Usually Non-Resident Indians (NRIs) have to pay tax twice. Non-Resident Indians who live and earn abroad have to pay tax in their host country. And if they earn income from investments, assets or business transactions in India, they will have to pay tax on this income in India as well. However, tax payment has some benefits. Do you make the most of any tax deductions and provisions available to you? In this article, we will discuss the 5 ways to save on the tax NRIs have to pay.
There are several ways to save on taxes paid in India. Out of which 5 ways to save on the tax NRIs have to pay while living and earning abroad include making the most of your deductions, PAN card application, home loan deductions, maintaining NRI status and maximizing the provisions on the sale of foreign assets. Before we look at tax saving tips, let’s understand the incomes in India which are taxable in the hands of NRIs.
Taxable income of NRIs in India
Non-Resident Indians have to pay tax on any income earned in India, such as NRI investments, assets, business transactions in India, etc. As an NRI you will have to pay tax on the following earnings in India:
- All income earned or generated in India
- Any salary received in India or payable for services offered in India
- Income that is directly or indirectly received in India
- Income from a house property located in India, such as rented property
- All capital gains in India such as on mutual funds, equities and bonds
- Income from FDs or savings accounts in India
- Interest earned on Non-Resident Ordinary (NRO) accounts
- Any income from a business controlled by an NRI in India
- Any gift received in India from a relative, exceeding Rs. 50,000
Note: India has signed the Double Taxation Avoidance Agreement (DTAA) with several countries. Hence, Income earned in these countries will not be taxable in India under DTAA. Also interest earned by NRIs on Non-Resident External (NRE) accounts and Foreign Currency Non-Repatraible (FCNR) accounts is not taxable in India.
5 Ways to save on the tax NRIs have to pay
Here are the 5 ways to save on the tax NRIs have to pay:
1. Claim most of your deductions
As an NRI, you can’t claim many of the basic deductions available to resident Indians. For example, NRIs can’t get tax deductions by investing in social schemes like PPF (Public Provident Funds) or the NSC (National Savings Certificates). Likewise, Non-Resident Indians are not entitled to claim tax deductions available for medical benefits or medical expenses. However, NRIs can invest in the National Pension System (NPS) in India and apply for tax deductions associated with it.
NRIs are eligible for tax deductions on contributions made towards NPS under Section 80CCD (1) of the Income Tax Act. A deduction of up to Rs. 1.5 lakh can be claimed. You can claim an additional deduction of Rs. 50,000 on top of the Rs. 1.5 lakh deduction limit. To qualify for this additional deduction, you must have exhausted the limit of Rs. 1.5 lakh by contributing to other investments eligible for deductions. Additional investments in the National Pension System can be utilized to apply for an additional deduction of Rs. 50,000.
2. Get a PAN card in India
A PAN or Permanent Account Number is used to identify taxpayers in India. Income tax agencies use a PAN to prevent tax fraud. Resident Indians as well as NRIs need a Permanent Account Number to claim income tax refunds.
Income earned above a certain threshold shall be taxed at source in India. In case you fail to provide your PAN number when you invest in India, you may have to pay higher tax at the source amount. Procuring a Permanent Account number will help you avoid higher or additional tax at the source.
3. Take advantage of provisions
NRIs can optimise their tax by taking advantage of the tax provisions associated with long-term assets purchased in a foreign currency. On selling or transferring foreign assets, you will make profits or losses. While you can’t deduct for capital gains received against the sale or transfer of foreign assets, you are entitled to some exemptions under Section 115F of the Income Tax Act.
You can convert the profit made from the sale of foreign assets into shares of an Indian company, deposit it into an Indian bank, or contribute to the NSC (National Savings Certificate) plan. If you reinvent your profit in this way, there are tax provisions that provide tax exemptions.
4. Claim home loan interest
NRIs can get tax deductions associated with their Indian property. They can claim deductions on property taxes as well as on interest and principal of their home loan in India. NRIs can also claim deductions on the rental income in India. Therefore investing in properties in India is a profitable proposition for NRIs.
NRIs will have to pay capital gains tax on the profit earned from the sale of their Indian property. It is advisable to limit the amount of capital gains you make in a year to stay in a lower tax bracket.
5. Maintain your NRI status
Tax liability is determined by the income and residential status of an individual. If your residential status changes, your tax liability will also change in India. Foreign income of NRIs is not taxable in India. However, if their residential status is not clear, their foreign income can be taxed in India. Hence, in order to avoid being trapped in the web of tax affairs, make your NRI status is straightforward.
For this, you have to plan your Indian visits in a way that your NRI status remains clear or you don’t lose your NRI status as per Income Tax Act.
When planning your taxes, keep these five tips in mind so that you can reduce the tax you have to pay.
Due to a complicated tax system, understanding tax laws can be confusing and NRIs may miss claiming deductions and other benefits. At SBNRI, we understand this struggle. You can download SBNRI App to connect with our NRI Tax Experts and get end-to-end assistance related to NRI tax filing.