NRI Taxation Rules in India and Tax Benefits

NRI Taxation Rules in India and Tax Benefits

Just as for a resident Indian, even non-resident Indians are subject to taxes levied by the government of India. Although the NRI taxation rules are different as compared to those for resident Indians, NRIs with some source of income generated from India are required to pay their due taxes for these incomes. Similarly, being an NRI also means that you can be exempted from certain tax laws that affect resident Indians. This paves the way for tax benefits that can be obtained by basically exempting yourself from taxes on your income. Tax is collected by the government in order to create funds that can be used for the development of the country. NRIs, although not staying in India, are still considered Indian citizens and therefore taxed by the Indian government under some certain conditions. At the same time, non-residents are also capable of availing some tax benefits. The conditions for taxation and exemption from taxation are covered below.

Who is subject to the NRI taxation rules?

Before discussing the rules itself, it is important to understand as to whom these rules can be applied to. The general definition of an NRI is a person who holds an Indian passport and is an Indian citizen, who conducts business or work outside India and resides abroad for an uncertain period of time. This general definition does not fit the definition laid out by the tax department on non-resident Indians. According to them a person is classified as an NRI under two conditions: the person stays outside the country for a period of one hundred and eighty two days or more during the previous year or the person does not reside in the country for a period of sixty days or more during the previous and for a combined total of three hundred and sixty five days or more over four years calculated prior to the previous year. This means that even if you are granted an NRI status by the government but have resided in the country for one hundred and eighty two days in the previous financial year, you will be considered a resident by the tax department and will have to pay taxes on your income accrued within the country. It is important to note here that the NRI taxation rules apply only to an NRI who has earned income or interests from within the country.

What is subject to the NRI taxation rules?

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As already mentioned before, the NRI taxation rules can only be applied on the income or gains accrued by a non-resident from within the country. This leads us to an exemption. A non-resident cannot be taxed on the income or gains earned from outside the country provided that they are able to maintain their non-resident status. The benefit of this is that an NRI falling under this category cannot be taxed by the Indian government as their income is not from within the country while at the same time they cannot be taxed by the government of the country they are residing in as they are not residents of that country meaning that their earnings remain tax free.

Non-residential Indians will be taxed on their income from within the country, however. This extends to income from salaries, whether accepted by the NRI or through a resident on their behalf, income accrued from any properties or assets present within the country in the form of sale or rent or lease and any income gained through securities or investments, long-term and short-term, present within the country. All these types of income will be charged under domestic tax laws which in turn imply that if an NRI generates income from within the country, they will have to file an income tax return. A non-resident Indian is required to file an income tax return and pay their taxes if they satisfy the conditions laid out by the Income Tax Act, 1961 and the Foreign Exchange Management Act which are; the taxable income from within the country during a financial year is over the exemption limit of two lakh rupees and the person has earned long-term or short-term financial gains from the sale of any investment or property even if the gains are less than the exemption limit.

How can an NRI avail tax benefits?

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Tax benefits are accrued on the income generated. This means that the benefits are dependent on the type of income and how it is generated. For this reason let us consider the two ways in which income can be generated.

For non-resident employees who work in the country. Although non-resident Indians are taxed for income that they generate from within the country, they can avail certain tax benefits present under the domestic tax laws such as the ninety day rule and under the Double Tax Avoidance Agreements (DTAA) such as the one hundred and eighty day rule by which they are exempted from paying tax on income generated from within India if they are considered residents of their home country, subject to some other rules such as their physical presence in India, cross charging and so on. Any income these non-residents generate from outside India is exempted from taxation.

In the case of non-resident employees who work out of the country, the income generated by them in a bank account present overseas is not subject to taxation from the government of India. Whereas, the income generated from within India is subject to the Indian domestic tax laws and also by the source country as most countries follow the source rule of taxation. In such cases, the individual may file for an exemption under the Dependent Personal Services (DPS) clause of the double tax avoidance agreement that is accepted by India as well as the country they are residing in provided that the individual classifies as a resident of the host country.

Besides the aforementioned, non-resident Indians can also claim foreign tax credits with respect to incomes that are taxed in the host as well as host countries. This is done in accordance with the rules defined under the domestic tax laws of the home country and the double tax avoidance agreement entered upon by the home and host countries. It is necessary to mention that in the case of a non-resident Indian who wishes to avail any of the tax benefits given by a double tax avoidance agreement, a Tax Residency Certificate has to be requested for and obtained in lieu of all the tax years for which such a benefit is claimed. Such a certificate has to be issued by the country from which the individual breaks residency.

It is important to note that Indian sourced income such as the interest from deposits, rent from properties present within India and so on will continue to be taxed in India according to the domestic tax laws and so will the exemptions be available under the domestic tax laws (other than those that are specifically not applicable to non-residents) such as Section 80C with regard to payment of principal on housing loans, certain investments and so on, can be availed by them. Furthermore, a non-resident person, whose income during the relevant tax year comprises solely of income from investments or income through long-term capital gains or both, is not necessarily required to file an income tax return in India. Also, an income tax return is not needed if the tax under consideration has already been accounted for at the source of such an income.

Can an NRI be exempt from the NRI taxation rules?

It is not possible to be completely exempt from taxes. However a non-resident Indian can avail the facility of special tax rates under the Indian tax laws for some certain investment incomes or financial gains from foreign exchange assets. Also the interest earned by a non-resident Indian from any bank accounts including NRE and NRO accounts are not subject to taxation and are therefore tax free under certain conditions.

Keeping in mind the above rules and regulations, one can plan ahead if they decide to go abroad to transact business and earn money. Based on various factors, the tax rates and laws applicable are different for different countries. However, it is impossible to avoid paying any tax at all on your income and this is necessary as the tax a person pays goes towards the development of a better country for them.

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