Dubai: NRIs have to pay income tax on income earned in India, which means that as per regulations, NRIs have to pay tax on income that accrues or arises in India.
NRIs also need to pay tax on income which is deemed to accrue or arise in India. Money received or deemed to be received in India is taxable.
Recent studies revealed investment patterns among NRIs, wherein only 2 per cent of the respondents have never invested in India. Out of those who invested in India, 87 per cent had invested in real estate, 39 per cent in equities or mutual funds.
Almost half of the NRIs (48 per cent), who had not filed the ITR, mistakenly believed that tax (TDS or Tax Deducted at Source, which is tax deducted at source of income before paying the balance to the payee), which was deducted on investments or income generation in India was equivalent to tax paid and so they are not required to file tax returns in India.
Moreover, around 90 per cent of the study respondents who had their tax deducted but did not file taxes, could have easily got most of their claimed tax back.
Types of NRI incomes that are taxable in India
Tax on an individual's income depends on the source of such income and the residential status in India. The residential status of an Indian citizen needs to be determined individually for every financial year which may vary from year to year.
Here are the incomes that are liable to tax in India.
Salary income: Income from salary received in India or income for services rendered in India shall be subject to Indian tax laws. Hence if an NRI receives a salary towards services rendered in India, the income shall become taxable irrespective of the place of receipt. The rate of tax will be as per the slab rate applicable in the particular financial year.
In case the Government of India remits any salary or income to a citizen of India towards services rendered outside India, it will still be considered as income accrued in India and will be chargeable to tax even if the status of the individual is 'non-resident' as per residency rules.
House property income: Rental income from the house located in India is taxable for an NRI owner of the house property. The determination of the taxable house property income shall be in similar lines as the resident.
The benefit of standard deduction of 30 per cent, deduction of property tax paid, and interest on a home loan is also allowed to the NRI.
Section 80C deduction for principal repayment, stamp duty and registration charges paid on the purchase can also be claimed. House property income will also be taxable at individual slab rates applicable.
Here it is to be noted that the person making rental payment to NRI is responsible for tax (TDS) deduction at 30 per cent under Section 195. Also, the tenant is required to fill the form 15CA and submit it online to the income tax department.
Income from other sources: Other sources income like interest received in saving account and fixed deposits held in Indian banks shall be taxable in the hands of NRI.
Interest on NRE and FCNR account is not liable for tax in India. However, interest earned in the NRO account is fully taxable. NRO account is opened in the name of NRI to manage income earned in India.
NRE account is freely repatriable (can be converted to any foreign currency), while the NRO account has restricted repatriability i.e permitted remittance allowed from NRO is up to $1 million (Dh3.67 million), which is net of applicable taxes in a financial year.
An NRO account is like your regular bank savings account but has certain restrictions. In this account you can deposit your rupee earnings from India such as rent, interest, dividends etc. You can also deposit funds from abroad that are in the form of freely convertible foreign currency. The funds in NRO account are usually from income earned locally, like rent on a property in India or certain capital account transactions like sale of property purchased prior to becoming an NRI.
FCNR stands for Foreign Currency Non Resident Account (Banks) Account Opening. This is a kind of fixed deposit account opened for depositing income earned overseas. The account is held in foreign currency. Interest earned on FCNR deposits is tax exempt as long as an individual qualifies as an NRI or not ordinarily resident. Hence, interest earned on FCNR deposits will be taxable in India.
Income from business or profession: Any income earned by a Non-resident Indian from a business set up or controlled in India will be considered income accrued and therefore taxable in India.
Capital gains income: Capital assets like house property, shares and securities, gold etc. which are of Indian origin, shall be taxable in India. If an NRI transfers any capital asset situated in India, he shall be liable to pay capital gain tax; the rules are the same as a resident.
If NRI sells a house property having more than 2 years of holding period, then the buyer is responsible for deducting tax (TDS) at the rate of 20 per cent, and if the holding period is less than 2 years, then the TDS deducted will be at 30 per cent. However, NRI can claim capital gains exemption under Section 54 by investing in house property or under section 54EC by investing in capital gain bonds.
In the case of capital gains arising on the sale of listed Indian stock and securities, the taxation rules are also the same for NRIs as for resident Indians. If the holding is more than 12 months, it will be considered long term capital gains taxable at 10 per cent exceeding INR100,000 (Dh9,990) gains; for a holding period of less than 12 months, 15 per cent tax will be payable.
For debt mutual funds, the holding will be considered to be 36 months for treatment as long term capital gains and taxed at 20 per cent after indexation whereas gains with less than 36 months of holding period will be taxed as short term capital gains at individual slab rate applicable.
NRIs cannot adjust their capital gains income from the basic exemption limit of INR250,000 (Dh12,488), as can be done by the resident citizens for tax purposes.
How to file income tax return for NRI?
We will next look at steps on how to file income tax return for NRI.
1. Determine your residential status
The first step is to be sure of your residential status. This has to be determined with respect to a financial year. However, it is slightly complex if you have moved abroad recently. The same thing happens if you have just moved back to India.
The residential status is determined under section 6 of the Income Tax Act 1961. The number of days you reside in India is important. An NRI needs to stay outside India for 182 days or more. Otherwise, one is a resident.
2. Calculate your taxable income
How NRI can file income tax return? You must calculate your taxable income. We need to understand the meaning of total gross income. It refers to total income before tax deductions.
Does your total gross income exceed INR250,000 (Dh12,488)? In that case, you have to pay taxes in India. This income could be from several sources. It could be in the form of your salary. It could be capital gains on the sale of shares and mutual funds.
Interest from deposits in NRO accounts and rental income is also a part of the bracket. However, NRIs can claim benefits under tax treaties. NRIs can also claim refunds if tax is deducted on their income.
However, for both of the above, it is mandatory to file returns. The gross income is not relevant. NRIs can also claim deduction up to INR150,000 (Dh7493.17) under section 80c of the Income Tax Act.
However, they cannot invest in certain instruments such as the Public Provident Fund (PFF). If your income in India exceeds INR5 million (Dh249,772), you are required to report your assets and liabilities in India.
3. Claim double taxation treaty benefit and verify returns
To understand how to file income tax return for NRI better, let us now look at the Double Tax Avoidance Agreement (DTAA).
DTAA enables an NRI to avoid paying tax twice on the same income. As per DTAA, an income may either be exempted from tax deduction in one country or taxed at a lower rate in the home country.
Let us say you have already paid tax in India. You can then get a tax credit in the country of residence. The credit is available on the tax paid on the same income.
Once you have filed income tax returns, you need to verify them within 120 days. Otherwise, they are not valid. We have seen the steps of how to file tax return for NRI.