How do I Determine My Residential Status?

You are considered an Indian resident for a financial year:

• When you are in India for at least 6 months (182 days to be exact) during the financial year
• 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 (Person of Indian origin) 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.

Resident but Not-ordinary Resident (RNOR) definition amended

An individual will be considered as RNOR for the year if he or she meets the following conditions:

• Who has been non-resident in India for 9 years out of 10 previous years preceding the year of consideration, or
• Who has stayed in India for 729 days or less during 7 previous years preceding the year of consideration

The Finance Act 2020 has amended the residency provisions to include Indian Citizens/ person of Indian Origin, who comes to visit India shall now be considered as RNOR subject to the following conditions:

• Total income other than foreign income is Rs.15 lakh or more,
• The individual has stayed in India for more than 120 days but less than 182 days in the previous year,
• The individual has stayed in India for 365 days or more in four years preceding the previous year.

Before this amendment, such individual was classified as non-residents. Due to the above-mentioned amendment, the individual may be classified as RNOR which will lead to loss of DTAA benefits, increased scope of total income for taxability, loss of various exemptions allowed etc.

It is to be further noted that in the above amendment, an individual staying for more than 182 days shall be classified as a resident irrespective of the level of income in the previous year.

Deemed residency status introduced in Finance Act 2020

Finance Act 2020 introduced the concept of ‘Deemed residency’. According to this, an Indian citizen of India, earning an income of more than Rs.15 lakh income from Indian sources, shall be deemed to be a resident of India if he is not liable for payment of taxes in any other country.

The deemed residents will be classified as RNOR with the effect from financial 2020-21. This amendment was brought in force to tax the incomes of the Indian citizen who are not liable to tax in any country

Special relief due to COVID lock-down

For FY 2019-20 if an individual has come to India on a visit before 22nd March 2020 and

• Has been unable to leave because of lockdown on or before 31st March 2020, period of stay from 22nd to 31st March shall not be considered.
• Has been quarantined due to Covid19 on or after 1st March 2020 and departed on evacuation flight on or before 31st March 2020, or unable to leave India his period of stay from the beginning of quarantine to 31st march shall not be considered.
• Has been departed on an evacuation flight on or before 31st March 2020, period of stay from 22nd March 2020 to date of departure shall not be considered

Is My Income Earned Abroad Taxable?

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 a 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 an NRO account is taxable for an NRI.

Am I Required to File My Income Tax Return in India?

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

Case Study

Twinkle lives and works in the USA. She checked her Form 26AS online and found out that a TDS entry of Rs 20,000 is mentioned. This TDS had been deducted at 30% on interest earned by her in her NRO account. Twinkle has no other income in India. Does Twinkle have to pay any tax in India, and is she required to file an income tax return? Whether your income will be taxed in India or not, depends upon your residential status.

First, let’s find out about Twinkle’s residential status.

She is an Indian citizen and has gone to the US for her job – she will be a resident if she spends 182 days or more in India.
Twinkle left India on 3rd July 2017 and came back to India on 15th March 2018. Therefore in the financial year that begins on 1st April 2017 and ends on 31st March 2018, Twinkle has spent less than 182 days in India. Since she is an Indian citizen on employment abroad, to qualify as a resident she must spend 182 days or more in India. Therefore, Srishti is an NRI for the purpose of income tax in India.

For Twinkle, only her income which is earned or accrued in India shall be taxable in India. Her income in the USA is not taxable in India since she is an NRI. Interest earned in India is taxable for an NRI. (Do note that interest on NRO account is taxable whereas interest earned on NRE account is exempt from tax).

Twinkle needs to add up all the income she has earned in India. The interest earned on the NRO account of Rs 70,000 is Twinkle’s only income.
For FY 2017-18, the minimum income which is exempt from tax is Rs 2.5 lakhs. Srishti’s total income in India is less than the minimum exempt amount, and therefore she does not have to pay any tax on it. In fact, since no tax is payable by her, she must claim a refund of the TDS deducted from her interest income.

A refund can only be claimed by filing an income tax return for that financial year.

When is the Last Date to File Income Tax Return in India?

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

Do NRIs Have to Pay Advance Tax?

If your tax liability exceeds Rs 10,000 in a financial year, you are required to pay advance tax. Interest under Section 234B and Section 234C is applicable when you don’t pay your advance tax.

Taxable Income for an NRI

Your salary income is taxable when you receive your salary in India or someone does it 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.

