Taxation has always been a confusing subject. Let’s understand the fundamentals of NRI Income Tax in this article step by step. We will guide you through the taxes you have to pay and not pay being an NRI.
In this article, we will cover:
- Definition of NRI as per Income Tax Act, 1961
- Amendment in the Definition of NRI as per Income Tax
- NRI Income Tax
- Income Tax for Indian Residents working abroad
- NRI Income Tax Slab Rates
- Sources of taxable Income for an NRI
- Tax for NRI: Taxation on Asset Classes (Capital Gains), Real Estate and NRO Account
- NRI Tax Filing
- ITR Form for NRI
- Income Tax Update 2020: New Disclosures asked in ITR Forms 1-7
- Income Tax form for NRI
- Summary of Tax for NRI: An overview
Before we move ahead, the very initial step should be understanding who is an NRI as per Income Tax.
Income tax doesn’t provide any direct definition for Non Resident Indians (NRIs) but it lays down certain criterias to certify citizens as residents of India:
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
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.
The individuals not satisfying the two cases mentioned above will be treated as Non-Resident Indians (NRIs) according to the Income Tax Regulations.
There has been an amendment in the definition of NRI as per IT Act which is already in effect from 1st of April 2020, let’s understand that as well:
The Income Tax Act amendment of 2020 is for NRIs whose taxable income in India exceeds Rs. 15 Lakhs, The amended criteria are as follows:
- If the individual is in India for at least 120 days (compared to the previous 182 days threshold) in the previous year, then
- We calculate whether he/she was in India for at least 365 days during the last 4 years to that year
If the criteria is satisfied, they become Residents.
After establishing the definition of an NRI as per Income Tax, we can now move forward and discuss NRI Income Tax.
Taxes are directly proportional to the resident status of an individual. Therefore, the first thing on the checklist must be knowing your residential status for the taxable year. Only then can you go ahead with the taxation. NRI Income Tax is deducted on the basis of your income. Let’s understand this:
- If you are an Indian Resident, then your global income is taxable in India
- If you are a Non-Resident Indian (NRI), then only the income generated in India is taxable
Now, mentioned above are the basic fundamentals of income tax for NRI. There can be further conditions that we must consider:
Indian residents working abroad have to pay income tax on their global income. But, there’s one catch here called the DTAA (Double Tax Avoidance Agreement) which is a treaty between countries to avoid paying double taxes. If you have already paid the taxes in India then you don’t need to pay taxes in your country of residence. There can be a difference in tax slabs though. Under such conditions, you pay the residual taxes in your country of residence. For example: If you had to pay 20% tax in the USA and the same income has been taxed at 15% in India in form of TDS defined under DTAA with USA, then you have to pay the remaining 5% tax in USA. Also, people generating income from countries in the Gulf region where no income taxes are applicable, don’t have to pay any taxes in India.
There are various documents required to avail the benefits under DTAA, which are:
- Self-declaration cum indemnity format
- Self-attested PAN card copy
- Self-attested visa and passport copy
- PIO proof copy (if applicable)
- Tax Residency Certificate (TRC)
Note: According to the Finance Act 2013, an individual will not be entitled to claim any benefit of relief under Double Taxation Avoidance Agreement unless he or she provides a Tax Residency Certificate to the deductor. To receive a Tax Residency Certificate, an application has to be made in Form 10FA (Application for Certificate of residence for the purposes of an agreement under section 90 and 90A of the Income-tax Act, 1961) to the income tax authorities. Once the application is successfully processed, the certificate will be issued in Form 10FB.
Now, we have established the basic criteria for income tax for NRI and Indian Residents. What comes next is understanding the different tax rate slabs. The taxation slabs in India are the same for everyone irrespective of their residential status. Any income that is taxed in India, is taxed on the same slabs. Let’s explore.
