NRI taxation in India is governed by NRI income tax rules. Non residential indian should know seven income tax rules before deciding taxability of income earned by him in India. In this article, you will get knowledge and understanding of these points.

7 Income tax rules for  NRI taxation in India:

  1. Introduction to the Basic Taxation structure
  2. NRI and its interpretation(s), etc.
  3. Residential Status of NRI
  4. Categories of Income & Liability to Tax
  5. Slab Rates Applicable to NRI.
  6. Double Tax Avoidance Agreements.
  7. Advanced implications also relevant for NRI’s – TDS rates for NRI

Introduction:

The Central Board of Direct Tax (CBDT), by means of the Income Tax Act, 1961; maintains the Direct-Tax Structure within India. The Income Tax Act, 1961 (hereinafter referred to as The Act) has made its own criteria to define the liability of individuals towards the provisions of Income Tax.

The Act has the following Residential Status(s) for Individuals:-

  • Non – Resident
  • Resident But Not Ordinarily Resident
  • Resident And Ordinarily Resident

Out of those 3 categories of Individuals; the Non – Residents, usually, are not liable to comply with any of the requirements of the Income Tax Act of INDIA.
(Please Refer to Exception (s) on pg 3 marked in Bold. )

 

NRI definition ( Non resident definition in Income tax):

Non Resident Indian – The term usually refers to An Indian, who happens to stay abroad. Such an understanding of the abbreviation NRI is derived from the common man’s Usual Interpretation and Understanding of the RESIDENCY Concept.

Citizenship of a Country and Residential Status Citizenship of a country and residential status are separate concepts. A person may be an Indian national/citizen but may not be a resident in India. On the other hand, a person may be a foreign national/citizen but may be a resident in India.
It should be noted that The I.T. Act does not use such a definition of NRI to determine the taxation criteria for individuals, instead the Act has its own criteria defined – as has been mentioned above.

Therefore,
To understand the Taxation rules that may apply to NRI’s, it is important to understand the Entity(s) Residential Status as per The I.T. Act.

NRI residential status:

As explained earlier, only the NON-RESIDENTs are exempted from complying to the provisions of the Income Tax Act. Therefore, it is important for us to understand the Act’s definition of a NON-RESIDENT.

The Income tax department classifies an individual to be a non-resident when:

  • You reside outside India for a period of 182 days or more during the relevant previous year.
  • You are not present in India for 60 days or more during the previous year and again for a combined total of 365 days or more during the previous 4 years prior to the previous year.

Your status of being a resident or a non-resident Indian depends on the above criterion. For example, while you are an NRI, you were physically present in India for more than 182 days during one financial year. In such a case you will be considered as a resident when it comes to taxes and you are obliged to pay taxes to the Indian government for the income earned in India, if any for that year

Now that it is clarified as to which NRI’s are liable to comply with the provisions of the Income Tax Act, we can move ahead to see what level of compliance is required by such NRI’s , with regards to the source of origin of Their Earnings.

For this purpose, we can now simplify our Residential Status Chart:-

The Act has the following Residential Status(s) for Individuals:-

  • Non – Resident (Since they are usually not required to comply with the provisions of the I.T. Act)
  • Resident But Not Ordinarily Resident
  • Resident And Ordinarily Resident.

 As is noticeable, the I. T. Act, in its definition of a Resident, has 2 variants,  Resident But Not Ordinarily Resident (R.NOR)& Resident And Ordinarily Resident (R.OR) . We shall now see as to how NRI’s are classified as either R.NOR or R.OR.

  • Obviously, if an NRI also happens to be a NON-RESIDENT, the question of him being R. NOR or  OR does not arise.
  • Further, the Act has Actively defined the term R. NOR; Hence, all NRI’s who are Resident’s, and do not fall under R. NOR criteria, will be considered as R. OR (because of the passive definition)

A NRI is an RNOR if he meets either of these two conditions: –

 

  • The NRI has been non-resident in India, in nine out of the ten previous years preceding that year,

Or

  • The NRI, during the seven previous years preceding that year, been in India for a period of 729 days or less

 

[Please Note that for Indian Taxation purposes, and accordingly also for the purpose of determining Residential status, the Period / Date count will be based on the Financial Year calendar, and NOT the Annual Calendar

Financial Year:- 1st April to 31st March

Annual Calendar:- 1st January to 31st December]

Categories of income and liability of tax ( Which income of NRI is taxable as per income tax act in India? )

Now that it is clarified as to the 2 types of RESIDENTS, we can move to understand the reason for such classification. The main reason for classifying them in this manner is to help identify the Source (s) of Income which can be brought to tax for NRI (s), based on their period of stay.

Following is the break-up of the Income (s) as identified by the I. T. Act , and how it attracts the liability of Income Tax provisions.

  • Income received or deemed to be received in India whether earned in India or elsewhere.
    Taxable for both, R. NOR & R. OR. Also Taxable to Non-Residents as an exception case,
  • Income which accrue or arise or is deemed to accrue or arise in India during the previous year, whether received in India or elsewhere.
    Taxable for both, R. NOR & R. OR. Also Taxable to Non-Residents as an exception case,
  • Income which accrue or arise outside India and received outside India from a business controlled from India.
    Taxable for both, R. NOR & R. OR.
  • Income which accrue or arise outside India and received outside India in the previous year from any other source.
    Only Taxable to R. OR , Exempt for R. NOR.
  • Income which accrues or arises outside India and received outside India during the year preceding the year and remitted to India during the previous year.
    Only Taxable to R. OR , Exempt for R. NOR.

