Comprehensive Guide to Income Tax for Non-Resident Indians (NRIs)

Income tax for Non-Resident Indians (NRIs) in India can be complex due to the unique status of NRIs and the differing tax rules that apply to them. If you're an NRI or someone planning to work or invest outside India, it's crucial to understand the tax implications both in India and in the country where you're residing.

In this blog, we will explain the various aspects of income tax for NRIs, including the definition of NRI, types of income subject to tax, exemptions, tax rates, and the implications of double taxation.

Who is an NRI?

An NRI is a person who is a citizen of India or a Person of Indian Origin (PIO), but resides outside India for employment, business, or other purposes. To be classified as an NRI for tax purposes, one must meet certain conditions set by the Income Tax Act, 1961:

1. Residential Status: An individual is considered an NRI if they satisfy the following conditions:

   • Not been in India for 182 days or more during the preceding financial year (April 1 to March 31).

   • Or, the person must have been in India for more than 60 days but less than 182 days in the last financial year, and at least 365 days in the last 4 years.

2. Exceptions: Special provisions apply for Indian citizens who are employed abroad or members of the crew of an Indian ship. These people may qualify as NRIs even if they spend less than 182 days in India.

Taxable Income for NRIs in India

NRIs are taxed on their income earned in India. The key principle governing tax on NRIs is that Indian income is taxable in India, regardless of whether the person resides in India or not. The tax treatment depends on the residential status and the type of income earned.

Types of Income Subject to Tax for NRIs

1. Income Earned in India (Indian Source Income)

   • Income from Salary: Salary earned in India is taxable in India. If you are working in India, this income is taxable even if you're an NRI.

   • Income from Property: Rent earned from property located in India is subject to tax.

   • Income from Business/Profession: If you have a business or profession in India, any profits earned will be taxable in India.

   • Capital Gains: Income from the sale of assets like property, shares, or bonds in India is subject to capital gains tax. This includes both short-term and long-term capital gains, with different tax rates applicable depending on the asset type.

   • Interest Income: Interest from bank deposits, fixed deposits, or bonds in India is taxable.

2. Income Earned Outside India (Foreign Source Income)

   • Foreign income earned outside India is not taxable in India, provided it is not remitted to India. For example, income earned from employment abroad or foreign investments is not taxable in India.

NRIs and Taxation of Foreign Income

While India does not tax income earned outside its borders, if you bring (repatriate) that income to India, it may become taxable.

• Repatriated Income: If foreign income is repatriated into India (e.g., by transferring funds to an Indian bank account), it is not subject to tax in India, though it may be subject to tax in the foreign country.

Tax Exemptions for NRIs

NRIs are entitled to certain tax exemptions under Indian law. Some of the key exemptions include:

1. Tax Exemption on Income from Interest:

   • Interest on NRE (Non-Resident External) accounts is exempt from Indian income tax.

   • Interest on NRO (Non-Resident Ordinary) accounts is taxable, but you may be eligible for tax deductions based on your residential status.

2. Capital Gains Exemption:

   • Long-term capital gains on the sale of listed equity shares or equity mutual funds are taxable at 10% if held for more than a year. However, the amount of capital gains can be exempt under specific conditions.

   • NRIs can claim the benefit of indexation on long-term capital gains.

3. Tax Exemption on Dividends:

   • Dividends from Indian companies are subject to tax deducted at source (TDS). However, the tax rate on such dividends is 20% for NRIs.

4. Repatriation of Funds: Any income that is repatriated (sent back to the foreign country) is not taxed in India, but it may be subject to tax in the foreign country.

Tax Rates for NRIs

NRIs are taxed at the same rate as residents, but there are some differences in tax rates for certain incomes like dividends, capital gains, and interest. Here's an overview of key tax rates for NRIs:

Income Type	Tax Rate
Short-term capital gains (STCG)	15% (on sale of equity shares or equity mutual funds)
Long-term capital gains (LTCG)	10% (on sale of equity shares, equity mutual funds, etc.)
Income from salary (in India)	Based on the applicable tax slab rates (10%-30%)
Interest on NRE accounts	Exempt
Interest on NRO accounts	30% (with applicable TDS deductions)
Dividend Income	20% (TDS)
Rental Income	Based on tax slabs (10%-30%)
Other Income (including capital gains on property)	As per the applicable tax slabs

Double Taxation Avoidance Agreement (DTAA)

India has signed Double Taxation Avoidance Agreements (DTAA) with several countries. Under the DTAA, NRIs may be able to avoid being taxed twice on the same income, once in India and once in the country of residence. This agreement generally allows the taxpayer to claim relief from double taxation either through exemption or by claiming a credit for taxes paid in the foreign country.

For instance, if you are paying tax on your income in the country where you are residing, you may be allowed to claim a foreign tax credit against your Indian tax liability.

Filing Income Tax Returns for NRIs

Even if you're an NRI, you are required to file an income tax return in India if:

1. You have taxable income that exceeds the exemption limit (₹2.5 lakhs for individuals under 60 years of age).

2. You want to claim a refund of TDS (if excessive TDS has been deducted).

3. You want to carry forward losses (such as capital losses) to offset future income.

ITR Forms for NRIs

• ITR-1: For individuals with income from salary, property, and interest.

• ITR-2: For individuals with income from capital gains, foreign assets, or business income.

• ITR-3: For individuals with business/professional income.

Conclusion

Taxation for Non-Resident Indians (NRIs) in India is largely focused on income sourced from India. While NRIs are not taxed on their foreign income, they must ensure compliance with the Indian tax laws, particularly regarding income earned in India. It is important to take advantage of the exemptions, deductions, and DTAA agreements to avoid double taxation.

If you're an NRI, staying updated with Indian tax regulations and seeking guidance on the most efficient tax strategies can help minimize your tax liability. Always consult a tax professional for personalized advice, especially when dealing with cross-border taxation issues.