Tax Liability of a NRI

In India, an individual’s tax liability is determined by their residential status, which is classified into three categories under the Income Tax Act of 1961:

1. Resident (ROR)
2. Resident but Not Ordinarily Resident (RNOR)
3. Non-Resident (NR)
4. Non-Resident Indian (NRI)

While the Income Tax Act does not specifically define an NRI, it provides criteria to determine who qualifies as a resident of India. Anyone who does not meet these criteria is considered a Non-Resident Indian (NRI).

Criteria for Resident Status under Section 6(1) of the Income Tax Act:

An individual is deemed a resident in India if they fulfill any of the following conditions:

• They stay in India for 182 days or more during a financial year;
• Or, they are in India for 60 days or more in a financial year, and 365 days or more in the four years immediately preceding the previous year.

However, for Indian citizens working abroad or for crew members on an Indian ship, only the first condition applies. Therefore, they are considered residents once they spend at least 182 days in India. This amendment was introduced in the Finance Act 2020.

Finance Act 2020 Amendments:

The Finance Act 2020 revised the rules regarding residency for tax purposes, particularly for Indian Citizens/Persons of Indian Origin visiting India. They may now be classified as Resident but Not Ordinarily Resident (RNOR) if they meet certain criteria:

• Their total income (excluding foreign income) is Rs 15 lakh or more.
• They have been in India for over 120 days but less than 182 days in the preceding year.
• They have spent 365 days or more in India over the past four years.

Before this amendment, individuals falling under these conditions were categorized as non-residents. After the revision, such individuals may now be classified as RNOR, which impacts their residency status, potentially disqualifying them from Double Taxation Avoidance Agreement (DTAA) benefits, leading to broader taxable income and loss of certain exemptions.

Tax Liability for NRIs:

For NRIs, tax liability in India is limited to income earned within the country. They are not required to pay tax in India on income earned abroad.

However, if the same income is taxed both in the foreign country and in India, NRIs can seek relief under the Double Taxation Avoidance Agreement (DTAA) if India has signed such an agreement with the other country, preventing them from paying taxes twice.

Taxation for Non-Residents (NRIs) in India:

Non-Resident Indians (NRIs) are only subject to tax in India on income that is earned within the country. Their global income, including income from foreign investments, salary earned abroad, or income from any foreign source, is not taxable in India. This means that NRIs do not have to pay tax in India on their foreign earnings.

However, if an NRI earns income from sources in India, such as rental income, income from investments, or business profits, that income is subject to Indian tax laws. NRIs must file an income tax return if they earn taxable income in India, including income from capital gains, interest, dividends, or property sales.

Double Taxation Avoidance Agreement (DTAA):

To prevent double taxation, India has entered into agreements with several countries known as Double Taxation Avoidance Agreements (DTAA). If an NRI is taxed in both India and the country where they are residing, they can claim relief under the provisions of DTAA. These agreements are designed to ensure that income earned in one country is not taxed twice, both in the country of origin and in the country of residence.

NRIs can claim exemptions or tax credits under DTAA, depending on the terms of the agreement with the respective country. In such cases, they may either be able to:

1. Claim a tax credit in the country of residence for taxes paid in India.
2. Exempt the income from taxation in one of the countries.

It’s essential for NRIs to understand the provisions of DTAA, as it helps in minimizing the tax burden by ensuring income is taxed only once, either in the source country or the country of residence.

Key Considerations for NRIs:

1. Income Earned in India: NRIs must pay tax on income earned in India, including interest income from Indian bank accounts, rental income, capital gains from Indian stocks, and other Indian sources of income.
2. NRI Bank Accounts: Income generated from Non-Resident External (NRE) or Non-Resident Ordinary (NRO) accounts may also be subject to tax. While NRE accounts are generally exempt from tax in India, income in NRO accounts is subject to tax.
3. Tax Filing Requirement: NRIs are required to file income tax returns in India if their taxable income exceeds the basic exemption limit, regardless of whether they live in India or abroad. They must also report income earned from Indian sources, and if applicable, claim deductions under provisions such as Section 80C (for investments in specified savings instruments), Section 80D (for insurance premiums), and others.
4. Capital Gains Tax for NRIs: If NRIs sell property or shares in India, capital gains tax will apply, and the rate depends on the holding period of the asset. Long-term capital gains (LTCG) on shares or mutual funds held for more than one year are generally taxed at a lower rate compared to short-term capital gains.
5. Taxability of Pension and Annuity: Pension and annuity income earned by NRIs in India is taxable under Indian tax laws. NRIs must declare such income in their Indian tax return, and they may be eligible for tax exemptions or rebates depending on the applicable tax treaties.

Conclusion:

NRIs must be aware of the tax implications of their income earned both within India and abroad. Understanding residency status, taxability of income, and the provisions of DTAA is crucial for ensuring compliance with Indian tax laws and avoiding double taxation. By making use of the exemptions and reliefs available under DTAA and other provisions, NRIs can reduce their overall tax burden and ensure proper tax planning.