Income Tax Slab Rates for NRI are diversifications based on income amount of the individual. NRI Tax Slab simply dictates what percentage of the total income of the NRI must be offered as tax. Below is the table for the NRI Income Tax Slab Rates:
|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%|
Knowing the tax rate slabs and residential status isn’t enough for carrying on with NRI Taxation. These are the fundamentals, the basics. Taxation starts from here. To understand about the Taxation for NRI in India we need to explore the various sources of income that an NRI can have in India and then discuss their taxation separately as NRIs have to pay different taxes on different modes of income. Let’s first understand what can be sources of taxable income for an NRI:
- Salary in India: You can have a salary in India before you become an NRI. Such situations can occur when your status changes in the middle of a financial year. You pay taxes on the salary as per your tax slab
- Interest accrued in Resident Bank Accounts: Again, residential status can happen anytime. You might have earned some interest on your resident accounts before becoming an NRI. The interest is added in your total income and taxed as per your tax slab. You can opt for a deduction up to Rs.10,000/- under Section 80TTA on the interest earned on resident saving accounts
- Interest from NRE, NRO & FCNR Accounts: Interest earned on NRE and FCNR Accounts are tax-free while the interest earned on NRO Accounts are taxable.
- Income from Property: Having a property in India can invite multiple sources of taxable income in forms of rent and capital gains. Taxes are even applicable while buying a property in the form of TDS (Tax Deducted at Source). We will discuss these taxes in detail in the upcoming segments.
- Capital Gains in other assets: Investments can be done by an NRI in asset classes such as Mutual Funds, Stocks, PMS (Portfolio Management Services) etc. We will also discuss the taxation for asset classes in the next section.
- Gifts: Gifts from relatives are not taxable in India. However, gifts from non-relatives up to a value of Rs.50,000/- are exempt from tax. Beyond that, the amount is added to the total income of the NRI and is taxed as per their individual tax slab.
Note: If you are an NRI, calculate your income in India and if your income is above the tax-exemption limit (Rs.2,50,000/-), file your tax returns within the prescribed due date.
Sources of taxable income for NRIs are many, but what matters more is understanding how the underlying assets are taxed. There are different tax rates for different asset classes. We will discuss the major asset classes chosen by NRIs for investments in India and their respective taxation:
- Tax on Investments in Asset Classes: Income from capital gains from asset classes such as stocks and mutual funds are taxed for an NRI. The taxation differs with respect to the funds chosen for investment. Investments can be carried out from the NRE/NRO accounts of an NRI on repatriable/non-repatriable basis respectively.
*(Equity Funds: An equity fund is a mutual fund that invests principally in stocks)
*(Debt Funds: A debt fund is a mutual fund that invests in fixed-interest generating securities such as corporate bonds, government securities)
|Nature of Profits / Income||Equity Funds*||Debt Funds*|
|Minimum Holding period* for Long term capital gains||1 year||3 years|
|Short term capital gains taxation||15% + 4% cess* = 15.60%||As per the tax rate of the investor (30% + 4% cess = 31.20% for investors in the highest tax slab)|
|Long term capital gains taxation||10% + 4% cess = 10.40% (if the long term gain exceeds Rs 1 Lakh)(long term gains up to Rs 1 Lakh is tax-free)||20% with indexation*|
*(Cess: A cess is a tax on tax that you pay to the government for purposes set by the government. The cess is charged till the objective set by the government is fulfilled. Eg: Krishi Kalyan Cess, Swachh Bharat Cess etc.)
*(Indexation: Indexation refers to the technique of adjusting income payments using a price index to maintain the purchasing power of the public after inflation)
*(Minimum Holding Period: It is a stipulated period defined to differentiate the gains as long term and short term. Assets held for less than minimum holding period will be taxed on short term and assets held for more than the minimum holding period will be taxed on a long term basis)
- Real Estate: Taxation on Real Estate is a bit complex. Taxation on Real Estate can be further subdivided into rent and capital gains. Along with that, TDS on buying a property is also a very essential instrument we must deduct and pay to the government authorities. We will cover all of them one by one.
- TDS while buying property: Deduct TDS as per the table below while buying property in India keeping in mind the associated conditions.
|Property Bought From||Condition||Tax deducted at source|
|Resident||50 Lakhs or above||1% TDS of Purchase Value|
|NRI||No Condition||20% plus surcharge and cess for long term gains and 30% plus surcharge and cess for short-term gains|
- Income from Rent: Rent from property owned by an NRI is subject to a TDS of 30% to be deducted by the tenant. The rent received after the deduction of TDS is added to the total income of the NRI and is applicable for tax according to the Tax Slab of the NRI. NRIs can also choose to pay taxes themselves and file the returns. However, there are certain deductions that must be considered: Municipal Taxes paid, standard deduction of 30% on taxable value, deduction for interest on any loan taken for the property, repayment of principal amount of home loan up to Rs.1,50,000/-.
