NRIs fall under the Income Tax Act, 1961. The income tax rules for NRIs vary greatly from those for residents. The status of an Indian citizen, whether a resident or NRI, is determined based on their physical presence in India during a financial year and the preceding 10 financial years. However, the residential status of an individual needs to be determined each year. Here are the new rules for NRI taxation in India.
Rules that Govern NRI Status
Under the legislation in India, there exist two primary laws that establish and outline the regulations pertaining to Non-Resident Indians (NRIs) as follows:
- Income Tax Act: This law governs the obligations related to taxation for NRIs.
- Foreign Exchange and Management Act (FEMA): This law regulates various aspects such as transactions, investments, the establishment of bank accounts, and more, concerning NRIs.
It is important to note that the definition of NRI differs under each of these acts.
New Rules to Determine NRI Status
An Indian citizen is considered a resident for a financial year if he/she fulfills any of the basic conditions mentioned below:
- You should be physically present in India for 182 days or more during the relevant financial year. Or
- Your physical presence in India during the applicable financial year is 60 days or more and 365 days or more in the preceding four financial years.
- An Indian citizen having total income, excluding income from foreign sources, exceeding Rs. 15 lakh during the relevant financial year. He should not be liable to pay tax in any other country or territory by reason of his domicile or any other criteria of similar nature.
The condition of 60 days is extended to 182 days if the individual leaves India for employment abroad. For an Indian citizen or a person of Indian Origin (PIO) who resides outside India and visits India, the condition of 60 days is extended to 120 days, if the total income of such a person in India is more than Rs. 15 lakh. However, if the total income (excluding the income from foreign sources) is equal to or less than Rs. 15 lakh, the condition of 60 days is extended to 182 days.
Note: The rule of the deemed residency and 120 days came into effect from the financial year 2020-21.
Any Indian citizen who does not meet the above conditions would qualify as a Non-Resident Indian (NRI).
New Definition of Resident but Not-Ordinarily Resident (RNOR)
Any individual who fulfills the following conditions will be considered as an RNOR for the year:
- You have stayed in India as an NRI for 9 years out of 10 previous years preceding the concerned year, or
- If you have been in India for a maximum of 729 days in the 7 years before the the year of consideration
As per the amendment in the residency provisions made by Finance Act 2020, an Indian citizen/ PIO who comes to visit India will be considered as RNOR provided:
- His/ her total income, other than foreign income, is Rs. 15 lakh or more.
- He/she has stayed in India for above 120 days and less than 182 days in the previous year. Or
- He/she has been in India for 365 days or more in four years preceding the previous year.
Before the mentioned amendment, these individuals were considered as non-residents. As per the amendment, an individual who stays in India for more than 182 days shall be classified as a resident regardless of his/ her income in the previous year.
Deemed Residency Status as per Finance Act 2020
The provision of ‘Deemed residency’ was introduced in the Finance Act 2020. As per the act, Indian citizens whose income is more than Rs. 15 lakh from sources in India shall be deemed a resident of India provided they are not liable to pay taxes in any other country.
He/she shall be classified as RNOR with effect from the FY 2020-21. Hence, Indian citizens who are not liable to pay tax elsewhere are taxed in India after this amendment.
Special Relief in view of Covid-19 Lockdown
Special relief for FY 2019-20 for individual who visited India before 22nd March 2020 and they were:
- Not able to leave India due to lockdown on or before 31st March 2020 – the period of stay ranging from 22nd to 31st March will not be considered.
- Quarantined on account of Covid-19 on or after 31st March 2020 and left the country on evacuation flight on or before 31st March 2020, or couldn’t leave India – the period of stay from running from the beginning of quarantine to 31st March will not be considered.
- Departed on or before 31st March 2020 – the time of stay ranging from 22nd March 2020 to the date of departure shall not be considered.
NRI Taxation: New Rules for NRI in India
An individual who qualifies as an NRI is taxable in India on the following incomes (income sourced in India):
- Your income earned or accrued in India.
- Any income that is deemed to accrue or arise in India.
- Any income received or deemed to be received in India.
