Residential status in India

A resident is defined under Income Tax Act, 1961 and Foreign Exchange Act (FEMA, 1999). The residential status of an individual in India is based on the period of stay in India in a particular year. Residential  status in India decides the tax filing for an NRI and Indian resident. NRI tax filing is not complicated as it looks, there are some exemptions and deductions but all together it is a simple process for NRIs.

If following conditions are satisfied, then an individual is said to be a citizen of India.

Condition as follows:

  • An individual stays within the country for 182 days or more in a particular financial year; OR
  • An individual is in India for 60 days in that year and has been there in the country for 365 days in any of the preceding 4 years.

Note:

  • An Indian citizen working abroad or a member of a crew on an Indian ship then only the 1st condition is applicable on.
  • The same is applicable to a *Person of Indian Origin (PIO) who is on a visit to India. The 2nd condition is not applicable PIO also.

*(A PIO is a person whose parents or any of their grandparents were born in undivided India.)

 If you do not meet of above conditions then you are not an NRI.

Is Income Earned Abroad by an NRI taxable?

NRI tax filing, totally depends on the residential status of the NRI.

  • In India, NRI’s whose income is earned or accrued in India is taxable. For example, Salary received in account (in India) or salary received for services provided in India, income from house property (situated in India), capital gains on transfer of asset(s) situated in India, income from fixed deposits or interest on savings bank account etc.
  • Income that is earned outside India is not taxable in India.
  • Interest earned on an NRE account and FCNR account is tax-free but Interest on NRO account is taxable for an NRI.

NRI tax filing is important and shall not be neglected by the NRIs.

Is NRI eligible to file ITR in India?

Any person (NRI or not), whose income exceeds Rs.2,50,000 (for FY ending 31st March 2016) is required to file an ITR in India.

NRI should file ITR when:

  • Want to claim a refund.
  • Have a loss that they want to carry forward.

NRI is eligible to file ITR in India (NRI tax filing), and can also claim for the refund. NRI tax filing and deductions is discussed below in a case study.

Case study

Misha lives and works in the Finland. She checked her Form 26AS online and found out that a TDS entry of Rs 21,000 is showing. This TDS had been deducted at 30% on interest earned by her in NRO account. Misha has no other income in India. Does Misha have to pay any tax in India and is she required to file an income tax return?

Solution

Income that will be taxed in India depends upon your residential status.

First, let’s find out Misha’s residential status. Since she is an Indian citizen and has gone to Finland for her job.

  • She is a resident if she spends 182 days or more in India. Misha left India on 3rd July 2016 and came back to India on 15th March 2017.
  • A financial year that begins on 1st April 2016 and ends on 31st March 2017, Misha has spent less than 182 days in India. Since, she is an Indian citizen employed abroad, to qualify as a resident she must spend 182 days or more in India. Therefore, Misha is an NRI according to Income Tax in India.

For Misha, only her income which is earned or accrued in India is taxable in India. Her income in the Finland is not taxable in India since she is an NRI. Interest earned in India is taxable for an NRI. (Note that: interest on NRO account is taxable but interest earned on NRE account is exempted from tax).

Misha have to add up all the income that she has earned in India. Interest earned on the NRO account of Rs. 70,000 is her only income. For FY 2016-17, the minimum income which is exempted from tax is Rs 2,50,000.

Therefore, total income of Misha’s India is less than the minimum exempted amount and she is not liable to pay any tax on it. She must claim a refund of the TDS deducted on her interest income.

Taxable Income of an NRINRI tax filing

1.    Income from Salary

Salary income is taxable when salary is received in India (Indian account) by an NRI or someone else on your behalf. This income is taxable at slab rate as per your income.

If salary of an NRI is paid against the service provided in India, it will be taxed in India. But the income of Diplomats, Ambassadors is exempted from tax (as they represent India outside India).

For example, Sourabh was working in Canada for a project of an Indian company for 3 years. Sourabh asked for the salary in his Indian account for his family and for the payment of housing loan installment. But as per Indian norms, his salary will be taxed if received in India. So, to NRI tax filing, sourabh decided to receive his salary in Canada only.

2.    Income from House Property

Income from property (in India) is taxable for an NRI. Property may be rented or vacant. The calculation of income from house property is same as that for a resident. Income from house property is taxed at slab rates as applicable.

  • NRI can claim a standard deduction of 30%, deduct property taxes.
  • Benefit of an interest deduction in case of home loan.
  • NRI is also allowed a deduction for principal repayment underSection 80C.
  • Also, stamp duty and registration charges paid on purchase of a property can also be claimed under Section 80C.

