited to the amount spent on the new house property.

DTAA For Income Tax For NRIs

An agreement known as the Double Tax Avoidance Agreement is signed by two nations. The agreement is established to reduce the burden of additional tax payments for NRIs and to promote the country as a desirable travel destination. Although the DTAA does not allow for complete tax avoidance by NRIs, it does allow them to avoid paying greater taxes in both nations. An NRI can reduce the tax consequences of their income made in India. Tax evasion cases are also decreased by the DTAA.

There are two ways to obtain tax relief under the DTAA: the exemption technique and the tax credit approach. NRIs are only taxed in one nation and exempt in another according to the exemption procedure. Under the tax credit approach, if the income is taxable in both countries then tax relief can be claimed only in the country of residence.

Frequently Asked Questions

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