Having a basic knowledge about taxation is essential for citizens of any country, and it is no different for Indian citizens. For Non-=Resident Indians (NRIs) too, understanding India’s tax rules is necessary to ensure compliance and avoid penalties. This article from IDFC FIRST Bank covers key things NRIs, or non-resident Indians (NRI full form), need to know about tax implications in India.

Income Tax for NRIs

While income earned abroad by NRIs is not taxed in India, any income from India that exceeds a specified threshold makes them liable to pay tax. The main sources of taxable Indian income for NRIs include:

  • Capital gains from mutual funds, equity investments, property rentals and fixed deposits
  • Interest income from fixed deposits and savings accounts
  • Rental income from properties in India
  • Income from business or profession set up in India

Tax deducted at source (TDS) also applies to an NRI’s income from fixed deposits, equity investments and property rentals at the maximum rate. So, in many cases, separate tax filing may not be required as TDS meets the tax liability. However, if the TDS deducted is higher than the actual tax owed, filing a tax return is necessary to claim a refund.

Special Tax Provisions for NRIs

The Income Tax Act has specific sections dealing with NRI taxation. Key among them are:

  • Section 115D: No deduction allowed on gross income from investments and long-term capital gains
  • Section 115E: Tax at 20% on investment income and 10% on long-term capital gains
  • Section 115F and 115I: Exemptions on capital gains from specified foreign exchange assets
  • Section 115G: Filing tax returns is not compulsory if only investment income and TDS are applicable
  • Section 115H: Tax exemptions can continue even after NRI returns to India permanently

These provisions allow for some exemptions and simplified compliance for NRIs compared to resident Indians. However, the eligibility thresholds and rates are still different.

Tax Exemptions for NRI Income

Some categories of income earned by NRIs enjoy a tax-exempt status:

  • Interest gained on NRE/ FCNR accounts
  • Interest from government securities and notified bonds
  • Dividend income from Indian companies

These exemptions are subject to the fulfilment of certain conditions under Indian tax laws. NRIs should appropriately document the sources of tax-free income.

Tax Deductions Available for NRIs

Unlike resident Indians, NRIs cannot claim many common deductions available under Sections 80C to 80U of the Income Tax Act. But some specified expenses can still be claimed:

  • Life insurance premium payment
  • Children’s tuition fees
  • Home loan principal repayment
  • Health insurance premium
  • Deduction of ₹10,000 on savings account interest

So, while NRIs have limited avenues for reducing their tax outgo, some tax planning is possible even for them.

When Should NRIs File Tax Returns?

NRIs may not be required to file tax returns if their only Indian income is from investments or long-term capital gains on which TDS has been deducted.

However, to claim refunds or exemptions, filing returns would be needed in the following cases:

  • If the TDS deducted exceeds the actual tax liability
  • If income apart from investment income or capital gains is earned in India
  • To carry forward capital losses on asset transfer to future years

The Bottom Line

While some beneficial provisions exist, NRIs need to adhere to all requirements of Indian tax laws. Timely filing, reporting accurate incomes and claiming legitimate deductions are advisable. Professional guidance on NRI taxation from reputed firms can also clarify and ensure compliance.

Note: The aforementioned regulations are liable to revisions at the discretion of the Central Government and Income Tax Department of India.

Eve Nasir

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