200311 tax nri
NRIs: How to save money on taxes when you deposit money in Indian bank accounts or investments? Image Credit: Reuters

Dubai: As a Non-Resident Indian (NRI), if you live and earn abroad, your foreign income will be taxed unless the country you are residing in doesn’t levy income tax.

However, if you still have investments, assets, or business transactions in India that earn you money, you will have to pay tax on the Indian income in India.

There are many different ways for you as a NRI to save on taxes. Let’s understand how you can optimise your taxes as a NRI while you are living and earning abroad, particularly when it comes to bank accounts and investments in India.

NRI investments 2021 AHR Wealth Management
But how is the income of an NRI taxed in India?

But how is the income of an NRI taxed in India?

Any income that is earned by an NRI is taxable by the Indian government. This can be income earned either from running a business enterprise in India, to your fixed deposits or savings accounts that are held at Indian banks.

For a residential property sold by an NRI, then the buyer of the property will deduct tax (TDS) at about 20 per cent. Some exemption from a capital gains tax payment may be achieved by re investing in another property or by investing in some capital gains bonds

Understanding Tax deduction at source (TDS)
TDS is the technical name of the tax that is applicable to all NRIs. Resident investors who have bought stocks and mutual funds are not subjected to tax, but NRIs are.

Short-term capital gains from stocks are subject to 15 per cent tax, while those from debt funds and debentures, gold and property are slapped a higher rate at 30 per cent.

Even long-term gains from property and gold are subject to 20 per cent tax. The tax on the interest on bank deposits is only 10 per cent for resident Indians, but NRIs have to cough up 30 per cent.

If an NRI earns rent from property in India, the tenant has to deduct 30 per cent tax from the payment. The tax can be particularly painful for older individuals whose income doesn't fall in the tax bracket. Even a person earning less than Rs250,000 (Dh12,344) a year will be subjected to 20-30 per cent tax.
Indian rupee
How can huge tax payments be easily avoided by opening specific bank accounts?

How can huge tax payments be easily avoided by opening specific bank accounts?

NRIs can avoid paying a higher tax by opening bank accounts like Non Resident Ordinary Rupee Account (NRO), Foreign Currency Non Resident Account (FCNR) and a Non Resident External Account (NRE). But how do they each differ and how much tax is levied with each? Let’s find out!

Explained: Difference between NRE, NRO, FCNR accounts
An NRO account is a Non-Resident (Ordinary) rupee account. Income earned in India can be deposited into a NRO account, for example, rental income, property sale value or interest income from India. Further, funds can be deposited into an NRO account through foreign remittance.

A NRE is a Non-Resident (External) rupee account permits for remittance of money from outside India to India. The funds in an NRE account can be remitted within India or repatriated to outside India.

NRIs also have an option to open a Foreign Currency Non-Resident (FCNR) Account. FCNR account is in the nature of a fixed deposit held in a foreign currency. The account could be held in a choice of nine different foreign currencies: USD, GBP, EUR, JPY, CAD, AUD, SGD, HKD and CHF.

These are bank accounts that are regarded as completely tax free in India, meaning NRI’s who hold such accounts in India don’t pay tax on their savings held in these accounts.

The interest your money earns when it is deposited in a FCNR and NRE accounts are entirely exempted from tax. However, interest that is earned from running an NRO account can be fully taxed.

The interest that is earned by NRO account holders is however taxable with the tax the NRI is subjected to being around 30 per cent.

While the interest that resident Indians earn from their bank deposits is an amount that gets subjected to tax, that is only above the Rs10,000 (Dh493) limit, with NRIs no such limit can be applied.

Indian rupee
How can NRIs avoid losing higher amounts to tax when investing in Indian investment products?
Higher tax payments can be prevented when NRI's invest in Indian mutual funds
It is possible for NRI's to save on tax payments by investing in Indian mutual funds. Dubai-based tax consultants often recommend to their NRI clients to invest in leading Indian mutual funds so as to able to save on a significant tax payment at the end of the financial year.

In order to be able to start investing in mutual funds in India, NRI's need to open one of three accounts, namely, NRO, FCNR and NRE accounts.

By investing in mutual funds, especially if the amount is a large sum of money, NRI’s may be entirely exempted from tax or may have to pay it at a rate which is much reduced. As a result, the savings they make from income earned in India will be far more than usual.

How else can NRIs avoid losing higher amounts to tax when investing in Indian products?

One way, matter experts reveal, NRIs can avoid the high tax is by being the second holder in joint investments. For all investments, the tax liability is always that of the first holders. If the first holder is a resident Indian, the gain will not be subjected to any tax.

Similarly, if the NRI is the second holder in a property, the tax will not apply unless the rent is above Rs50,000 (Dh2,468) a month. Another way is by investing in the name of adult children or spouse, if they have resident status.

It is also a good idea, tax consultants further note, to gift fixed deposits to children or parents before going on an overseas assignment. NRIs are not allowed to hold resident fixed deposits. If one already holds a fixed deposit jointly with a resident family member, the bank may allow the deposit to be held till maturity, but not renew it further.

How NRIs can claim tax benefits

If an NRI still wishes to hold a deposit jointly, then he can open an NRO (non-resident ordinary) savings account, with the resident family member as a second holder.

Mutual funds can be bought with the resident Indian as primary holder and the NRI as the joint holder. However, equities cannot be held jointly because NRIs who want to trade in the Indian stock markets have to register with a bank offering portfolio investment schemes.

Keep in mind that both investors and property owners would ultimately have to bear the tax liability on the income.

How NRIs can claim tax benefits
The interest earned on NRE account is tax-free and continues to be exempt for two years after the individual returns to India.

It's best to retain deposits held in foreign currency in the NRE account to earn tax-free interest for two more years.

After two years, when the tax status changes, these deposits can be moved to the regular savings account.