This blog discusses the issue of double taxation for NRIs and offers strategies to prevent it, including understanding tax laws, claiming tax credits, and seeking professional advice from tax experts.
Residential status for tax purposes is an important consideration for NRIs (Non-Resident Indians) who have earnings both abroad and in India. NRIs can face difficulties in managing their finances and tracking bank accounts in different countries. NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts can help NRIs manage their finances.
Residential status for tax purposes
Residential status for tax purposes in India is an important factor in determining an individual’s tax liability. The residential status is determined based on specific criteria outlined in the Income Tax Act. Here are the key points regarding residential status for tax purposes in India:
Resident: An individual is considered a resident for tax purposes if they meet any one of the following conditions:
- Physically present in India for 182 days or more in the relevant tax year (182-day rule)
- Present in India for 60 days or more in the relevant tax year and 365 days or more during the four years immediately preceding the relevant tax year
Resident and Ordinarily Resident (ROR): A resident individual is further classified as ROR if they satisfy any one of the following conditions:
- If he/she has resided in India for at least two of the ten prior fiscal years before the current year.
- They have stayed in India for 730 days or more during the seven years immediately preceding the previous year
Resident but Not Ordinarily Resident (RNOR): A resident individual who does not meet the conditions to be classified as ROR is considered RNOR
It is important to note that the residential status for tax purposes is different from an individual’s citizenship status. An individual may be a citizen of India but can be a non-resident for tax purposes, and vice versa
Benefits available under DTAAs
Benefits available under DTAAs (Double Taxation Avoidance Agreements) can help NRIs avoid double taxation. India has signed DTAA with more than 90 countries across the world to tackle the problem of tax avoidance and solve the issue of double taxation of NRIs. As per the treaty, NRIs need to pay tax in either of the countries. This means, if you have already paid taxes on capital gains in India, you don’t need to pay tax for the same in the country of your residence.
Few basic principles of DTAA
A few basic principles of DTAA include the source principle, which determines the country where the income is generated, and the residence principle, which determines the country where the taxpayer resides
Foreign Tax Credit (FTC) in India
Foreign Tax Credit (FTC) in India is a mechanism that allows NRIs to claim a credit for taxes paid in a foreign country against the tax liability in India. This helps NRIs avoid double taxation.
Strategies to Prevent Double Taxation for NRIs
Strategies to Prevent Double Taxation for NRIs include opening an NRE account, investing in NRI mutual funds, and investing in capital gains bonds within a certain timeframe. It is important to strategize financial planning and tax planning for NRIs so that they pay the right amount of tax.
What is double taxation for NRI?
Double taxation for NRI refers to the situation where an NRI is taxed twice on the same income in two different countries. This can happen when an NRI earns income in India and the country of their residence.
Do NRI need to file tax return in India?
In the old regime, NRIs are required to file a tax return in India if their income in India exceeds the basic exemption limit of INR 2.5 lakhs in a financial year.
Which ITR is applicable for NRI?
ITR-2 is applicable for NRIs.
What is the capital gains tax for the NRI?
The capital gains tax for NRIs depends on the type of asset sold and the duration of holding. Short-term capital gains (assets held for less than 2 years) are taxed at a higher rate than long-term capital gains (assets held for more than 2 years). The tax rate for long-term capital gains is 20% with indexation benefits.
What are the disadvantages of NRE account?
One disadvantage of an NRE account is that the interest earned on the account is tax-free in India but may be taxable in the country of the NRI's residence. Another disadvantage is that the account is denominated in Indian rupees, which can be subject to currency fluctuations.
Conclusion
The determination of residential status is crucial as it affects the taxability of an individual’s income in India. Different tax rules and rates may apply based on the residential status. It is advisable to consult a tax professional from Vakilsearch for specific details and implications related to residential status for tax purposes in India.
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