- Capital Gains Tax for NRI on sale of Property: The minimum holding period for long term capital gains for real estate is 2 years.
|Nature of gains||Tax Liable||Tax Deducted at Source (TDS)|
|Short Term Capital Gains||As per tax slab||30%|
|Long Term Capital Gains||20%||20% (plus surcharge and cess) with indexation|
- Taxation on Multiple Properties: If NRI owns more than one residential property which are self-occupied, then only one of the houses will be treated as self-occupied and all others will be treated as deemed to be let out. In such cases, a notional rent is computed and offered to tax as if the property was rented out
- NRO Account Tax: The NRO Account Tax Slab is 30%. Taxes are deducted on the interest earned on the deposits at 30% along with surcharge and cess. The basis of deduction is simple. Since, the income generated in India is maintained in an NRO Account for an NRI, the interest earned on it is taxable in India.
So, till now, we understood who is liable to pay taxes in India. Then we explored the different sources of income and their individual taxation. Now, we need to address the aspect of HOW! How can NRIs file taxes in India? In the next segment, let’s find out.
Income tax filing for NRI is a mandatory step. Filing taxes is mandatory for everyone. NRI Tax Filing can be complex to people but SBNRI is here to make it simple for you. In this segment, we will guide you through the basics of NRI Tax Filing.
There are 7 ITR Forms in India from ITR-1 to ITR-7 and every financial year the government rolls out the forms. Let’s understand these forms briefly to get an idea where NRIs fall.
|ITR-1||Income >50 Lakhs from: Salary/Pension, One House Property (no joint ownership), Other Sources|
|ITR-2||Income from: Every income in ITR-1 >50 Lakhs, Capital Gains, More than 1 house property, Foreign Income/Asset, Holding Dictatorship in a company, unlisted equity shares|
|ITR-3||Income From: Every Income of ITR-2, Business/Profession, As a partner in a firm, Presumptive Income >50 Lakhs|
|ITR-4||Every income from ITR-1 presumptive income under: Salary/Pension, Other Sources, One House Property (no joint ownership), Total Income >50 Lakhs|
|ITR-5||Applicable to: Firms, LLPs, AOPs, BOIs|
|ITR-6||For companies not claiming exemption under section 11|
|ITR-7||Persons/Companies under: Sections 139 (4A), (4B), (4C), (4D)|
- House ownership: Individual taxpayers who are joint owners of house property cannot file ITR 1 or ITR4.
- Passport: One needs to disclose the Passport number if held by the taxpayer. This is to be furnished both in ITR 1-Sahaj and ITR 4-Sugam. Hopefully, it will be made mandatory in other ITR Forms as and when they are notified.
- Cash deposit: For those filing ITR 4-Sugam, it has been made compulsory to declare the amount deposited as cash in a bank account, if such amount exceeds Rs 1 crore during the FY.
- Foreign travel: If you have spent more than Rs 2 lakh on traveling abroad during the FY, you need to disclose the actual amount spent.
- Electricity consumption: If your electricity bills have been more than Rs 1 lakh in aggregate during the FY, you need to disclose the actual amount.
- Investment details: Details of investment qualifying for deduction under chapter VIA with bifurcation of details of investment made during the period from April 1, 2020 to June 30, 2020.
- Extension: For every assessment year, the last date for filing tax returns is July 31, However, this year ITR filing date has been extended till November 30, 2020 due to pandemic Covid-19.
- Income Tax Exemptions and Deductions that you can claim under the New Tax Regime for FY 2020-21 (AY 2021-22): Withdrawal by an employee from the Employees’ Provident Fund (EPF) is not taxable after 5 years of continuous service.
- Withdrawal from National Pension Scheme (NPS): On maturity or premature closure up to 40% of the amount received on such withdrawal remains tax free for all. In case of partial withdrawal from NPS, up to 25% of the contributions made by the individual will be tax free. Employer’s contribution to NPS up to 10% of their basic salary and dearness allowance also remains tax free.
