A thorough overview of the tax advantages available to Non-Resident Indians (NRIs) in India will be discussed at Vakilsearch. We cover a variety of topics, including income tax laws, tax obligations, high post-tax return investments, NRI investment policies, and commonly asked issues. To maximise your tax savings, contact our Vakilsearch tax experts.

Definition of NRI (Non-Resident Indian)

A ‘Non-Resident Indian (NRI)’ refers to an individual who is either a citizen of India or of Indian origin but does not reside in India. In India, NRIs are primarily governed by two Acts: the Income Tax Act, 1961, and the Foreign Exchange and Management Act, 1999 (FEMA). Although the term ‘Non-Resident Indian’ is defined differently under these Acts, it is important to note that for income tax purposes, compliance with the provisions of the Income Tax Act, 1961, is what matters, and the FEMA Act is not relevant in this context.

A ‘Person of Indian origin (PIO)’ is someone who, or whose parents or grandparents, were born in undivided India.

Types of Non-Resident

Non-Resident External (NRE) Account

The Non-Resident External Account serves the purpose of enabling Non-Resident Indians to deposit their income earned abroad in Indian rupees. This account offers various options, including savings, current, fixed, and recurring deposits. One key advantage of an NRE account is that the interest earned on the deposited funds is tax-free. Additionally, these accounts allow for repatriation of funds and can be opened jointly with an Indian citizen and resident relative.

Non-Resident Ordinary (NRO) Account

Similar to an NRE account, an NRO account allows individuals to hold funds in Indian currency. However, it differs in that it is specifically designed for storing income generated within India. Income earned from the individual’s country of residence is not eligible for this account and would need to be deposited into an NRE account. Recent developments have allowed certain cases to include foreign income in NRO accounts, depending on the bank and other factors. NRO accounts can be opened as savings, current, or fixed deposit accounts.

Foreign Currency Non-Residential (FCNR) Account

Unlike NRE and NRO accounts, an FCNR account allows Non-Resident Indians or persons of Indian origin (PIO) to deposit earnings from abroad in the currency of their country of residence. The deposited amount is tax-exempt, and as long as the account holder maintains their NRI status, the funds can be held in that currency. This type of account provides NRIs with the advantage of storing their foreign income in its original currency.

Double Taxation Avoidance Agreements (DTAA) and its Significance

The Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between India and another country (or multiple countries) to prevent taxpayers from being subject to double taxation on their income, both in the source country and the country of residence. Currently, India has entered into double tax avoidance treaties with over 80 countries worldwide.

The need for DTAA arises from the challenge of balancing tax collection on individuals’ global income. When conducting business in a foreign country, individuals may find themselves liable to pay income taxes in both the country where the income is earned and the country of their citizenship or residence. For example, if someone relocates from India to another country while still earning income from Indian sources, such as interest from deposits, they may be subject to taxation on the same income by both India and their current country of residence based on their consolidated global earnings. This situation could result in double taxation. To address this issue, the DTAA provides valuable assistance to taxpayers.

Rules for NRI Investments

The taxation provisions are governed by the Income Tax Act, 1961. An individual is classified as a Non-Resident if they do not reside in India for at least 182 days in the financial year or at least 365 days during the preceding four years and at least 60 days in the current year.

• The interest earned in a Non-Resident External Account is exempt from tax.
• The interest earned in a Non-Resident Ordinary Account is subject to a tax rate of 30%.
• Withdrawals from a Foreign Currency Non-Resident account are not subject to taxation.
• Transactions conducted through an SNRR account are subject to tax based on the prevailing provisions.
• Equity funds are taxed at a rate of 15% if sold before completing one year. Gains exceeding one lakh are taxed if the investment is held for more than one year. In the case of debt funds, a tax of 20% is applied if sold after three years, while a tax of 30% is imposed for selling before three years, as per the Indian government’s regulations.
• India has entered into numerous double tax avoidance agreements with various countries to prevent dual taxation in different jurisdictions.

Tax Exemptions for NRIs

The following income types are eligible for tax exemption:

• Interest earned on NRE/FCNR accounts.
• Interest earned on government-issued savings certificates and notified bonds.
• Dividends earned from shares of domestic Indian companies.
• Long-term capital gains from listed equity shares and equity-oriented mutual funds.
• Capital gains can be exempted under specific sections and conditions:

Section 54: Exemption can be claimed if a house property held for 3 or more years is sold, and the proceeds or part thereof are used to purchase another property or deposited in a PSU or other banks as per the Capital Gains Account Scheme of 1988.

Section 54F: Exemption can be claimed if any property other than a house is sold, and capital gains are incurred. This exemption applies to the construction or purchase of a new house, proportionate to the amount spent on the new asset.