For example, Payal owns a house property in Delhi and she stays in Thailand. She thought of renting her Delhi’s apartment and receives rent in her Thailand account. Rent that she receives is taxable in India.

3.    Rental Payments to an NRI

A tenant who pays rent to an NRI owner must deduct TDS at 30%. The income can be received to an account in India or the NRI’s account in the country where NRI is currently residing.

For example, Mariya pays a monthly rent of Rs. 50,000 to her NRI landlord. She must deduct 30% TDS or Rs 15,000 before transferring the money to NRI’s landlord’s account. For, NRI tax filing (Mariya), must prepare Form 15CA (in this case) and submit tax online to the Income Tax Department.

4.    Income from Other Sources

Income from other sources includes Interest income from fixed deposits (FD’s) and savings accounts in Indian bank accounts.

  • But interest income of FD’s and savings account is taxable in India.
  • Interest on NRO account is fully taxable.
  • Interest on NRE and FCNR account is tax-free.

Interest income is taxable under Indian law but can claim the refund also as per provisions mentioned for NRI tax filing.

5.    Income from Business and Profession

Any income earned by an NRI from a business set up in India, is taxable to the NRI.

6.    Income from Capital Gains

Capital gains from any capital asset (situated in India) sold or transferred, shares, securities etc. is taxable in India.

For example, if house property is sold and has long-term capital gains, then buyer can deduct TDS at 20%.

But, seller is allowed to claim capital gains exemption by investing the capital gains in a house property again as per Section 54 or investing in capital gain bonds as per Section 54EC.

Deductions

Deductions allowed to NRI Deductions not allowed to NRI
Under Section 80C
A maximum deduction up to Rs. 1,50,000 for an individual.

  • Life insurance premium payment (premium less than 10%)
  • Children’s tuition fee payment (educational institution situated within India and for 2 children)
  • Principal repayments on loan for the purchase of a house property
  • Unit-linked insurance plan (ULIPS)
  • Investments in ELSS

Under Section 80C

Deductions not allowed to NRIs

  • Investment in PPF is not allowed.
    (PPF accounts which are opened while they are a resident are allowed to be maintained but new PPF accounts is not allowed).
  • Investments in NSCs
  • Post office 5-year deposit scheme
  • Senior citizen savings scheme

Deduction from House Property Income for NRIs

Under section 80CCG or investment under RGESS

  • NRIs cannot claim for any deduction in RGESS.
Under section 80E

  • NRI can claim deduction of interest paid on education loan.
  • There is no limit on the amount of claim.
  • Deduction is available for a maximum of 8yrs or till interest is paid (whichever is earlier).
  • Deduction is not available on the principal repayment of the loan but is on the interest paid.

Differently-abled under section 80DDB

  • In this section, deduction is allowed for the medical treatment of a disabled for Indian resident not for NRIs.

Under section 80G

  • NRI can claim a deduction for donations for social causes.
Differently-abled under section 80U

  • In this section, deduction for disability where the taxpayer suffers from a disability as defined is allowed only to resident Indians not to NRIs.
Under section 80TTA

  • NRI can claim a deduction on income from interest on saving bank account up to Rs. 10,000.
  • Allowed for deposits in the savings account only.

Exemptions

On sale of Property by an NRI

NRI can save tax on capital gains under (on long-term capital gains)

  • Section 54
  • Section 54F
  • Section 54EC

When property is held for more than 3 years then it is taxed at 20%. Long-term capital gains earned by NRIs are subject to TDS of 20%.

NRI tax filing

The NRI should make these investments and can claim excess TDS (that was deducted at the time of NRI tax filing and can claim a refund).


Cases of taxability of NRI’S income

Case 1: Gone for a Temporary Foreign Assignment

Sourabh works in Singapore on a temporary assignment for 4 months and he earns in Singaporean Dollars during that time. This income is credited into bank account in India. After 4 months sourabh is eturned to home. How should he file his ITR?

Solution:

When he returns within 182 days: Sourabh’s taxes for this year will depend on residential status. He is not outside of India for more than 182 days; he will be considered an Indian resident.His salary from Singapore will be included as salary while filing income tax return in that particular year.

When he returns after 182 days: Sourabh’s residential status has changed and to pay taxes only on the Indian income earned so far.

Note: Sourabh’s foreign income credited to an Indian bank account is taxable in India (NRI tax filing).

