Taxation of non-resident Indians (NRIs) involves understanding specific rules and regulations defined by the Indian Income Tax Act. Here’s a comprehensive guide:
1. Definition of NRI
An individual is considered an NRI if:
- They are an Indian citizen who resides outside India for employment, business, or any other purpose indicating an indefinite period of stay abroad.
- They have stayed in India for less than 182 days during the financial year.
2. Income Tax Rules for NRIs
NRIs are liable to pay tax only on the income earned or accrued in India. Income earned outside India is not taxable in India for NRIs. The following types of income are subject to tax in India:
A. Income from Salary
- If the services are provided in India, the salary income is taxable in India.
- If the salary is credited to an Indian account for services provided outside India, it is not taxable.
B. Income from House Property
- Rental income from a property situated in India is taxable.
- Standard deductions and property taxes can be claimed as deductions.
C. Income from Other Sources
- Interest earned on savings accounts and fixed deposits held in Indian banks is taxable.
- Interest earned on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is exempt from tax.
D. Income from Capital Gains
- Gains from the transfer of capital assets situated in India are taxable.
E. Income from Business and Profession
- Income from a business controlled or set up in India is taxable.
3. Tax Rates Applicable to NRIs
- Income up to INR 2.5 lakh: Nil
- Income from INR 2,50,001 to INR 5 lakh: 5%
- Income from INR 5,00,001 to INR 10 lakh: 20%
- Income above INR 10 lakh: 30%
Additionally, applicable surcharges and cess need to be considered.
4. Deductions and Exemptions
NRIs are eligible for various deductions under the Income Tax Act, such as:
- Section 80C: Investments in specified instruments like Life Insurance Premium, ELSS, etc., up to INR 1.5 lakh.
- Section 80D: Premiums paid for health insurance.
- Section 80E: Interest on education loans.
- Section 80G: Donations to specified funds and charitable institutions.
5. Double Taxation Avoidance Agreement (DTAA)
India has DTAA with several countries to avoid double taxation. NRIs can benefit from reduced tax rates on income such as interest, royalties, etc., in India. They need to provide a Tax Residency Certificate (TRC) from the country of their residence.
6. Filing Income Tax Returns
NRIs must file income tax returns in India if:
- Their total income exceeds INR 2.5 lakh.
- They have to claim a refund or carry forward a loss.
7. Tax Planning for NRIs
Effective tax planning can help NRIs reduce their tax liability. Some common strategies include:
- Investing in tax-saving instruments.
- Using benefits under DTAA.
- Properly timing the repatriation of income.
Understanding these rules is crucial for NRIs to comply with Indian tax laws and optimize their tax liabilities.