Hello NRIs! Let’s come straight to the point. Are you liable to pay taxes in India? How exactly is the term NRI Income Tax accessed? How do you know whether you have to pay taxes in India or not? Too many questions. Too many doubts? Well, worry not, we will shoot all of them down, one by one.
NRI Income Tax
Before we dive into something as deep as Income Tax, we need to swim around the shore and get to know about the fundamentals a little bit. Income Tax in India has certain rules and regulations that define who are liable to pay them and who are exempted. So before knowing about the process of paying these taxes, let us first figure out whether you are even liable to pay these taxes or not. One thing you should know is that only the income generated in India is liable for Income Tax.
Having established that, this income in India can be generated by both Residents as well as Non-Residents. So a better understanding of these terms is essential.
Now, who is a resident of India? Who decides that? Well, it is decided by the Income Tax Act 1961.
According to Income Tax regulations, a citizen will be a resident of India in the previous year, if:
- He/she is in India for at least 182 days in that year, OR
- If the individual was not in India for at least 182 days in the previous year but he/she was in India for at least 365 days during the last 4 years to that year and at least 60 days during that year
The individuals not satisfying the two cases mentioned above will be treated as Non-Resident Indians (NRIs) according to the Income Tax Regulations.
The conditions can be a bit difficult to understand so let us try to understand them using examples:
Case 1: Consider you were in India for 207 days in 2019, then you are a resident of India for 2019.
Case 2: Say, you were in India for 70 days in 2019, then you fail the first criteria! But you were in India during the entire time span of 2014-2018. Then you are a resident of India in spite of not being in the country for at least 182 days in 2019.
Now, we know how can the residential status be defined under the Income Tax Act, which brings us to the next segment where we discuss where can NRI park their funds in India and what are the types of Bank Accounts they can opt for!
There are 3 types of Banking Accounts that NRIs can choose from to park their funds in India, here is an overview of these accounts to help you understand about them.
NRI Income Tax: TYPES OF NRI ACCOUNTS
| Factors to consider | Non Resident External (NRE) Account | Non Resident Ordinary (NRO) Account | Foreign Currency Non Resident (FCNR) Account |
|---|---|---|---|
| Purpose | For income earned outside India | For income earned from India (pension, rent etc.) | Foreign Currency Investment in India |
| Currency | INR | INR | USD, GBP, EUR, JPY, CAD, AUD, SGD, HKD and CHF |
| Tenure of Deposits | 1 year to 10 years | 7 days to 10 years | 1 year to 5 years |
| Interest | Up to 7.81%* | Up to 7.30%* | Up to 3.05%* |
| Repatriation(transfer of money from Indian bank account to foreign bank account) | Both Principal (money invested initially) and Interest completely repatriable | Up to a maximum of 1 million USD per financial year | Both Principal and Interest completely repatriable |
| Tax Deductions | No tax | Tax on Interest earned (not on principal amount): 30% tax + surcharge + education cess will be deducted at the source of interest earned in India | No tax |
Based on the overview, it can be understood that NRIs are liable to pay taxes on the income generated in India and for all forms of income generated in India, there is only one account where you can deposit such funds, which is the Non-Resident Ordinary (NRO) Account. The forms of income that are liable for tax deductions in India for NRIs are:
- Income from property owned in form of rent
- Monthly Income such as pension or salary
- Income from any owned business or profession
- Income from interest on NRO Savings or Fixed Deposit Account
- Income from selling property
- Income from Investments done through NRO Account such as Mutual Funds, Stocks etc.
Now, from whatever we have discussed so far, we can conclude that taxes are to be paid for any source of income that is generated in India and since NRO Account is used to maintain the income generated in India, the money in the account is liable for taxes. The funds are taxed on the interest earned at source on this format: 30% tax along with surcharge and education cess but you can opt for a tax refund as per your income tax slab. For example if you fall in the 15% slab you can opt for a 15% refund while filing your returns.
Here are the income tax slabs in India for your reference:
| Income Tax Slab | Tax Rate |
|---|---|
| Up to 2.5 Lakhs | Nil |
| 2.5 Lakhs to 5 Lakhs | 5% |
| 5 Lakhs to 7.5 Lakhs | 10% |
| 7.5 Lakhs to 10 Lakhs | 15% |
| 10 Lakhs to 12.5 Lakhs | 20% |
| 12.5 Lakhs to 15 Lakhs | 25% |
| 15 Lakhs and above | 30% |
Now, let’s eliminate another type of NRI Account which is the Foreign Currency Non Resident (FCNR). The FCNR Account is only used for foreign currency investments as a deposit only account and both the principal as well as the accumulated interest is not taxable and can be repatriated abroad freely.
This leaves us with the Non Resident External (NRE) Account. Now, according to the overview, the principal amount deposited in this account and the interest earned on deposits is completely and freely repatriable but what about the investments made through the NRE Account?
Here’s the catch: The investments made through the NRE as well as NRO Account are liable for TDS (Tax deducted at source). The investments in the Indian Market can be done on both repartiable (NRE) and non-repatriable (NRO) basis.
The returns on investments on NRE will be received after the taxes have been deducted. There are multiple investment vehicles in India and we have already discussed the top 5 investment opportunities for NRIs in India. Also, the taxation on such investments have been covered by us on our blog.
Now, there is another doubt that rattles NRIs quite often, which is..
Do NRIs need to pay double taxes?
No. NRIs need not pay double taxes. There is a provision called DTAA (Double Taxation Avoidance Treaty). If the DTAA is signed between India and the country of residence of the NRI, the NRI will not be paying double taxes on the same source of income. NRIs will however need to pay differential taxes. (For example: If for a certain investment, taxes are deducted at 15% in India as TDS and the same income is taxed at 20% in the USA, then NRIs in the USA need to pay the remaining 5% tax to the US.)
India has signed DTAA with more than 85+ countries all around the globe including USA, UK, Saudi Arabia and UAE. You can check the list of the countries and find additional information regarding DTAA on our blog.
So, in this article we tried to understand under what act NRIs are liable to pay taxes in India and what are the criteria they must fulfill in order to be eligible for the same. Then we tried to understand the various bank accounts that can be chosen by NRIs for parking their funds in India and how exactly the funds in these accounts are taxable. Now you can paint a clearer picture of the roots of taxation in India for NRIs.
For any further doubts and queries, you can get taxation advisory from experts at SBNRI. Contact us using the button below.