Case 2: Recently moved to abroad

Prashant moves to New Zealand on a new assignment. His income is credited to his NRE account in India. He continues with his FD investments and has put some money away in a savings account in India. He just received Form 16 from his Indian employer. Should he file his returns this year in India?

Solution:

Every individual (NRI or not) must file ITR if income exceeds Rs. 2,50,000. But, NRIs are only taxed for income earned/collected in India.

So, Sourabh will pay taxes on income he earned while in India, and income accrued from FDs and savings account.

Prashant’s income from India is:

Income from Indian employer is Rs. 3 lakh, interest income from FDs is Rs. 25,000, Bank account savings interest is Rs. 4,500.

Deductions as follows:

Under section 80C (PPF investments) is Rs. 20,000, under section 80TTA exemption is Rs. 4,500, taxable income is Rs. 3,05,000, tax slab at 10% is Rs. 5,500, cess at 3% is Rs. 165, TDS deducted by the employer is Rs. 4,000, TDS deducted by bank is Rs. 4,500 and tax refund is Rs. 2,835.

Case 3: Living in a Foreign Country

Karan moved to the US, 3 years back and is paid in US dollars. He invested his money in savings account and FDs in India. He bought an apartment and earns a rent of Rs. 35,000 per month. Then, he gifts a car to his parents and transfers Rs. 10,000 per month for household expenses into their account during a year. He also transfers Rs. 20,000 to his father’s account for the premium of the insurance policy bought for his parents.

Solution:

Karan’s gift to his father and money transfer of Rs 10,000 to his mother is exempt from tax. Regarding the insurance expenses on his parents, karan can claim a deduction under Section 80D of Rs 20,000, since his father is over 65 years of age.

He will be required to file a tax return in India as his gross income exceeds Rs. 2,50,000.

nri tax filing


Case 4: NRI recently moved back to India
Here, taxable income is Rs. 3,04,000. Karan will be taxed on this amount as per provisions for NRI tax filing.

Returning NRIs are considered as RNOR (RESIDENT BUT NOT ORDINARILY RESIDENT) when:

  • An NRI been in 9 of the 10 financial years proceeding the year of return.                                                                                                                          OR
  • NRI have lived in India for 2 years or less (729 days or less) in last 7 financial years.

The Income Tax Department allows RNORs to enjoy the tax exemptions provided to NRIs for a period of 2 years after their return. After 2 years, returning NRIs will be treated as resident individuals.

Note: Deposits held in foreign currency, which are exempted for an NRI, is also exempted for returning NRIs only for 2 years and relieved from NRI tax filing.

Case 5: Resident with Global Income

If you are an Indian resident, your global income is taxable in India. This income can be earned or received outside.This income is also taxable in other countries; you can take benefit of DTAA (Double Tax Avoidance Agreement).
Shreya returned to India in 2010 after living in London for more than 5 years. The French company in which she worked has sends her fees in pounds. Shreya’s salary is credited in her bank account in London has has paid tax in London also.

Solution:

Shreya is an Indian resident and taxability of income in India depends on residential status. An Indian resident has to pay tax on their global income. The resident must disclose all the income earned by them from all sources and all countries in their ITR and pay tax in India (An NRI pays tax only on income earned or accrued in India).

Therefore, all of Shreya’s income, including the fee that she earns in foreign currency will be taxable in India.

Her income in pounds will be converted to Indian rupees and is added to her total income. This total income will be taxed at slab rates prescribed by the tax department.

If Shreya has already paid tax on the foreign income in the UK, she can claim the benefit under DTAA.

Based on the relevant provisions of the DTAA between the two countries, Shreya will be saved from getting taxed twice.

If you are a resident and have earned any income from abroad, remember to disclose it in your income tax return (NRI tax filing).

Note: An expatriate in India is someone who comes to live in India but is not a citizen of India (foreign nationals).

Double Taxation problem for NRIs

DTAA is considered as a Tax Treaty. It is a bilateral economic agreement between two nations that aims to avoid or eliminate double taxation problems of the same income in two countries.

Under DTAA, there are two methods to claim tax relief:

nri tax filing

Conclusion

Government has India has kept each and every aspect in mind and then created policies for the NRIs. Indian government has tried to keep these rules less complicated as possible.But before filing income tax, study each aspect thoroughly and then file ITR. NRI tax filing is almost similar to that for an Indian resident. NRI has to keep in mind the forms that they have to fill. India government has also taken care about the double taxation issues that is faced by most of the NRIs.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.