The NRI Series – NRI Obligations, Incomes & Deductions

The NRI Series – NRI Obligations, Incomes & Deductions

In our first article of the NRI Series (https://gjmco.blogspot.com/2018/11/the-nri-series-understanding-nri-status.html) we discussed about NRI Status and Scenarios when the NRI incomes can be liable to taxes in India.  In this second article we shall discuss the various types of income and deductions NRIs’ are eligible to.  But before we move further let’s revise upon the NRI Status & their taxability from the previous article briefly:

NRI Status:

You are considered an Indian resident for a financial year: (i.) When you are in India for at least 6 months (182 days to be exact) during the financial year (ii.) You are in India for 2 months (60 days) for the year in the previous year and have lived for one whole year (365 days) in the last four years. If you are an Indian citizen working abroad or a member of a crew on an Indian ship, only the first condition is available to you – which means you are a resident when you spend at least 182 days in India. The same is applicable to a Person of Indian Origin (PIO) who is on a visit to India. The second condition is not applicable to these individuals. A PIO is a person whose parents, or any of his grandparents were born in undivided India.   You are an NRI if you do not meet any of the above conditions.

NRI Taxation:

An NRI’s income taxes in India will depend upon his residential status for the year. If your status is ‘resident,’ your global income is taxable in India. If your status is ‘NRI,’ your income which is earned or accrued in India is taxable in India. Salary received in India or salary for service provided in India, income from a house property situated in India, capital gains on transfer of asset situated in India, income from fixed deposits or interest on savings bank account are all examples of income earned or accrued in India. These incomes are taxable for an NRI. Income which is earned outside India is not taxable in India. Interest earned on an NRE account and FCNR account is tax-free. Interest on NRO account is taxable for an NRI.

Let’s understand now the Obligations, Incomes & eligible Deductions for NRIs’ under the Indian Income Tax Law:

Requirement to File Income Tax return:

NRI or not, any individual whose income exceeds Rs.2,50,000 is required to file an income tax return in India. 

Due date for filing Income Tax return:

July 31st is the last date to file income tax return in India for NRIs.

Obligation to Pay Advance tax:

If your tax liability exceeds Rs 10,000 in a financial year, you are required to pay advance tax. NRI will also be liable to pay interest on non-payment or late payment of advance taxes.

Taxable Incomes for an NRIs

Your salary income is taxable when you receive your salary in India or someone does on your behalf. Therefore, if you are an NRI and you receive your salary directly to an Indian account it will be subject to Indian tax laws. This income is taxed at the slab rate you belong to.

A.) Income from Salary

Income from salary will be considered to arise in India if your services are rendered in India. So even though you may be an NRI, but if your salary is paid towards services provided by you in India, it shall be taxed in India immaterial of where you are receiving the income. In case your employer is Government of India and you are the citizen of India, income from salary, if your service is rendered outside India is also taxed in India. Note that income of Diplomats, Ambassadors are exempt from tax.

B.) Income from House Property

Income from a property which is situated in India is taxable for an NRI. The calculation of such income shall be in the same manner as for a resident. This property may be rented out or lying vacant. An NRI is allowed to claim a standard deduction of 30%, deduct property taxes, and take benefit of an interest deduction if there is a home loan. The NRI is also allowed a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid on the purchase of a property can also be claimed under Section 80C. Income from house property is taxed at slab rates as applicable.

Payments to an NRI

Any person who makes any payment to an NRI must remember to deduct TDS at 30%. The income can be received to an account in India or the NRI’s account in the country he is currently residing. A person making a remittance (a payment) to a Non-Resident Indian has to submit Form 15CA. This form has to be submitted online. In some cases, a certificate from a chartered accountant in Form 15CB is required before uploading Form 15CA online. (We shall discuss these in our next article of the NRI Series)

C.) Income from Other Sources:

Interest income from fixed deposits and savings accounts held in Indian bank accounts is taxable in India. Interest on NRE and FCNR account is tax-free. Interest on NRO account is fully taxable.

