How NRIs are taxed and what they can do to save taxes

Non-Resident Indians (NRIs) are known for boosting India’s reputation globally. NRIs living and earning abroad have their foreign income taxed in their host country. However, if they have investments, assets, or any business transactions generating income for them in India will be taxed as per the Indian taxation scenario. With a significantly growing number of NRIs, the government is steadily simplifying the complex taxation system. 

At first, the government is emphasising on providing ease of compliance through digital means. With the last date to file an Income Tax Return (ITR) approaching, it is essential for NRIs to understand their tax liability and comply with Indian tax regulations to avoid any penalties or legal ramifications.

"It is prudent for NRIs to file ITR in India, independent of whether they have taxable income from India or not, because it helps them to keep their NRI status updated yearly with the IT department and to avoid any litigation. Also, ITR filings at times are a pre-cursor in the repatriation of money and property sale in India," said Mudit Vijayvergiya, Founder of SBNRI. 

Outlook on NRI taxation

Under Section 6 of the Income Tax Act 1961, the residential status of NRIs always has to be determined to know their tax eligibility. To determine their residential status, the physical presence of an individual in India during a financial year and immediately preceding years is taken into account. 

To qualify as a resident in India in any financial year (FY), an individual has to be physically present in India for a period of 182 days or more during the relevant FY; or be physically present in India for a period of 60 days or more during the previous year and 365 days or more during the preceding 4 FYs. 

However, for an Indian citizen and a PIO (person of Indian origin) who visits India, the 60-day period is extended to 182 days. The same rule is applicable to the Indian citizen who leaves India in the previous year for the purpose of employment abroad. The period of 60 days is extended to 120 days, if the total income, other than income from foreign sources, of an Indian or a PIO is in excess of Rs. 15 lakh during the previous year.  

Thus, from assessment year (AY) 2021-22, such an individual is deemed to be an Indian resident only when he or she is not liable to pay tax in any other country because of their domicile or residence and their total income in India, Rs. 15 lakhs. While NRIs are not taxed on their foreign earnings, they are liable to pay tax on any income accruing or arising in India. 

For FY 2021-22, like resident Indians, NRIs are not required to file their income tax returns if their total income in India for the year is less than the basic exemption limit of Rs. 2,50,000. However, in the Union Budget 2023, the basic exemption limit has been hiked to Rs. 3 lakh from Rs. 2.5 lakh. Still, for NRIs, it is a wise move to file a tax return as, at times, it is a precursor in other processes (property sale, repatriation etc.). Mostly, NRIs pay higher Tax Deducted at Source (TDS) versus resident Indians and this higher TDS can be refunded, only if they file ITR. 

NRIs are required to pay tax on salary received in India, income from a house property or building situated in India in the form of rents, capital gains from sale of assets situated in India, interest on savings NRO bank accounts and fixed deposits, business income or income from other sources. Interest income from an NRE account and FCNR account is not taxed in India.
Tax saving ideas for NRIs

While many basic deductions that resident Indians are eligible for are not available for NRIs, they can save on taxes in many different ways. 

Under section 80C, NRIs can avail of deductions on life insurance premium payment, children’s tuition fees paid to any school, college, or educational institution situated in India, investment in equity linked saving scheme or ELSS, and on principal repayment for a home loan obtained for buying or constructing residential house property. 

Additionally, NRIs can also claim deductions on the premium paid for a health insurance policy under section 80D and donations for social service activities under section 80G. Moreover, NRIs can claim an exemption under sections 54, 54EC and 54F in respect of capital gains arising on the transfer of capital assets, being long-term residential property, land or building or both, and any asset other than a residential house, respectively. 

The income tax rules for NRIs are different from resident Indians, considering the complexity and perplexity of the system. It is strongly recommended that NRIs should consult tax professionals to understand the importance of their residential status and ensure compliance with income tax regulations.