NRI Status and Taxation: What You Need to Know

As more Indians move abroad for work, business, or personal reasons, understanding the tax implications for Non-Resident Indians (NRIs) becomes crucial. While the income of NRIs may be earned outside India, they may still have tax obligations in India depending on their NRI status, the type of income, and the duration of their stay.

This blog aims to clarify the NRI status and how it affects taxation on income earned in India and abroad.

What is NRI Status?

The term Non-Resident Indian (NRI) is defined under the Income Tax Act, 1961, and an individual’s status as an NRI is determined based on their residential status in India.

To determine whether you qualify as an NRI, the Indian tax law uses the following criteria:

1. You must not have been in India for 182 days or more in the relevant financial year (April 1st to March 31st).

2. You must not have been in India for 60 days or more in the preceding financial year, AND a total of 365 days or more in the four preceding years.

If you meet both conditions, you will be considered an NRI.

Taxation of NRIs in India

While NRIs are not taxed on their global income (i.e., income earned outside India), they are liable to pay taxes in India on income that is earned or accrued within India. Let’s break down how taxation works based on income sources:

1. Income Earned in India

NRIs are subject to tax on the following types of income earned in India:

• Income from Salary: If an NRI has worked in India and earned a salary, it will be taxed according to the Indian tax slabs. However, if the work is done outside India (for example, in a foreign country), the salary is not taxable in India.

• Income from Property: Rental income earned from property in India is taxable for NRIs. Additionally, if an NRI sells a property in India, capital gains tax (CGT) will apply on the sale proceeds.

• Interest Income: Interest earned on deposits in India, such as Fixed Deposits (FDs) or Non-Resident External (NRE) accounts, is subject to tax in India. Interest on NRE accounts is tax-free, but interest earned on Non-Resident Ordinary (NRO) accounts is subject to tax at source.

• Dividends and Capital Gains: Income from dividends and capital gains (from the sale of stocks, mutual funds, or other securities in India) is taxable for NRIs. The tax treatment on capital gains varies depending on the holding period (short-term or long-term).

2. Income Earned Outside India

Income that is earned outside India (for example, in the country of residence of the NRI) is not taxable in India. However, NRIs may still be subject to tax in the country where the income is earned, depending on the tax laws there.

Some examples of non-taxable income in India include:

• Foreign Salary: If an NRI is employed in a foreign country and earning a salary, that salary is not taxable in India.

• Overseas Business Income: Profits from a business carried out abroad will not be taxed in India.

Tax on Specific Incomes for NRIs

1. Tax on Capital Gains

Capital gains tax for NRIs depends on whether the asset is classified as a long-term or short-term asset, similar to the tax structure for residents.

• Short-Term Capital Gains (STCG): If an NRI sells an asset like stocks or mutual funds within 36 months (for immovable property, it’s 24 months), the gains will be taxed as STCG. The tax rate is 15% for assets like listed shares and mutual funds.

• Long-Term Capital Gains (LTCG): If an NRI holds the asset for more than the required period (36 months for most assets), the gains will be taxed as LTCG. The tax rate is 10% on gains exceeding ₹1 lakh per year for listed shares and equity mutual funds (without the benefit of indexation).

For immovable property, the long-term capital gain tax is 20% with indexation benefits.

2. Tax on Dividends

Dividends received from Indian companies are taxable in the hands of the NRI at a rate of 20% (plus applicable surcharge and cess), subject to Tax Deducted at Source (TDS). However, under the Double Taxation Avoidance Agreement (DTAA) between India and certain countries, NRIs may be eligible for a reduced rate of tax.

3. Tax on Interest Income

• NRE Accounts: Interest earned on NRE accounts is tax-free in India, making it a good option for NRIs to park their funds.

• NRO Accounts: Interest earned on NRO accounts is subject to tax at 30% (plus applicable surcharge and cess), and it is deducted at source.

4. Tax on Rental Income

Rental income earned by an NRI from property located in India is taxed as income from house property. The following deductions are allowed to reduce taxable income:

• Municipal taxes paid on the property.

• Standard deduction of 30% of the rental income.

The tax is levied according to the applicable tax slabs in India.

Taxation of NRIs: DTAA Benefits

India has signed Double Taxation Avoidance Agreements (DTAAs) with several countries to avoid double taxation of income. Under these agreements, NRIs may:

• Claim relief from double taxation by getting a tax credit or exemption for taxes paid in the foreign country.

• Pay tax at a reduced rate as per the provisions of the agreement.

NRIs can take advantage of the DTAA benefits to lower their tax burden in both India and their country of residence.

For example, if an NRI pays tax on salary earned abroad in a foreign country, the NRI may be eligible to claim a tax credit in India for the taxes paid in that country.

Filing Income Tax Returns (ITR) for NRIs

NRIs must file an Income Tax Return (ITR) in India if they have taxable income in India (such as income from property, capital gains, or interest). Even if they have no taxable income, they may need to file an ITR to claim a refund of TDS (Tax Deducted at Source).

The applicable ITR forms for NRIs are:

• ITR-2: For individuals who earn income from sources other than business or profession.

• ITR-3: For individuals who have business income in India (for example, from renting out property).

NRIs must file their tax returns online through the Income Tax Department’s e-filing portal and ensure that they report their foreign income (if any) correctly.

Conclusion

The tax liability for NRIs in India is primarily focused on income earned or accrued in India, with the added benefit of avoiding double taxation on foreign income. NRIs must be aware of their tax obligations in both India and their country of residence and make use of provisions like DTAAs to minimize tax burdens.

It is crucial for NRIs to file their tax returns on time, report their income accurately, and claim any applicable tax credits or exemptions. Consulting with a tax professional or financial advisor can help NRIs navigate complex tax scenarios and ensure compliance with both Indian and international tax laws.