Are you an NRI having income in India? Here’s how you will be taxed

• Despite their physical presence abroad, NRIs maintain tax obligations on their Indian-sourced income.
  
• The capital gains tax provisions for NRIs are similar to those for resident individuals, except for the applicability of TDS provisions.
  
• It is important for NRIs to carefully consider their tax liabilities in both India and the country where they are a resident.
  

You are a non resident Indian (NRI) if you live abroad. More specifically, you are classified as "non-resident" of India for a specific financial year as per the Income Tax Act. Despite their physical presence abroad, NRIs maintain tax obligations on their Indian-sourced income. This includes income sources such as salary received for services provided in India, interest earned from fixed deposits or savings bank accounts in India, as well as any capital gains arising from the sale of assets located in India.

“NRIs are not taxed on their foreign income, which is not received in India or deemed to accrue or arise in India. However, they may be subject to tax in the country where the income is earned,” says Archit Gupta, CEO, Clear, a fintech company.

How income in India is taxed for NRIs

Let us take a look at how income in India is taxed for NRIs.

Income from salary

NRIs are subject to income tax in India on their salary if the services are rendered in India.

“The income is taxed according to the income tax slabs applicable to residents,” says Akhil Chandna, Partner, Grant Thornton Bharat, a professional services firm.

Income from business and profession

Income earned by NRIs who have business connections in India is liable to be taxed in the country. The taxation of this income follows the same slab rates that are applicable to residents, and it is calculated based on the total income earned within India.

Rental income

There are no distinct rules for the taxation of house property in India based on residency status. The taxation rules for rental income from properties situated in India are the same for both residents and non-residents (NRIs). The rental income is taxable in the hands of the property owner, regardless of whether they are an NRI or a resident Indian.

Income from other sources

"Other Sources" income typically includes interest income from fixed deposits and savings bank accounts held in India, dividend income, etc.

“Interest earned on Non-Residential External (NRE) and Foreign Currency Non-Resident Account (FCNR) accounts is fully exempt from tax. However, interest on non-resident ordinary (NRO) accounts is fully taxable,” says Chandna.

He adds that for NRIs, income from "Other Sources" is subject to slab rates applicable to them. However, in many cases, income paid to an NRI is subject to TDS at a flat rate of 30% plus the applicable surcharge and health and education cess.

Taxation on investment gains

The capital gains tax provisions for NRIs are similar to those for resident individuals, except for the applicability of TDS provisions. The taxability of capital gains depends on the holding period and the type of investments sold.


Source: Grant Thornton

Taxation on money remitted to India

Since the money being remitted is from the NRIs income in a foreign country, it may be subject to income tax in that country. “Hence, in most cases, the NRI will not have to pay income tax on the remittance in India as it is already taxed in the foreign country. Further, if the money is being remitted for personal use by the NRI's family in India, such as for their living expenses or education, there is no tax liability,” says Chandna.

How NRIs can reduce their tax liability

NRIs can avail tax deductions under the Indian Income Tax Act, including deductions under Section 80C for investments in specified financial instruments, Section 80D for health insurance premiums, Section 80G for charitable donations, and Section 24 for home loan interest.

“NRIs can minimise capital gain tax by investing in specified assets, such as residential properties and specific bonds, within a stipulated time period,’ says Chandna.

What to do if your PAN is inoperative

An NRI is not required to obtain an Aadhaar Card in India, and hence they are not required to link their PAN and Aadhaar. However, it is likely that some NRIs will find their PANs inoperative after June 30. “This is because the residential status of the individuals may not be updated in the records of the Income Tax (IT) Department as "Non-Residents".

The IT Department has clarified that NRIs whose PAN has become inoperative shall reach out to their jurisdictional AOs along with supporting documents (such as a passport copy) to prove that they are NRs in India,” says Chandna.

“It is important for NRIs to carefully consider their tax liabilities in both India and the country where they are resident, as double taxation may arise if they are taxed on the same income in both countries,” says Gupta.

NRIs can claim relief from double taxation under the provisions of a tax treaty (DTAA) between India and the country where they are residents or through the use of the foreign tax credit provisions under Indian tax law.