D.) Income from Business and Profession

Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.

F.) Income from Capital Gains

Any capital gain on transfer of capital asset which is situated in India shall be taxable in India. Capital gains on investments in India in shares, securities shall also be taxable in India. If you sell a house property and have a long-term capital gain, the buyer shall deduct TDS at 20%. However, you are allowed to claim capital gains exemption by investing in a house property as per Section 54 or investing in capital gain bonds as per Section 54EC.

G.) Special Provision Related to Investment Income

When an NRI invests in certain Indian assets, he is taxed at 20%. If the special investment income is the only income the NRI has during the financial year, and TDS has been deducted on that, then such an NRI is not required to file an income tax return.

H.) What are the Investments that Qualify for Special Treatment?

Income derived from the following Indian assets acquired in foreign currency:

i. Shares in a public or private Indian company

ii. Debentures issued by a publicly-listed Indian company (not private)

iii. Deposits with banks and public companies

iv. Any security of the central government

v. Other assets of the central government as specified for this purpose in the official gazette

No deduction under Section 80 is allowed while calculating investment income.

I.) Special Provision Related to Long-Term Capital Gains

For long-term capital gains made from the sale of transfer of these foreign assets, there is no benefit of indexation and no deductions allowed under Section 80. But you can avail an exemption on the profit under Section 115 F when the profit is reinvested back into:

i. Shares in an Indian company

ii. Debentures of an Indian public company

iii. Deposits with banks and Indian public companies

iv. Central Government securities

v. NSC VI and VII issues

In this case, capital gains are exempt proportionately if the cost of the new asset is less than net consideration. Remember, if the new asset purchased is transferred or sold back within 3 years, then the profit exempted will be added to the income in the year of sale/transfer. The benefits above may be available to the NRI even when he/she becomes a resident – until such an asset is converted to money, and upon submission of a declaration for the application of the special provisions to the assessing officer by the NRI. The NRI may choose to opt out of these special provisions and in that case the income (investment income and LTCG) will be charged to tax under the usual provisions of the Income Tax Act.

Deductions and Exemptions for NRIs

Similar to residents, NRIs are also entitled to claim various deductions and exemptions from their total income. These have been discussed here:

a. Deductions Under Section 80C

Most of the deductions under Section 80 are also available to NRIs.  Currently, a maximum deduction of up to Rs 1.5 lakhs is allowed under Section 80C from gross total income for an individual.

b. Of the Deductions Under Section 80C, those allowed to NRIs are:

i. Life insurance premium payment: For policy in the NRI’s name or in the name of their spouse or any child’s name. The premium must be less than 10% of sum assured.

ii. Children’s tuition fee payment: Tuition fees paid to any school, college, university or other educational institution situated within India for the purpose of full-time education of any two children (including payments for play school, pre-nursery and nursery).

iii. Principal repayments on loan for the purchase of a house property: Deduction is allowed for repayment of loan taken for buying or constructing residential house property. Also allowed for stamp duty, registration fees and other expenses for purpose of transfer of such property to the NRI.

iv. Unit-linked insurance plan (ULIPS)

v. Investments in Equity Linked Savings Schemes (but only through Portfolio Investment Scheme.  This will be discussed in our forthcoming articles of the NRI Series)

Other Allowable Deductions

Besides the deduction that an NRI can claim under Section 80C, he is also eligible to claim various other deductions under the Income tax laws which have been discussed here

a. Deduction from House Property Income for NRIs

NRIs can claim all the deductions available to a resident from income from house property for a house purchased in India. Deduction towards property tax paid and interest on home loan deduction is also allowed.