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 the Government of India and you are a citizen of India, income from salary, if your service is rendered outside India is also taxed in India.

Note that the income of Diplomats, Ambassadors are exempt from tax. For instance, Ajay was working in China on a project from an Indian company for a period of 3 years. Ajay needed the salary in India to take care of the needs of his family and make payments towards a housing loan. However, since the salary received by Ajay in India would have been taxed as per Indian laws, Ajay decided to receive it in China.

Income from House Property

Income from a property that 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.

For instance, Nandini owns a house property in Goa and has rented it out while she lives in Bangkok. She has set up the rent payments to be received directly in her bank account in Bangkok. Nandini’s income from this house which is in India shall be taxable in India.

Rental Payments to an NRI

A tenant who pays rent to an NRI owner 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 in.

For instance, Maria pays a monthly rent of Rs.30,000 to her NRI landlord. She must deduct 30% TDS or Rs 9,000 before transferring the money to the landlord’s account. Maria must also get a Form 15CA prepared and submit it online to the Income Tax Department. 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. In Form 15CB, a CA certifies details of the payment, TDS rate, and TDS deduction as per Section 195 of the Income Tax Act, if any DTAA (Double Tax Avoidance Agreement) is applicable, and other details of nature and purpose of the remittance.

Form 15CB is not required when:

• Remittance does not exceed Rs 5,00,000 (in total in a financial year). Only Form 15CA has to be submitted in this case.
• If lower TDS has to be deducted and a certificate is received under Section 197 for it or lower TDS has to be deducted by order of the AO.
• Neither is required if the transaction falls under Rule 37BB of the Income Tax Act, where it lists 28 items. Check out the entire list here.

In all other cases, if there is a remittance outside India, the person who is making the remittance will take a CA’s certificate in Form 15CB and after receiving the certificate submit Form 15CA to the government online.

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 the NRO account is fully taxable.

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.

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.

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.

What are the Investments that Qualify for Special Treatment?

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

1. Shares in a public or private Indian company
2. Debentures issued by a publicly-listed Indian company (not private)
3. Deposits with banks and public companies
4. Any security of the central government
5. 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.

Special Provision Related to Long-Term Capital Gains

For long-term capital gains made from the sale or 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:

1. Shares in an Indian company
2. Debentures of an Indian public company
3. Deposits with banks and Indian public companies
4. Central Government securities
5. 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.

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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:

Deductions Under Section 80C

Most of the deductions under Section 80 are also available to NRIs. For FY 2019-20, a maximum deduction of up to Rs 1.5 lakhs is allowed under Section 80C from gross total income for an individual.

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

i. Life insurance premium payment: The policy must be in the NRI’s name or in the name of their spouse or any child’s name (child may be dependent/independent, minor/major, or married/unmarried). The premium must be less than 10% of the 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 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): ULIPS is sold with life insurance cover for deduction under Section 80C. Includes contribution to a unit-linked insurance plan of LIC mutual fund e.g. Dhanraksha 1989 and contribution to another units-linked insurance plan of UTI.

v. Investments in ELSS: ELSS has been the most preferred option in recent years as it allows you to claim a deduction under Section 80C up to Rs 1.5 lakhs, it offers the EEE (Exempt-Exempt-Exempt) benefit to taxpayers and simultaneously offers an excellent opportunity to earn as these funds invest primarily in the equity market in a diversified manner.

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:

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. You can read about house property income in detail here.

Deduction under Section 80D

NRIs are allowed to claim a deduction for the premium paid for health insurance. This deduction is available up to Rs 50,000 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 Rs 50,000 if their parents are senior citizens, and Rs 25,000 if the parents are not senior citizens.

Within the existing limits allowed, a deduction of up to Rs 5,000 for preventive health check-ups are also available.

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.

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.

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 a savings account (not time deposits) with a bank, co-operative society or post office and is available starting FY 2012-13.

Deductions not Allowed to NRIs

Some Investments under Section 80C:

• 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)
• Investments in National Savings Certificates (NSCs)
• Post office 5-year deposit scheme
• Senior citizen savings scheme (SCSS)

Deduction for the Differently-Abled under Section 80DD

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

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.

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.

Exemption on Sale of Property for an NRI

Long-term capital gains are 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 the sale of a house property. Exemption under Section 54F is available on the sale of any asset other than a house property.