- Under Section 10 (10D) of the Income Tax Act, the sum assured and any bonus paid on maturity or surrender of the life insurance plan is tax free. Maturity proceeds continue to be exempt under Section 10(10D) even in the new regime. The maturity amount including interest received on the Sukanya Samriddhi Yojana will not attract any tax.
- Conveyance Allowance granted to meet expenditure incurred on conveyance in performance of duties of an office and any allowance granted to an employee to meet the cost of travel on tour or on transfer (including relocation) are tax free. Interest received from post office savings account balances up to ₹3,500 annually per individual will remain free from tax.
- Any scholarship granted to meet education costs is tax exempt under Section 10 (16) of the Income Tax Act. Gratuity received from the employer up to ₹20 lakh after rendering 5 years of continuous service. Leave encashment received at the time of resignation or retirement up to ₹3 lakh.
Based on the above table, NRIs have to fill the ITR-2. There are a few more forms that NRIs must be aware of, which are:
Form 26AS for NRI: Form 26AS is an annual consolidated tax statement that can be accessed at the Income Tax website using the Permanent Account Number (PAN). The Income tax department has the details of all the tax deducted from your income or paid by you in their database. You can refer to it while filing your taxes.
Note: There have been amendments in the latest disclosure asked for ITR Forms 1-7 considering the Form 26AS for NRI, which are:
Form 26AS will now be a complete profile of the taxpayer w.e.f. 01.06.2020, CBDT vide Notification dated May 28, 2020 amended Form 26AS in Sec 285BB w.e.f. 01.06.2020. Key takeaways are:
- New form 26AS will also provide information in respect of “Specified financial transactions” which include transactions of purchase/ sale of goods, property, services, works contract, investment, expenditure, taking or accepting any loan or deposits of such value as may be prescribed but not less than of Rs 50,000.
- Information about income tax demand, refund, proceedings pending, and proceedings completed which may include assessment, reassessment under section 148,153A 153C, revision, appeal will also be shared in this form 26AS.
- Information on this form 26AS will not be a one-time affair at year end. This will be a live 26AS, as this will be updated regularly within 3 months from the end of the month in which such information is received.
- Form 26AS will now be a complete profile of the taxpayer for that particular year as against earlier form 26AS which just provided the information about taxes paid by way of TDS/TCS or self-assessing. This form will also have mobile no, email I’d and Aadhar no. of the taxpayer.
- Further an enabling provision has been notified empowering the CBDT to authorise DG Systems or any other officer to upload in this form, information received from any other officer, authority under any law. Thus any adverse action initiated or taken or found or order passed under any other law such as custom, GST, Benami Law etc. including information about Turnover, import, export etc. will also be put in this form 26AS so that not only the concerned taxpayer but also all the Income Tax authorities will know and have access to such information.
- This form 26AS will also provide information received by the Tax Department from any other country under the treaty /exchange of information about income or assets of the taxpayer located outside India.
- The implication of this new form 26AS will be that banks, financial institutions or any other authority or customer, buyer etc. while carrying out due diligence of the person/ corporate concerned will now ask for form 26AS so as to be sure that there are not any major issues about such person/corporate.
Form 16 for NRI: Form 16 basically provides a detailed summary of the amount paid or credited to the employee and the TDS on the same. Form 16 is the certificate issued under section 203 of the Income tax Act for tax deducted at source (TDS) from income under ‘salary’. It is issued on deduction of tax by the employer from an employee’s salary and deposit of the same with the government.
In the article, we initially understood the fundamentals of taxation followed by the different sources of taxable income and taxes liable on each asset class. NRIs as a community need to revise everything, Starting from their bank accounts to the taxes on each asset class chosen for investment, real estate and what not!
We, at SBNRI, understand your struggle and are at bay to address all your queries and doubts. Transition from being a resident to an NRI can be full of complex questions. We are there, with answers for all your questions. Visit the SBNRI Blog and browse through the fundamentals of NRI Banking.
To get complete investment and taxation advisory from experts at SBNRI, contact us through the button below.