Income Tax for NRI: Income Tax Rules For NRIs Explained

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Key Takeaways: As a person living and working abroad, you may be wondering what your tax implications are in India. Here is a look at the NRI definition according to Indian Income-tax laws and subsequent tax implications.

To calculate Income Tax for NRIs, you must first know what your residential status is according to the law. As per the income tax department, an NRI is an individual who is either an Indian citizen or a Person of Indian Origin who is not a resident Indian.

New Residency Status Rules

Until the end of Financial Year (FY) 2019-20, the term NRIs included those individuals who stayed in India for 182 days (or less) in any financial year. In March 2020, the Indian government introduced changes.

If you are an NRI visiting India, your residency status will change if you meet these criteria:

The first, your total Indian income (income accruing in India) is more than INR 15 lakh during a financial year and if you stay for more than 120 days in the same financial year.
The second, an NRI is deemed to be a resident of India if they are an Indian citizen with a total income (other than from foreign sources) exceeding INR 15 lakh and they are not liable to pay tax in any other country^[1].

Understanding the Resident But Not Ordinarily Resident (RNOR) Status

Let’s say, you have visited India frequently in four years before the current FY of your recent visit. Then if the total number of days exceeds 365 (over four years), you will be considered a resident Indian for income tax purposes. Your residency status will then become Resident But Not Ordinarily Resident (RNOR).

What constitutes taxable income in India?

Once you have established your residential status, you need to calculate your taxable income. If your total gross income is more than INR 2.5 lakh in a financial year, you will need to pay tax.

These are the categories of taxable income^{[2] [3]}:

Income from salary or professional consultation.
Income from house property (a standard deduction of 30% applies).
Income from business in India.
Income from other sources like Interest on NRO Deposits, dividends or gifts.
Income from capital gains arising aut of the sale of assets.

Assets can be equity investments in India that are shares, mutual funds units, property, etc. The duration of how long you hold an asset will determine whether it is applicable for short-term or long-term capital gains taxes.

Open an NRI Savings Account

Income tax for NRI

In case of a resident Indian, the person would be liable to pay tax in India irrespective of whether they earned income in India or abroad. However, for an NRI or an RNOR, income which is earned outside India is not taxable in India.

But you may have Indian investments that generate income or other sources of money in India. This includes rent from a family property or an existing fixed deposit. For all these, you will have to file income tax returns.

Deductions and Exemptions

Income Tax for NRIs also entails deductions and exemptions under various sections for various forms of investments. If you have invested in ELSS or ULIPs, you can claim deduction under Section 80C. Other options allowed under this section are Life Insurance premium payments and principal repayments on a home loan.

You can also claim exemptions under Section 54 on long-term capital gains arising out of the sale of a property. To read more about the tax implications of selling a house in India, click here.

Avoiding double taxation

If you have been taxed in India and your country of current residence, you can seek an income tax relief from a DTAA (Double Tax Avoidance Agreement) between the two countries. You can claim tax relief under DTAA in two ways, the exemption method and tax credit method. By the exemption method, you will be taxed in only one country and exempted in another. In the tax credit method, where the income is taxed in both countries, you can claim tax relief in the country of current residence.

Final Note: If you qualify as an NRI under income tax laws, you need to be compliant of all the income tax rules. An online search will help you find reputed individual tax consultants or Chartered Accountant firms in India who assist NRIs around the world.

*Disclaimer: This article is for information purpose only and is not a tax advice by DBS Bank. Sound professional advice should be taken before making any investment decisions. Bank will not be responsible for any tax loss/other loss suffered by a person actng on the above.

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