Income Tax Rules and Process to File Tax Return for NRIs

Do you know Non-residential Indians, i.e. NRIs, have to pay income tax in India?

Not only residential Indians but NRIs also come under the taxation system. In this piece, we have discussed income tax for NRI, available deductions and exemptions. Stay tuned!

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As stated in the introductory paragraph, the taxation system applies to both residential individuals and Non-residential Indians, i.e. NRIs in India.

Here, residential individuals have to pay taxes on global income, meaning that it is taxable whether they have earned in India or outside of the country.

On the other hand for Non Residents, income earned or accrued in India is considered to be taxable India. To be precise, for NRIs, income from other countries is not taxable in India.

From the above discussion, readers can get a brief idea about the grounds of applicable income tax for NRI. Now, let’s take a deep dive into the various aspects of the NRI taxation system in India.

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According to the Foreign Exchange Management Act (FEMA), a civilian is considered NRI if he/she has spent a specific number of days abroad and subsequently was absent in India.

In India, primarily two acts govern NRIs. These are,

• The Foreign Exchange Management Act, 1999 (FEMA)
• The Income Tax Act, 1961.

Coming back to the NRI taxation system in India, though income earned outside India/globally is not taxable in India, there are certain cases where the income in India is taxable. These include earning via source term deposit, property rent going beyond the fundamental limit (as stated in the Income Tax Act, 1961), mutual fund, capital gains from investment inequities. In all these cases, filing for an income tax return for NRI is mandatory.

As per this tax imposition, TDS is applicable at the highest rate on the interest generated on the capital gains from term deposits, shares and mutual funds. Usually, these incidents eliminate the need for filing a tax return.

In other cases, it may happen that the overall TDS does not add the Non-residential Indian’s basic tax liability. Here, NRIs are left with no choice but to file a tax return in order to file a claim for tax refunds.

Now the basic definition of NRI and the taxation system is clear to individuals, let’s focus on the exemption, deductions, taxable income and benefits. So, let’s start!

Tax exemptions for NRIs is available on the following types of income -

• Interest earned on Government-issued saving certificates and bonds.
• Capital gains (exempted as per Sections 54, 54F, and 54EC).
• Specified Long-term capital gains from listed equity shares and equity mutual funds. 

• Interest generated from NRE or FCNR accounts.

Deduction of Income Tax for NRI is mentioned under several IT acts. These are as follows:

1. Section 80C

As per Section 80C, NRIs can claim an income tax deduction in the following instances:

• ULIPs
• LESS
• Principal repayments on home loan
• Payment of premium for a life insurance policy
• Payment of tuition fees for children

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2. Section 80E

A deduction is available under Section 80E in case an NRI pays interest on an education loan

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3. Section 80TTA

Under Section 80TTA, NRIs can claim a deduction of ₹10,000 on interest earned on a savings bank account.

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4. Section 80D

An income tax deduction is available under Section 80D. Here, Non-Residential Indians can claim a deduction on the premium paid for a health insurance policy.

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5. Section 80G

As per Section 80G, NRIs can claim deductions on donations related to approved charitable or religious activities.

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Below are discussed incomes that are taxable for Non-Residential Indians.

1. Income from House Property

For NRIs, any income from property located in India is taxable as per the IT Acts. Here, the tax calculation process follows similar rules as that of Indian residents. To be precise, Non-Residential Indians can enjoy the following advantages,

• Deduction on property tax
• Interest deduction in case of home loan
• Deduction on the principal amount of home loan is available under Section 80C of the IT Acts. Along with this, a deduction is available on stamp duty and registration charges on the purchase of a property.

• NRIs can calm a standard deduction of 30%.

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2. Income from Salary

Salary of NRIs is taxable under two conditions. These are,

• Condition 1: Here, if an NRI receives a salary in India directly into an Indian bank account, it will be taxable as per the income tax rules for NRI. The condition applies in another situation when someone else receives the income on behalf of that NRI.   
• Condition 2: As per this condition, if an NRI earns a salary for services rendered in India, it will be considered as taxable income in India.

Both the cases follow the applicable income tax slab for NRI.

3. Income from Other Sources

Income (interest on fixed deposit and savings account) which are sourced in India is taxable.

4. Income from Capital Gains

Any income generated by transferring capital assets located in India will be taxable.

Filing Income Tax ensures numerous benefits for NRI. These are,

• The Income Tax Act allows exemption from wealth tax for NRIs on bank deposits within the country.
• Gifts given through NRE and FCNR accounts are free from gift tax in India.

After learning about deductions and exemptions of income tax for NRI, concerned individuals can follow the step-by-step guide discussed in the next section.

Firstly NRIs must determine the right of residence every year which is based on the number of days they have stayed in India.  Then compare TDS paid on tax return as reflected on Form 26AS and evaluate the taxable income and tax liability. 

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In case the earnings of the NRI are taxed both abroad and in India, they can undergo exemptions under DTAA (Double Taxation Treaty). Proceed with the process by filing the right ITR forms for NRI.

Then NRIs who are filing ITR must mention their bank account details. Those who have an account in India do not have to mention details of offshore bank accounts. For those who do not have an account in India, they can provide their offshore bank account details. It is equally important to provide information related to assets and liabilities etc., in the ITR. 

Once the ITR is uploaded, verification regarding the same must be done within 30 Days.

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Offline Process

• Step 1 - Collect the ITR form and fill it with the required information.
• Step 2 - Submit the form along with the Acknowledgement form to the Income Tax Officer. The income tax return and filing must be verified and attested by an authorized person outside India.

The above-mentioned sections thoroughly talk about various aspects of income tax for NRI. Read the details carefully and apply for an income tax return if it is a taxable income.