Many people go abroad these days for various reasons like higher studies, work and more. In such cases, they are considered an NRI or Non-Resident Indian.
Now, while they have moved outside of India, they may still have investments here like a house property that generates rental income, or they might also be investing in the Indian stock market to earn profits. And because this income is being earned/accrued in India, they will have to pay taxes on it.
Taxation for residents and NRIs is slightly different, and we’ll discuss it in detail here. But first, let’s understand how is the residential status determined.
You are a resident if:
- You have lived in India for 182 days or more during the financial year, or
- You have lived in India for at least 60 days in a financial year and at least 365 days in the last 4 years.
Note: If you are an Indian citizen working abroad, only the first condition is applicable. This means that you will be considered a resident only when you stay in India for more than 182 days during the financial year.
If you don’t fulfil the above conditions, you’ll be considered an NRI.
In the case of a resident, their global income is taxable in India, but for NRIs, only the income accrued/earned in India is taxable.
Let’s see how various incomes earned by an NRI are taxed in India.
Salary Income
Here, there can be two cases.
- One, the salary is received in India (in Indian bank account)
- Two, the salary is earned by rendering services in India
In both these cases, the salary income would be taxable as per the applicable slab rate.
Capital Gains
Any capital gains arising from the sale of capital assets located in India will be taxable. While the tax rates remain the same as in the case of residents, a TDS is applicable on these capital gains for NRIs. The TDS rates differ based on the capital asset.
The entity paying the NRI is liable to deduct this TDS. For example, in case of capital gains from house property, the buyer needs to deduct TDS and file form 27Q. Moreover, it is necessary for the deductor to have a valid TAN (Tax deduction and collection account number).
The basic exemption of ₹2.5L is not available for NRIs in case of LTCG and STCG from listed shares and mutual funds.
Rental income from house property
If you’re an NRI and own a property in India, any income from such property will be taxable at slab rate. However, you can claim all deductions w.r.t. house property income which include:
- Standard deduction of 30%
- Home loan deduction u/s 80C (for principal repayment) and 24b (for interest paid).
Moreover, the tenant is required to deduct TDS at the rate of 30% before making the payment to NRI.
Income from other sources
Incomes like interest from deposits and dividends are considered other source income. Again, a TDS of 30% is applicable on interest from FDs and 20% TDS is applicable on dividends.
While interest income is taxed as per the slab rate, dividends for NRIs are taxed at a special rate of 20%.
Interest earned from deposits in NRE and FCNR accounts are fully exempted from taxes. However, for NRO accounts, this amount is taxable.
Business Income
Any income that you earn from a business set up in India is also taxable as per the applicable slab rate. You can claim expenses related to your business and pay taxes on the net income.
Can NRIs claim any deductions?
Yes, NRIs are allowed most Chapter VI-A deductions including 80C for investments and life insurance, 80D for medical insurance, 80E for education loans and more.
Further, NRIs can also claim home loan interest as a deduction u/s 24b and capital gains exemptions like those u/s 54, 54F and 54EC.
Which ITR form do NRIs have to file?
In most cases, ITR-2 will be applicable for NRIs. However, they will have to go for ITR-3 if they have income from business.
Do NRIs have to report foreign assets and incomes in India?
No, you are only required to report incomes that are taxable in India. There’s no need to report your foreign holdings or income in the ITR.