NRIs are taxed in India only on the income earned in India, such as salary, rent, capital gains or NRO interest. Foreign income will not be taxed. These taxes are managed via Tax Deducted at Source (TDS), and NRIs are eligible for zero tax liability on income above a certain threshold. It is important to comply with TDS provisions, filing deadlines and reporting norms to avoid unnecessary penalties.
Read the blog below to learn more about NRI Income Tax Filing in India and how to file income tax in India as an NRI.
What is NRI Income Tax in India?
Not all NRI income is taxable in India. Income taxable in India includes income earned or received in India. It includes:
- Salary earned for working in India
- Rent from properties located in India
- Capital gains from the sale of Indian shares or properties
- Interest on NRE and FCNR accounts is non-taxable. However, interest on an NRO account is taxable.
How to determine the Residential Status of an NRI?
It is important to check your residential status before knowing your tax liability. There are laws about your residential status that decide whether your global income is taxed in India.
You are considered an Indian Citizen if:
- You have stayed in India for more than 182 days in a single financial year.
- You have stayed for 60 days in the present year plus 365 days in the past 4 years.
The residential status for individuals is further classified into 2 types:
- ROR (Resident-Ordinarily Resident)
- RNOR (Resident but Not Ordinarily Resident)
What are the types of Taxable Income of NRIs in India?
The types of income taxable in India for NRIs include:
1. Income from Salary
- Your income will be taxed in India if it is earned in India.
- If the salary is received from services rendered outside of India, it is still taxable.
- Your salary will be taxed on services provided in India regardless of where you receive the income.
- For instance, if your employer is the Indian Government and you are a citizen of India while your service is rendered outside of India, your salary will be taxable in India.
Note : Diplomats and Ambassadors are exempt from taxes on their income.
2. Income from a Property
- If you are an NRI and have immovable properties in India, then the income from it will be taxed.
- Calculations by tax calculator and deductions for house property income are similar for both residents and non-residents.
- Income from the house property is taxed as per the applicable slab rates.
- The tenant must deduct TDS on all rent payments, even if the payments do not cross the limits mentioned under Section 194-IB.
- The tenant must also submit Forms 15CA and 15CB when remitting the payment to the non-resident landlord.
3. Income from Other Sources
NRIs cannot maintain a normal bank account in India to deposit their income. As per FEMA guidelines, their income must be deposited in NRE or NRO accounts. Once you become an NRI, your existing bank account must be converted to an NRO account.
- Non-Resident Ordinary (NRO) Account
- This account is used to deposit and manage income earned in India.
- It includes income earned from rents, interest, gifts, pension and sale of immovable property in India.
- Non-Resident External (NRE) Account
- This account is used to deposit foreign earnings in India.
- The deposits are made in foreign currency, which is then converted to Indian rupees at prevailing exchange rates.
4. Income from Business and Capital Gains
- NRIs who earn their income from businesses set up in India have their income taxed.
- Any capital gain on the transfer of capital assets will be taxable if it is situated in India.
- The buyer must deduct TDS at 12.5% when purchasing a property from a non-resident.
- Capital gains on investments in Indian shares are also taxable in India.
- As per Section 54, you can also claim capital gains exemption by investing in a house property or investing in a capital gains bond as per Section 54EC.
5. Special Provisions related to Investment Income
If you are an NRI investing in certain Indian assets, they are taxed at 20% on the income earned. NRIs are not required to file Income Tax Returns if the special investment income is the only income the NRI has during the financial year and TDS has been deducted.
What are the investments that qualify for special treatment?
These include:
- Security deposits with banks or public companies
- Shares in a public or private Indian company
- Any security of the Central Government
- Debentures issued by a publicly-listed Indian Company
- Other assets of the central government as specified for this purpose under the official gazette
What are the different types of Tax Deductions for NRIs?
NRIs also benefit from certain deductions and exemptions from their total income, which are listed below.
1. Deductions under Section 80C
NRIs are also included in most deductions under Section 80. For a financial year, a maximum deduction of up to Rs. 1.5 lakhs is allowed under Section 80C from gross total income for an individual.
2. Deduction from House Property Income for NRIs
NRIs are eligible for all the deductions available to a normal Indian resident. These include:
- Interest deduction on home loan under Section 24.
