Income Tax for NRI and Foreign Income

Important Keyword: Income Heads, Income Source, NRI Taxpayers, Resident Status.

Definition of NRI

Determining the tax liability of an NRI hinges upon their residential status for the year. It’s crucial to ascertain the residential status of an individual before delving into their tax obligations. Here are the criteria for determining residential status:

You’re considered an Indian resident for a particular financial year if:

1. You’ve spent at least 182 days (6 months) in India during the financial year, or
2. You’ve resided in India for at least 60 days (2 months) during the previous year and have lived for at least 365 days (a year) during the last four years.

However, the first condition alone applies if you’re an Indian citizen working abroad or a member of a crew working on an Indian ship. In such cases, if you spend at least 182 days in India during the financial year, you’re deemed a resident Indian.

A person is considered to be of Indian origin if they, or either of their parents or any of their grandparents, were born in undivided India.

If you don’t meet any of the above conditions, then you’re categorized as an NRI.

Determining the residential status plays a pivotal role in assessing the taxability of income.

If your status for the previous year is “Resident,” your global income will be taxable in India. However, if your status is “NRI,” only the income earned or accrued in India will be taxable in India. Some examples of incomes earned or accrued in India include salary received in India, professional fees received in India, rental income from property in India, capital gains from the transfer of assets situated in India, and interest income on fixed deposits or savings accounts in India.

All these incomes are taxable in India for an NRI. Any income earned by an NRI outside India, such as salary income abroad or interest earned on NRE accounts or deposits abroad, will not be taxable in India.

It’s important to note that interest income on the NRE account is completely tax-free, while interest earned on the NRO account is subject to TDS at the rate of 30.9%.

Taxable Incomes for NRI Include

Salary earned or received in India by an NRI, or on their behalf, is taxable in India. This includes income deposited to an Indian bank account. For instance, if an Indian company employee, like Ravish, is deputed to work in Dubai but continues to receive their salary in India, that income is taxable in India.

However, salaries received by diplomats and ambassadors are completely exempt from taxation.

Income from house property situated in India is taxable for NRIs. The calculation follows the same rules as for resident Indians, including deductions like the standard 30% deduction and deductions for interest and principal repayment on home loans. Rental income received by NRIs is subject to a 30.9% TDS by the tenant.

Income from businesses set up or controlled from India is taxable for NRIs, as is income from other sources like interest on deposits or savings bank accounts in India. Interest earned on NRE and FCNR accounts is tax-exempt for NRIs, while interest earned on NRO accounts is subject to a 30.9% TDS.

Capital gains from the transfer of assets situated in India, including shares and securities, are taxable in India for NRIs. However, exemptions under sections 54 and 54EC are available for capital gains arising from the sale of residential property.

Deductions and Exemptions for NRI

Here is a summary of deductions and exemptions which are / not allowable for NRI:

Deductions/ Exemptions	Allowable	Not allowable
Section 80C	Life Insurance Premium Payment	Investment in PPF
	Children’s Tuition Fee Payment	Investment in NSCs
	Principal Repayment on Loan for purchase of House Property	Post Office 5 year Deposit Scheme
	Investment in ELSS	Senior Citizen Saving Scheme
	Investment in Unit Link Insurance Plan
Section 80CCG	–	Investment under RGESS
Section 80D	Premium Paid for Health Insurance	–
Section 80DD	–	Expenditure on Maintenance including medical treatment of a handicap dependent
Section 80DDB	–	Expenditure towards medical treatment of a differently abled dependent
80E	Interest paid on education loan	–
80G	Donations for charity (social) causes	–
80TTA	Interest income from savings bank account	–
80U	–	Deduction available to differently abled individuals
80U	–	Deduction available to differently abled individuals
Deductions from House Property Income	Standard deduction	–
	Property taxes paid
	Interest paid on home loan
Exemption on sale of Long term property	Section 54: On sale of long term house property	–
	Section 54F: On sale of any long term asset other than house property
	Section 54EC: On sale of any property and reinvestment in bonds of National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC)

How to Avoid Double Taxation?

To avoid double taxation, NRIs can benefit from the Double Taxation Avoidance Agreement (DTAA), an agreement between India and foreign countries. The DTAA provides relief in two ways:

1. Exemption from double taxation: If the agreement allows exemption, the NRI is taxed in only one country, and no taxes are payable in the other. For instance, if Manali, a non-resident Indian, earns interest income from fixed deposits in India while working as a Certified Accountant in the US, and India and the USA have an agreement providing exemption, her interest income is taxed only in India, exempt from US taxation.
2. Tax Credit (Relief): If the agreement provides relief, incomes are taxed in both countries, but the NRI can claim relief in their country of residence. For example, if Paritosh, an NRI content writer in Australia, earns rental income from his flat in India, and India and Australia have an agreement providing relief via tax credit, his rental income is taxed in both countries. However, Paritosh can claim a tax credit in Australia for the taxes paid in India.

Changes in Budget 2020: The budget introduced changes affecting NRIs:

1. Criteria for Determining Residential Status: The condition of 182 days to determine residential status was reduced to 120 days in a financial year. An Indian national is now deemed a resident if they stay in India for at least 120 days.
2. Resident – Not Ordinary Resident (RNOR): The requirement for being deemed an RNOR was increased from 2 out of the previous 10 years to 4 out of the previous 10 years.

Section VI (IA) – New Clause

The Finance Minister’s latest announcement introduces a new clause, stating that if an individual isn’t a resident of any other country, they’ll be deemed a resident of India by default. Once deemed a resident, they must disclose all assets and finances, whether from India or abroad.

Dividend Distribution Tax (DDT)

Under the current tax regime, companies deduct DDT on dividends paid to shareholders. However, the new regime exempts dividends from taxation at the shareholder level. Instead, companies will deduct TDS on distributed dividends. For NRI shareholders, TDS will be deducted under section 195, and dividend income will be taxed according to slab rates.

Source of Income	Resident	Not Ordinary Resident	None-Residents
Income earned in India	Taxable in India	Taxable in India	Taxable in India
Any income received in India	Taxable in India	Taxable in India	Taxable in India
Income earned outside India but received in India	Taxable in India	Taxable in India	Taxable in India
Income earned and received outside India	Taxable in India	Taxable in India	Not Taxable in India
Any income earned outside India for a business or profession controlled in or from India	Taxable in India	Taxable in India	Not Taxable in India
Income earned outside India from any source other than business or profession controlled from India	Taxable in India	Not Taxable in India	Not Taxable in India

Read More: Guide: Income Tax for NRO and NRE Accounts

Web Stories: Guide: Income Tax for NRO and NRE Accounts

Official Income Tax Return filing website: https://incometaxindia.gov.in/