Section 54EC: Long-term capital gains can be invested in bonds issued by entities like the National Highway Authority of India and Rural Electrification Corporation. These bonds have a redemption period of 3 years and should not be sold before maturity. The maximum investment limit in a financial year, as per the 2014 budget, is ₹ 50 lakhs.

All the above exemptions are subject to the prevailing tax laws at the time.

Tax Deductions for NRIs

Taxation for NRIs follows stricter rules compared to residents. The allowable deductions for NRIs are as follows:

• Allowed deductions for NRIs under Section 80C:
• Premium payments for life insurance, where the premium is less than 10% of the sum assured and the insured is the NRI, spouse, or child.
• Tuition fee payments to Indian educational institutions for the full-time education of up to two children.
• Principal payments on a loan for the purchase of a house property, including EMIs, stamp duty, registration fees, and other transfer expenses incurred by NRIs.
• Allowed deductions for NRIs under Section 80D:
• Premiums paid for health insurance covering the immediate family and dependents.
• Deductions of up to ₹ 5,000 for preventive health check-ups.

Allowed Deductions for NRIs Under Section 80E:

• Deduction of interest paid on an education loan for higher education of self, spouse, children, or dependent students, with no cap on the interest amount. The deduction period is eight years or until the interest is fully paid.
• Allowed deductions for NRIs under Section 80G:
• Applicable if appropriate donations have been made as per Section 80G of the Income Tax Act.
• Allowed deductions for NRIs under Section 80TTA:
• Deductions of up to ₹ 10,000 on interest earned on savings bank accounts.
• Long-term capital gains for properties held for over 36 months can be taxable, but exemptions can be availed by reinvesting the proceeds in another house property or specific bonds. If the value of the new bonds or property is lower than the proceeds, an exemption will be availed accordingly.

Last Date to File ITR for NRI

NRIs Have to Pay Advance Tax

NRIs are required to pay advance tax if their tax liability for a financial year exceeds ₹ 10,000. Failure to pay advance tax may result in the applicability of interest under Section 234B and Section 234C.

• According to the Income Tax Act, non-resident Indians (NRIs) are required to pay tax on income generated in India.
• The length of NRIs’ stays in India and the source of their income determine how much tax they must pay.
• NRIs are not subject to taxation in India on income earned abroad.
• Only income earned in India, such as wages, rent, interest, dividends, and capital gains, is subject to taxation for NRIs.
• To lower their tax obligations, NRIs might claim exemptions and deductions on specific assets and costs.
• If an NRI’s total income in India exceeds the basic exemption ceiling, they must submit an income tax return there.
• On contributions given to specific charity organisations in India, NRIs are eligible to claim tax benefits.
• NRIs must abide by the tax laws for transferring income to their country.

NRI Tax Benefits

According to the Income Tax Act, NRIs are eligible for a number of tax breaks, including exemptions from paying long-term capital gains taxes on equity investments and tax deductions for health insurance payments. Additionally, they are eligible for tax deductions for donations made to specific Indian charity organisations.

Tax Liabilities

On income derived from sources including salary, rent, interest, dividends, and capital gains, NRIs are taxed in India. On specific investments and expenses, they can, however, claim tax exemptions and deductions, which can assist lower their tax liability. Here are a few points to consider:

• On income derived from sources including salary, rent, interest, dividends, and capital gains, NRIs are taxed in India.
• The length of NRIs’ stays in India and the source of their income determine how much tax they must pay.
• Only money earned in India is subject to taxation for NRIs; income earned abroad is not subject to taxation in India.
• Tax Deducted at Source, or TDS is imposed on certain types of income for NRIs, including interest, rent, and capital gains.
• To lower their tax obligations, NRIs might seek tax exemptions and deductions on specific assets and costs.
• If an NRI’s total income in India exceeds the basic limit, they must submit an income tax return there.

Options for Investments with High Post-Tax Returns

NRIs can invest in various options in India with high post-tax returns, such as tax-free bonds, Public Provident Fund (PPF), National Pension System (NPS), and Equity-Linked Saving Scheme (ELSS). These investments not only offer good returns but also provide tax benefits to NRIs.

Rules for NRI Investments

NRIs can invest in various financial instruments such as shares, mutual funds, and fixed deposits in India. However, they need to follow certain rules and regulations, such as opening a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account, providing appropriate documentation, and complying with Foreign Exchange Management Act (FEMA) regulations.

Frequently Asked Questions

Yes, NRIs are liable to pay tax on income earned from mutual funds in India. However, the tax liability depends on the type of mutual fund and the duration of holding.

Conclusion

Get in touch with Vakilsearch, and get basic legal advice.

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