Types of NRI Income Taxable in India
- Income earned in India refers to any income that arises or accrues in India as deemed by law.
- Income accrued in India refers to income as per Section 9 of the Indian Income Tax Act, irrespective of your residential status. If any one of the criteria mentioned in the Section 9 is met, the income is considered to be accrued in India.
- Income from salary for services provided in India
- Salary income from Government of India for Indian citizens serving outside India
- Dividend paid by an Indian company, inside or outside India
- Income from any business association in India
- Income from house property or assets in India
- Rental payments to an NRI
- Interest on an NRO account
- Income from capital gains on transfer of an Indian capital asset
- Royalty, interest, or any fee under specific situations by Central or State Government of India
Note: There are different rules for taxation of different types of income such as sale of unlisted securities, in case of NRIs.
Various Deductions Available to NRIs
Outlined below are the deductions and exemptions applicable to the Income Tax of Non-Resident Indians (NRIs):
Deductions under Section 80C:
Given below are the deductions available to NRIs under Section 80C:
a. Tuition fees for children: NRIs can avail a deduction for tuition fees paid to schools, colleges, or universities in India for the full-time education of their children.
b. ULIPs (Unit Linked Insurance Plan): Investment in ULIPs provides insurance and investment benefits in a single integrated plan. Premiums paid for oneself, spouse, and children are eligible for deduction.
c. Life insurance policy premiums: Deduction is available if the policy is purchased in the NRI’s name, spouse’s name, or child’s name, provided the premium is less than 10% of the sum assured.
d. ELSS (Equity Linked Tax Saving Scheme): By investing in ELSS, NRIs can claim a tax rebate of up to Rs 1,50,000 per year, resulting in potential tax savings of up to Rs 46,800 per year.
e. Principal repayments on home loans: Similar to Indian residents, NRIs can claim a deduction for the repayment of principal on home loans. Other expenses related to acquiring the property also qualify for deduction under this section.
Section 80D
NRIs have the opportunity to claim tax deductions on the premiums paid for health insurance policies under this specific section.
Section 80E
NRIs can avail tax deductions on the interest paid on education loans under this section.
Section 80G
NRIs can claim tax deductions on payments made in the form of eligible donations under this section.
Section 80TTA
A deduction of up to Rs. 10,000 can be claimed on the interest income earned from savings bank accounts under this section.
Are NRIs Required to File Income Tax Return in India as per New Rules?
Any individual, whether resident or NRI, whose income in India exceeds Rs. 2,50,000 is required to file an income tax return in India. However, a new tax regime was introduced in Union Budget 2023-24 for NRIs. New Rules for NRI Taxation will apply based on their current residential status and relief provided by new Acts.
Whether NRI tax rules or criteria to determine NRI status keep changing each year. Due to a complicated tax system, understanding tax rules for NRIs 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. SBNRI will also help you get a lower TDS Certificate.
You can also click on the button below to ask any questions. Visit our blog and YouTube Channel for more details.
FAQs
NRIs need to file income tax returns in India before 31st July without any penalty, unless the government extends the last date.
Yes. An NRI seller is liable for capital gains tax in India upon the sale of their property. The purchaser needs to deduct taxes on sale consideration. The tax deduction rate for a long-term capital gain is 20% plus applicable surcharge and cess. On a short-term capital asset, tax is deductible at 30% plus applicable surcharge and cess.
However, there is a provision under the law wherein you can apply for a lower TDS certificate.
As per the regulations of the Foreign Exchange Management Act (FEMA), it is prohibited for non-residents to maintain resident savings accounts in India. Therefore, it is necessary to convert your resident savings account into an NRO (Non-Resident Ordinary) account. Failure to comply with this requirement and continuing to use the resident account may result in significant penalties being imposed.
NRIs have two avenues to benefit from double taxation relief, as outlined below:
Tax Credit Method: In the Tax Credit Method, the home country allows the NRI to claim a tax credit for the tax paid in the source country where the income is earned.
Tax Exemption Method: In the Tax Exemption Method, the income is taxed in one country and exempted from taxation in another country.
No, it is not true. NRIs can easily file and validate their income tax returns online from anywhere in the world.
