Non-Resident Indians are referred to as those who are of Indian origin or who are Indian citizens but are currently not residing in the country. To determine whether a person is a non-resident Indian or not, the residential status of the person in the past year or more is taken into consideration. The Income Tax Act 1961 provides information and guidelines on how to classify a person as a country resident.
An individual is considered a resident if,
If he/she stays in India for a minimum of 182 days
If he/she stays for 60 days or more in the previous year and 365 days or more in the last four years before the previous year.
Any money received in regular intervals by an individual is classified as income. The period could be weekly, monthly, bi-annually, or yearly. Income could be monetary or non-monetary. Income is taxable either on a receipt or on an accrual basis.
1. Salary income: Any remuneration received by an individual for providing services under an employment contract in his/her name is classified as income from salary.
2. Income from the property: Also known as an income from house property, it does not just refer to income from a house but also includes income from all kinds of properties like houses, offices, buildings, shops, or any property appurtenant to land. Residential property and commercial property are not treated differently under Income Tax Act. The Tax applies only to the legal owner of the property.
3. Profits and Gains from business or any other profession: The income appearing under the profit/loss section of the account statement produced by the individual paying the Tax is classified under this section. The income is not just the profits but also the losses, recorded in the negative. The section covers all kinds of income, profit or loss, legal or illegal. Any income earned by business people in the previous year is considered for taxation the following year. The returns for the income tax should be filed by the 31st of July in the assessment year.
4. Capital gains income: If an investment/asset is transferred, the profit earned on the transfer is classified as income from capital gains. It could be on a long-term or a short-term asset. The resultant short-term or long-term gains will be considered a gain taxable under the Income Tax Act. The capital gains come into play only when the asset transferred is a capital asset. For instance, selling shares or a house and the income or profit made on the sale will be considered under this category.
5. Other sources: Dividends, savings account interest, Gifts received, etc., which cannot be classified into different income categories, are considered as income from other sources.
For a resident taxpayer, the income, whether it was earned or accrued outside India, will be taxable in India. But for non-resident Indians, the income earned or accrued outside will not be considered for taxability in India.
Let us look at the five primary sources of income explained above and their taxability for Non-Resident Indians.
1. Income from salary: If the remuneration was received for services rendered in the country, then the same is taxable even if the receipt of the money is outside India. The salary paid to government officials like diplomats for their services outside India is also considered for taxability in India. This would mean all the salary components like perquisites, allowances, etc.
2. House property income: If the NRI owns a property in India, then any income received on the property like rent is taxable in India. There are, of course, deductions which they can avail on this income.
3. Income from businesses: This would come under the purview of taxation if the accrual of the revenue comes out of a business in India or through a connection in India. However, specific business categories are exempted from this. The business income becomes taxable only if the business has a permanent establishment in India. It could be a factory or a branch, or a construction site. Apart from companies, professional income for jobs like teachers, doctors, accountants, etc., are taxable if the income is accrued in India.
4. Capital gains income: If the income was received by transfer of capital assets in India, then the income from the transfer is taxable in India. For shares, if the sale includes companies incorporated outside the country but has a value dependent on assets in the country, then it is also taxable.
5. Royalty or Fee for Technical Services (FTS) income:Royalty is the income received by the person- creator, inventor, or developer for allowing his artwork, scientific invention or any other creation to be used commercially.
Royalty is taxable in India.
If an income is accrued by royalty where it was accrued as part of services or products utilized in the country or for a profession or business that happened in the country, then the same is taxable. The income by royalty or Fees for Technical Services (FTS) becomes taxable for NRIs if the same is paid by any Indian organization or by the Indian Government.
6. Dividend and interest incomes: Dividends received by NRI from shares in an Indian Company will be taxable @ 20% under the provisions of Section 115 A and 115 E of the Income Tax Act.
NRI’s hold 2 types of bank accounts in India on which interest is
Income derived by NRI from
Income from the above assets will be Taxable at the flat rate of 20% under the Income Tax Act 1961
No deduction is allowed under Section 80 with regard to the above Investment Income.
The resultant capital gains will also be taxed @ 20%.
No indexation benefit will be available while calculating capital gain
No deduction under section 80 will be available
Section 115F allows for the exemption of the Long Term Capital gains to NRI’s
If the profit is reinvested back into the special investments
The exemption shall be given by the Tax Department proportionately if the reinvested amount is less than the net consideration.
Net Consideration is Gross consideration less expenses incurred wholly and exclusively for the purpose of the transfer.
Deductions available to NRIs
1. NRI’s cannot claim deduction under Section 80C for sums invested in
• PPF ( Public Provident Fund)
• Post Office 5-year Deposit Scheme
• NSC ( National Savings Certificate)
• SCSS ( Senior Citizen Savings Scheme)
2. NRI’s cannot claim deductions available to Differently abled under Section 80DD, 80DDB and 80U
3. NRIs cannot claim a deduction for the sum invested in RGESS( Rajiv Gandhi Equity Saving Scheme) under section 80CCG
TDS or Tax deducted at source applies to certain scenarios for the NRIs as explained below:
Double Taxation Avoidance Agreements (DTAA)
In the case of NRIs, often, the income earned by them gets taxable in the source country and the land of residence. This leads to Double Taxation. Therefore, many countries’ governments enter into DTAA with other countries so that the NRI doesn’t end up paying taxes twice. The provisions of DTAA should be resorted to in such cases to minimize Tax Liability by taking Tax Credits.
It would be prudent to get in touch with a tax expert to know more about the taxability and the deductions available to NRIs in India.
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