- Principal repayment deduction under Section 80C.
- Standard deduction of 30% on rent.
- Additional deduction under Section 80EE and Section 80EEA.
3. Deduction under Section 80D
- NRIs can also claim a deduction for health insurance premiums.
- For insurance of self, spouse and dependent children, NRIs can claim a deduction of up to Rs. 25000.
- NRIs can also claim a deduction for their parents' insurance (father, mother or both), up to Rs. 25000.
- If the insurance premium is paid for resident senior citizens, the deduction limit will be set to Rs. 50000.
4. Deduction under Section 80E
- In case of an educational loan, NRIs can claim a deduction on the paid interest.
- This includes if the NRI took the loan for themselves, their spouse, children or for a student who is under legal guardianship of the NRI.
- There is no set limit for the amount that can be claimed as a deduction under this section.
- The deduction is available for a maximum of 8 years or till the interest is paid.
- The deduction is not available on the principal repayment of the loan.
5. Deductions under Section 80G
- NRIs can claim a deduction for donations for social causes.
6. Deduction under Section 80TTA
- Under Section 80TTA, like resident Indians, NRIs can also claim deductions on income from interest on savings bank accounts for up to a maximum of Rs. 10000.
- It is allowed on deposits in a savings account with a bank, co-operative society or post office.
What are the types of deductions not allowed for NRIs?
These include:
1. Investments under Section 80C
- NRIs cannot open a new PPF account. However, if they opened an account while they were an Indian resident, those accounts can be maintained.
- They are not allowed to invest in National Savings Certificates (NSCs).
- Post Office 5-year deposit scheme.
- Senior Citizen's Saving Scheme
2. Deduction for the Differently-Abled under Section 80DD
- Deduction in this case is for the maintenance, which includes the medical treatment of a handicapped dependent person. This is not available to an NRI.
3. Deduction for the Differently-Abled under Section 80DDB
- Deduction in this case is for the medical treatment of a dependent disabled person. This is only available to resident Indians.
4. Deduction for the Differently-Abled under Section 80U
- Deduction in this case is when the taxpayer themself has a disability. This is only available to resident Indians.
What are the documents required by NRIs to file taxes?
The documents that are required to file income taxes are listed below.
- Identity and Residency Documents
- Your valid passport
- Your PAN Card or Tax Identification Number
- Income Documents
- Form 16- As mentioned under Section 203. The employer issues this and reflects the salary which is being paid.
- Form 16A- As mentioned under Section 203. It is issued quarterly by the deductor for TDS on non-salary income.
- Form 26AS- Tax credit statement available on the e-Filing portal. It reflects all TDS/TCS deducted against your PAN.
- Annual Information Statement- which is available on the e-Filing portal. This includes TDS/TCS, SFT information, tax payments, demand/refund details and information received from foreign governments.
- Bank Account Documents
- NRO account statement
- NRE account statement
- FCNR (B) statement
- Capital Gain Documents
- Sale deed or purchase deed
- Cost of acquisition records
- Capital gains statement
How to file Income Tax in India as an NRI?
Follow the steps below for ITR filing in India.
- Confirm your residential status.
- Make sure you identify the correct ITR form.
- Select the appropriate tax regime.
- Collect all the necessary documents.
- Log in to the Income Tax e-Filing portal and compute your taxable income.
- Claim the applicable deductions. Make sure you apply special NRI Capital Gains Provisions.
- Apply DTAA benefits. (if applicable)
- Submit and verify the ITR.
How can NRIs avoid Double Taxation?
The best way to avoid double taxation is to find a Double Taxation Avoidance Agreement (DTAA) between the two countries.
There are 2 ways to claim tax benefits under DTAA:
- Exemption Method:
NRIs are only taxed in one country and are exempted from the other.
- Tax Credit Method:
The income is taxed in both countries, but tax relief can be claimed in the country of residence.
Conclusion
Understanding income tax filing for NRIs is important for staying compliant and making informed financial decisions. By knowing your residential status, taxable income sources and available tax benefits, you can easily manage your tax obligations in India. Regular tax planning and timely filing can help NRIs avoid penalties, claim eligible deductions and optimise the overall tax liability. Staying updated on the latest NRI tax rules ensures a smooth and easy tax filing.