• If you are not very keen to reinvest your profit from the sale of your first property into another one, then you can invest them in bonds for up to Rs.50 lakhs issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
• 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.
• The money invested can be redeemed after 3 years, but cannot be sold before the lapse of 5 years from the date of sale. With effect from the FY 2018-2019, the period of 3 years has been increased to 5 years.
• With effect from FY 2018-19, the exemption under section 54EC has been restricted to the capital gain arising from the transfer of long term capital assets being land and building or both. Earlier, the exemption was available on transfer on any capital assets. 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.

How are You Taxed When You are a…

Resident Individual on a Temporary Foreign Assignment

Ramesh worked out of Singapore on a temporary assignment for 4 months and earned Singaporean Dollars during that time. He got this income credited to a bank account here in India. He has returned back home now. How should he file his income tax return?

Ramesh’s taxes for this year will depend on his residential status. Since Ramesh has not been outside of India for more than 182 days, he will be considered a resident. He will be required to file his income taxes in India this year.

This will also include his salary earned during the foreign assignment in Singapore. If the assignment extends to more than 182 days, Ramesh’s residential status will change and he will be required to pay taxes only on the Indian income earned thus far. Here, note that Ramesh’s foreign income credited to an Indian bank account is taxable in India.

Resident Individual recently moved abroad

Vishesh moves to the US on a new assignment. He gets his US income credited to an NRE account in India. He continues with his FD investments and has some money put away in a savings account in India. He just received a Form 16from his Indian employer. Should he file his returns this year in India?

NRI or not, every individual must file a tax return if their income exceeds Rs 2,50,000. But note that NRIs are only taxed for income earned/collected in India. So, Rahul will pay taxes on income earned while in India, and income accrued from FDs and savings account.

Living in a Foreign Country

It’s been 3 years since Arjun moved to the US. He is paid in US dollars. He has his money invested in a savings account and FDs in India. He has bought an apartment and gave it on rent for Rs.35,000 per month. He gifts his parents a car and transfers Rs.10,000 every month to their account to help with their household expenses during the year. He also transfers Rs 20,000 in his father’s account to meet the cost of the insurance policy he has purchased for his parents.

Arjun’s gift to his father and money transfer of Rs 10,000 to his mother is exempt from tax. Regarding the insurance expenses on his parents, Rahul can claim a deduction under Section 80D of Rs 20,000, since his father is over 65 years of age. He will be required to file a tax return in India as his gross income exceeds Rs 2,50,000.

NRI Recently Moved Back to India

Returning NRIs assume RNOR (Resident, Non-Ordinary Resident) status when:

• You have been an NRI in 9 of the 10 financial years preceding the year of your return
• You have lived in India for 2 years or less (729 days or less) in the last 7 financial years.
• The IT Department allows RNORs to continue to enjoy exemptions available to NRIs for a period of 2 years after their return. Therefore, deposits held in foreign currency, which are exempt from an NRI, shall be exempt from returning NRIs for 2 years. After these 2 years, returning NRIs are treated as resident individuals.

A resident with Global Income

If you are a resident Indian, your global income is taxable in India. This income may have been earned or received outside – but it shall be taxed in India. In case this income is also taxable in another country, you can take benefit of DTAA (Double Tax Avoidance Agreement).

CASE STUDY:

Shreya returned to India in 2010 after living in London for more than 5 years. The French company she worked for has retained her as a consultant and sends her fees in pounds. Her salary is credited to a bank account there, and Shreya pays tax on it in the UK.

Does Shreya Have to Pay Tax on this Income or Include it in Her Income Tax Return in India?

Shreya is a resident of India. The taxability of income in India depends upon residential status. A resident has to pay tax on their global income. The resident must disclose all the income earned by them from all sources and all countries in their income tax return and pay tax on it in India. (An NRI pays tax only on income earned or accrued in India).

Therefore, all of Shreya’s income, including the fee that she earns in a foreign currency will be taxable in India.

Her income in pounds shall be converted to Indian rupees for the purpose of income tax calculation and added to her total income, which will be taxed at slab rates prescribed by the tax department.

If Shreya has already paid tax on the foreign income in the UK, she can claim the benefit under DTAA. Based on the relevant provisions of the DTAA between the two countries, Shreya will be saved from getting taxed twice.

If you are a resident and have earned any income from abroad, remember to disclose it in your income tax return.

Income Tax Filing for Foreign Nationals

An expatriate in India is someone who comes to live in India but is not a citizen of India.

Read more about income tax filing for foreign nationals here

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 Taxation 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 the tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.