It is now clear that Income (s) from all sources are Taxable for R. OR, and for R. NOR – usually only Indian origin Income are taxable. Further , we have learnt that NON-RESIDENTS are usually not liable to Income Tax Act provisions, except in cases as mentioned under the Exception case (s) mentioned above.

We can further clarify those exception cases (s) conducting an analysis:-

  • Salary: Salary income sourced from India or income received on your behalf is taxable.
  • Property and Assets: Any income or Capital gain that you generate from the sale/ rent or lease of a valued property or an asset based in India will be taxed as per the Income Tax rules.
  • Securities and Investments: Income or capital gains from long-term or short term investments are liable to be taxed.

 

Non-Residential Indians are liable to pay taxes to the government on their income from salaries, assets or from investments or securities held in India. If you are an NRI with your income sourced in India, you have to file your tax returns. Presently, as per Income Tax Act,1961 and Foreign Exchange Management Act (FEMA), you become liable to pay taxes in case you fulfill either of the following conditions:

  1. Your taxable income in India during a particular financial year is more than the exemption limit of Rs 2.5 lakh.
  2. You have earned short-term or long term capital gains from sale of any investment or property, even if the gains are less than the exemption limit. However, If taxable income consists of only investment income or long term capital gains AND When the tax has already been deducted at source, on such income, the Non-Resident need not file the Income Tax Return

Now that we know about the Basic categorization to Income (s) based on its Source & Nature, we have got a better understanding of how & which Income (s) are Taxed to the NRI’s based on the Residential Status’.

Income tax slab for NRI in India:

We can proceed further by acknowledging the Taxation Slabs that apply to the NRI individuals.
(For the purposes of reviewing taxation slabs, we have presented the Slab rates for the Financial Year-2015-2016. Needless to mention, these slabs may differ for different Accounting periods. )

Income Tax Slab (s) for :-

General Tax Payers

Income tax slab (in Rs.)Tax
0 to 2,50,000No tax
2,50,001 to 5,00,00010%
5,00,001 to 10,00,00020%
Above 10,00,00030%

 

Senior citizens (Aged 60 years but less than 80 years)

Income tax slab (in Rs.)Tax
0 to 3,00,000No tax
3,00,001 to 5,00,00010%
5,00,001 to 10,00,00020%
Above 10,00,00030%

Super senior citizens (Aged 80 and above)

Income tax slab (in Rs.)Tax
0 to 5,00,000No tax
5,00,001 to 10,00,00020%
Above 10,00,00030%

Double Tax Avoidance Agreements:

Now that our basic concepts regarding NRI taxation have been cleared, we can see what D T A A means.

India has comprehensive Double Taxation Avoidance Agreements (DTAA ) with 88(signed 88 DTAAs out of which 85 have entered into force) countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country.

The Indian govt. enters into a Double Tax Avoidance Agreement with another Countries govt. to ensure that Person (s) carrying on any of his transactions in between the two countries is NOT burdened with taxation Twice, i.e is not taxed on the same Income Twice.

 

With regards to our topic of NRI Taxation, it is to be mentioned that NRI’s are usually eligible to claim the beneficial Tax agreements as per the D T A Agreements. Such D T A Agreements are usually binding on the Income Tax Dept., but not on the NRI.

The NRI can take a beneficial stand by deciding if he wants to opt for D T A A interpretation OR the usual tax provision, on a case to case basis.

The NRI has to check whether India has signed any D T A A with his residing country, and If any such D T A A agreement is existing, he may rightly claim for such beneficial provision (s) as explained above.

 

[ We cannot possibly enlist all the relevant points with regards to D T A A , since this topic does not directly relate to the DTAA benefits. Nevertheless, a working knowledge on this topic has been excellently portrayed ].

 TDS on NRI income ( Tax deducted at source provision for NRI u/s 195)

 Now that we have dealt with majorly basic concepts of Taxation, along with D T A A ; we can now take a look at the application of TDS – for NRI’s, in a Nutshell.

The provisions of the Act with regards to TDS applies to all Assessee’s, not just NRI’s.
Since this article is for the immediate benefit of NRI’s, we will focus on Section 195

Sec 195­ though it’s heading is ‘other sums’ it deals with payment to NRIs other then Salary income. According to Sec 195 when payment is credited or paid to any NRI for interest or other sum excluding Salary is liable to deduct TDS. But if interest is payable by Government or Public sector bank 10(23D) then TDS will be applicable only on payment basis.

This section doesn’t cover dividend which are covered u/s 115­O.

Where the person responsible for paying such sum  chargeable under this Act (other than salary) to a non­resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub­section (1) only on that proportion of the sum which is so chargeable:” this shows that the objective of this section is if income of NRI is taxable in India only then TDS should be deducted. If it is not taxable in India then no TDS liability occurred.

There are specific rates mentioned for NRI’s TDS calculations, however those apply on a case to case basis. As part of a basic conceptual understanding that the decision makers of NRI’s must understand, we have carefully introduced such required knowledge in the aforementioned para(s).

One last thing that I wish to remind, just for being a NRI, one will not fall under the category of Section 195, which usually deals with Foreign Assessee’s; One must see the Residential status as per the Income Tax Act, and then decide on the TDS implications !!.

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