b. Deduction under Section 80D

NRIs are allowed to claim a deduction for premium paid for health insurance. This deduction is available up to Rs 30,000 (increased to Rs 50,000 effective 1 April 2018) for senior citizens and up to Rs 25,000 in other cases for insurance of self, spouse, and dependent children. Additionally, an NRI can also claim a deduction for insurance of parents (father or mother or both) up to Rs30,000 (raised to Rs 50,000 effective 1 April 2018) if their parents are senior citizens, and Rs 25,000 if the parents are not senior citizens. Beginning FY 2012-13, within the existing limit a deduction of up to Rs 5,000 for preventive health check-ups are also available.

c. Deduction under Section 80E

Under this Section, NRIs can claim a deduction of interest paid on an education loan. This loan may have been taken for higher education for the NRI, or NRI’s spouse or children or for a student for whom the NRI is a legal guardian. There is no limit on the amount which can be claimed as a deduction under this Section. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier. The deduction is not available on the principal repayment of the loan.

d. Deduction under Section 80G

NRIs are allowed to claim a deduction for donations for social causes under Section 80G. Here are all the donations which are eligible under Section 80G.

e. Deduction under Section 80TTA

Non-resident Indians can claim a deduction on income from interest on savings bank account up to a maximum of Rs 10,000 like resident Indians. This is allowed on deposits in savings account (not time deposits) with a bank, co-operative society or post office and is available starting FY 2012-13.

f. Deductions NOT Allowed to NRIs

Some Investments under Section 80C:

i. Investment in PPF is not allowed (NRIs are not allowed to open new PPF accounts, however, PPF accounts which are opened while they are a resident are allowed to be maintained)

ii. Investments in NSCs

iii. Post office 5-year deposit scheme

iv. Senior citizen savings scheme

g. Investment under RGESS (Section 80CCG)

h. Deduction for the Differently-Abled under Section 80DD

Deduction under this Section is allowed for maintenance including medical treatment of a handicapped dependent (a person with a disability as defined in this Section) is not available to NRIs.

i. Deduction for the Differently-Abled under Section 80DDB

Deduction under this Section towards medical treatment for a dependent who is disabled (as certified by a prescribed specialist) is available only to residents.

j. Deduction for the Differently-Abled under Section 80U

Deduction for disability where the taxpayer himself suffers from a disability as defined in the Section is allowed only to resident Indians.

k. Exemption on Sale of Property for an NRI

Long-term capital gains (when the property is held for more than 3 years) is taxed at 20%. Do note that long-term capital gains earned by NRIs are subject to a TDS of 20%.

NRIs are allowed to claim exemptions under Section 54, Section 54 EC, and Section 54F on long-term capital gains. Therefore, an NRI can take benefit of the exemptions from capital gains at the time of filing a return and claim a refund of TDS deducted on Capital Gains. Exemption under Section 54 is available on long-term capital gains on sale of a house property. Exemption under Section 54F is available on sale of any asset other than a house property.

Exemption is also available under Section 54EC when capital gains from sale of the first property is reinvested into specific bonds.

i. If you are not very keen to reinvest your profit from sale of your first property into another one, then you can invest them in bonds for up to Rs.50 lakhs issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). ii. The homeowner has 6 months’ time to invest the profit in these bonds, although to be able to claim this exemption, you will have to invest before the tax filing deadline. iii. The money invested can be redeemed after 3 years, but cannot be sold before the lapse of 3 years from the date of sale. The NRI must make these investments and show relevant proof to the buyer to get no TDS deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.

5. How can NRIs Avoid Double Taxation?

NRIs can avoid double taxation (meaning: getting taxed on the same income twice in the country of residence and India) by seeking relief from Double Tax Avoidance Agreement (DTAA) between the two countries. Under DTAA, there are two methods to claim tax relief – exemption method and tax credit method. By exemption method, NRIs are taxed in only one country and exempted in another. In tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.

For any queries, feel free to write to us at info@gjmco.in

Thanks & Best regards,
Knowledge Base Team
GJM & Co.
Chartered Accountants
www.gjmco.in