Income Tax: How are NRIs taxed in India? 5 things you need to know before ITR deadline

ITR filing 2024: Non-Resident Indians (NRIs) should make sure to file their income tax returns in India if they have earned income within the country during a particular financial year. The income taxes payable by NRIs in India are determined based on their residential status for the year under the Indian Income Tax Act, 1961. If an NRI's status is deemed 'resident,' then their global income becomes subject to taxation in India.

To ascertain whether you, as an NRI, are liable to pay taxes in India, the initial step involves determining your residential status for tax purposes in the previous year and establishing if your income falls within the taxable bracket.

Taxation norms

Residents must pay taxes on income earned in both India and abroad, whereas NRIs are not required to pay tax on foreign income. It is important to understand your residency status, taxable income, available deductions and exemptions, as well as determining the appropriate Income Tax Return (ITR) forms.

Every taxpayers should determine their residential status in accordance with provisions of Section 6 of the Income Tax Act, 1961 (herein after referred to as ‘IT Act’) for the relevant financial year for the purpose of taxation. 

Income accruing or arising in India for NRIs is governed by Section 9 of the Income-tax Act. Generally, foreign income for NRIs is exempt from taxation in India, except in specific circumstances outlined by the Act.

Income taxable in India

It is important to note that income accruing outside of India from a business controlled from or a profession set up in India will not be taxed for NRIs.

NRIs will have to pay taxes on any income that is earned, received, or deemed to accrue in India. Taxable income for NRIs includes the following:

> Salary received or for services provided in India.
> Income generated from residential property in India, whether it is rented out or vacant.
> Capital gains from the sale of property or assets located in India.
> Income from deposits such as fixed deposits or interest earned on bank savings accounts in India.
> Interest earned on NRO (non-resident ordinary) accounts will be taxed, whereas the interest on NRE (non-resident external) and FCNR (foreign currency non-resident) accounts will be exempt from taxation.

Taxability of incomes

If your total annual income exceeds the basic exemption limit of Rs.2.5 lakh, regardless of whether you are a Non-Resident Indian (NRI) or a resident, it is compulsory to file your tax returns. The deadline for filing these returns is 31 July of the pertinent assessment year. However, if you are a working partner in a firm that requires its accounts to be audited, the filing deadline is extended to 30 September.

CA (Dr.) Suresh Surana shares the taxability of salary income, rental income, dividend income, interest income and capital gains has been provided below:

Salary Income:

Chargeability: Salary income earned by an NRI for services rendered in India is taxable in India. If the services are rendered outside India, salary income may not be taxable in India unless it is received in India or from an Indian employer.

Tax Treatment: Generally, salary income is subject to tax withholding (TDS) by the employer in India and subject to tax as per the income tax slab rates. NRIs need to file tax returns in India if their total income exceeds the basic exemption limit to claim refunds or adjust tax liabilities.

Rental Income:

Chargeability: Rental income from property located in India is taxable for NRIs.

Tax Treatment: TDS is applicable on rental income exceeding a certain threshold and such income would be subject to tax as per the marginal slab rates. NRIs need to file tax returns in India to declare rental income and pay taxes accordingly. Deductions for property taxes, standard deduction @ 30%, etc., can be claimed.

Capital Gains:

Chargeability: Capital gains arising from the sale of assets located in India are taxable for NRIs. This includes gains from real estate, shares, mutual funds, etc.

Tax Treatment: Different tax rates apply for short-term and long-term capital gains. NRIs can benefit from indexation for long-term capital gains on specified assets.

Interest & Dividend Income:

Chargeability: Interest income earned from bank deposits, fixed deposits, bonds, etc., in India is taxable for NRIs. Also, dividends received from Indian companies are taxable in India.

Tax Treatment: TDS is applicable on interest income exceeding specified thresholds. NRIs need to file tax returns in India to declare such income and pay taxes as per their applicable tax slab. It is important to note that any interest earned on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is tax-exempt. However, interest earned by a non-resident on a Non-Resident Ordinary (NRO) account remains taxable.

Gifts:

Chargeability: Gifts received in India by an NRI are taxable under certain conditions.

Tax Treatment: Gifts received from specified relatives are exempt from tax. However, gifts of specified assets received from non-relatives above specified limits are taxable. NRIs need to disclose such gifts in their tax returns. The receipt of gifts is further subject to the conditions as prescribed under the foreign exchange regulations in India.

Tax Treaty Benefits

According to Section 90(2) of the Income-Tax Act, with respect to the above discussed income heads, NRIs can evaluate to apply either the double tax treaty rate or the rate specified under the IT Act, whichever is more beneficial. To avail the tax treaty rate, NRIs need to provide certain specified documents, including a tax residency certificate (TRC), Form 10F, and a non-permanent establishment (PE) declaration, among others.

Tax relief

India has Double Taxation Avoidance Agreements (DTAAs) with several countries to prevent double taxation for NRIs. Under these treaties, NRIs can claim relief or credit for taxes paid in India on income that is also taxable in their home country.

An NRI is not required to file tax returns under sub-Section (1) of Section 139 if the total income in the previous year comprised solely of investment income or income from long-term capital gains, or both, and appropriate tax deducted at source (TDS) as per the provisions of Chapter XVII-B has been deducted from said income.