Income tax planning for NRIs is different in India. I am sharing some important information that can be helpful for you
- Who is an NRI – for Tax Purpose
- Tax Planning for NRI
- Taxable income for NRIs
- Tax-free income for NRIs
- DTAA Simplified
- NRI Tax Planning Tips
- Download Tax Planning for NRIs PDF guide from bottom of this post
Definition of a Non-Resident Indian (NRI)
An Indian is considered as a non-resident when he/she has stayed less than 182 days of the current financial year in India or if the person has been in India for less than 60 days in the current financial year and has been in India for less than 365 days in the last 4 years. The following flowchart helps to determine easily whether a person is an NRI-
Income Tax Planning for NRIs
The taxation rules in India are different for NRIs. Here is some information for an NRI to plan his taxes better-
The following income of an NRI is taxable
- Income earned, accrued or to be earned or accrued via salary in India.
- Capital gains received or deemed to be accrued from the transfer of property/ real estate or other capital investments in India.
- Interest earned or income from capital gains of short-term investments and securities.
The following income of an NRI is non-taxable
- Interest earned from NRE accounts.
- Allowances or Perquisites paid by Government of India to an NRI for his/her services outside India.
- Long-term capital gains from sale of equity shares or units of equity funds but such transactions are subject to securities transaction
- Interest on certain savings certificates and bonds subscribed to using the foreign exchange.
Note – this is tax-free in India but may be taxed in the country where you are currently residing.
Must Read – Tax Treatment on NRI/PIO Fixed Deposits
Information on DTAA
DTAA stands for Double Taxation Avoidance Agreement. It is an agreement created to ensure that people do not pay tax more than once on the same income earned. It might happen that you have not fulfilled the conditions to be an NRI and have earned income in 2 countries say India and United States. You will have to pay tax on income earned and investment income in US and India. You can avoid double taxation by any of these three methods –
- Showing tax payment in one country and getting exempt from the second country.
- Deducting tax paid from total income across all countries and then paying tax in the country that you are staying on balance amount.
- Getting credit for tax paid in the country currently staying for income earned in a different country and deducting that amount in the country where it was earned.
If you are getting credit for tax paid in the source country, you should ensure that you have a Tax Residency Certificate (TRC).
Currently, India has DTAA in place with 84 countries. DTAA is a mechanism to reduce your tax burden. It is not a tool for tax evasion. You should understand the rules clearly before opting for it.
NRI Tax Planning Tips
- Tax Filing – As an NRI, if your income is above Rs. 2,50,000 in India, you have to file tax returns.The tax slabs applicable to NRIs are the same as residents. If you have to claim a tax refund, you have to file a tax return. If you have a capital loss to be set off against capital gains. to lower your actual tax liability, you have to file a tax return. In the ITR form, you have to select the residential status as ‘NRI’ to file tax returns. You can check tax deducted at source by downloading Form 26AS where all details of tax collected are mentioned. Not filing of income tax returns can result in interest and penalty.
- Moving back to India – If you are an NRI planning to move back to India, you should consider assuming Resident but not ordinarily resident (RNOR) status. You can get this status if –
You have been an NRI in 9 of the last 10 financial years
You have lived in India for 2 years or less in the last 7 financial years
You will get the benefit of exemptions given to NRIs for 2 years post your return. If you continue to stay in India after that, you will be treated as a resident and taxation rules of for resident Indians will be applicable to you.
- Property related tax matters – As an NRI, you can own, buy and sell assets outside India provided you conduct these transactions as an NRI without tax implications in India. You can also inherit property from an NRI. But if you plan to sell these assets after becoming a resident, there can be capital gains tax liability under the taxation laws in India. It might be better to sell off the assets as an NRI to plan taxes better.
- Reduce Tax Liability – You can reduce tax liability by gifting assets to adult children and parents. If there are tax-free bonds issued, you can invest in them. You can create an HUF to take advantage of separate exemption limits allowed for HUF. If you do not plan to return soon to India, you should convert some of your NRO deposits to NRE deposits to reduce tax payable. After these 2 years, returning NRIs are treated as resident individuals.
- All you want to Know about TDS for NRIs
Examples to understand Tax Planning for NRIs
- Avinash is an NRI. He has a house in Delhi. He wants to sell it and buy a house in the United States. Are the capital gains taxable?
Long term capital gains got from selling a residential house are exempt from tax if the individual has within a period of one year before or two years after the date of sale, or within a period of 3 years constructed, one residential house in India. Since Avinash wants to buy property outside India, he will not get tax exemption.
- Neha has been living and working in Singapore for the last 8 years. She gifts a car to her parents who are residents in India. Is the gift taxable?
The car is a gift to a relative and therefore not taxable for Neha or for her parents.
- Mr. Dubey has been working in Dubai for many years now. He has invested in many fixed deposits in India. Is the interest earned taxable?
The taxability depends on the type of account-
– Interest on a non-resident ordinary (NRO) account
– Interest on resident accounts is fully taxable
– Interest earned on NRE accounts is non-taxable
– Interest earned from deposits in FCNR account is exempt from tax.
One Blunder – It’s not Legal for NRIs to Hold Resident Savings Account
It is important to plan your investments and tax even if you are an NRI. It will help to reduce your tax burden and steer away from problems of tax evasion. You can manage your wealth and income better when you convert your status to Resident Indian.
Note – we are not tax planning experts – “Tax Planning for NRIs” post is based on our interaction with the clients & basic reading.
Please add your experiences & challenges while tax planning in the comment section – I think that will be helpful for other TFL readers.
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