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Perfect Guide on NRI Income Tax Rules and Policies in India

As a non-resident Indian have you been grappling with the constant challenge of how various incomes would be taxed in your home country and in India? Are your decisions related to remittances, investments, property purchases and rentals marred at the thought of taxes?

Though tax laws in different countries are difficult to fathom, they aren’t as perplexing as you thought.  Take for instance the income from abroad. The ground rule is that income which is earned outside India by an NRI is not taxed in India.

Similarly, there are a host of other incomes that aren’t taxed in India, but may or may not be touched in the country you are residing in. We present a simple guide for Non-resident Indian to assist them in saving taxes by understanding which income will be exempt and which won’t.

Income exempt in India

Most NRIs have bank accounts in India – either non-resident external accounts or foreign currency non-resident account. The good news is that though Indian residents have to pay tax on their savings bank account interest above Rs. 10,000, NRIs are excused. No taxes are to be paid on the interest arising out of these bank accounts.

You need not worry about paying taxes on income you earn abroad. Also, gains from money sent home to family members or for investments are exempted (taxed at concessional rates under specific scenarios).

Income Taxed in India

Gains – long-term or short term – from investments or sale of assets such as house would be taxed in India. Also, rental income is taxed in India, but a standard deduction of 30% of the rent (less municipal taxes) is available.

If you have inherited assets from Indian parents or relatives then you wouldn’t have to bear taxes when you gain control of these assets. But later, recurring gains such as rental income or income from sale or transfer would be liable to tax.

Exempt in India, Taxed abroad

There are certain conflicts with regards to specific income with regards to tax laws in different countries. As a result, you would have to bear the brunt of tax in your new country. For instance, dividends distributed by Indian companies are exempt in India but taxed in countries such as the US.

Select long-term capital gains from Indian investments are exempt in India, but taxes are applicable as per the rules of the country you now reside in.

Calculating taxes

If you only have capital gain income from shares and securities in India then you would not get the basic exemption limit. Your shares, mutual funds and other assets, when sold in India, would be taxed just like residents. Equities held for more than a year are exempt only in case of STT paid else it is taxable @ 10%, while non-equity funds have a different taxation structure based on when they are sold. The entire gain made on investments in the non-equity fund up to 36 months (12 months if prior to July 10, 2014) are added to the income and taxed as per the bracket. While those redeemed after 36 months are taxed at the rate of 10%. In case of assets other than Shares & securities sold before 36 months then they are taxed as per the regular bracket and if sold after 36 months are taxed at 20%.

Also remember that to avail the benefits of exemption under section 54, 54EC and 54F, and these can be availed only in case you invest the proceeding in India.

Paying taxes

Under most situations taxes would be deducted before making your payments, be it investments or rents, as mandated by the section 195 of the Income Tax Act.

But, if there are additional liabilities then you can pay the taxes online through a seamless process.

Tax filing

Even though you may have to face the tax brunt, it doesn’t merit efiling income tax returns unless your income exceeds the threshold limit. If your earning from all sources put together – rent, dividend, capital gains, investment income, etc – shoots beyond Rs. 2.5 Lacs (Rs. 3 Lacs for those between 60 – 80, Rs. 5 Lacs for those above 80 years) for the financial year 2014 – 15, then you would have to file a tax return.

When your income exceeds the threshold, you should check whether you can skip filing tax returns through provisions under Chapter (XII-A). Here, if all taxes have been deducted at source for specified income then there is an option wherein an NRI need not file a return.

Also, if this income earned is a result of sale or transfer or regular income from foreign exchange asset then an NRI need not file tax returns.

However, while filing returns in the country you reside in you should declare the Indian Income as you would get tax credit in countries in a Double Taxation Avoidance Agreement (DTAA) with India.

Steps to save taxes

Though one cannot escape tax completely, he can claim deductions by investing in various investment avenues eligible for 80C. However, as an NRI you aren’t permitted to invest in National Saving Certificates, Senior Citizens Savings Scheme, Post Office Time Deposits or open new PPF accounts or extend them.

Other taxation benefits under home loan, life insurance, pension plan, equity-linked savings schemes of mutual funds are allowed. Tuition fee paid for spouse or children in India too can be claimed for deduction.

Health insurance policies or health check-ups paid for parents or dependants in India too are allowed for deduction under section 80D.

If you aren’t willing to buy another property using the sale amount to save taxes, then long-term capital gains arising due to sale of assets can be invested in tax-saving bonds such as those issued by NHAI or REC. But these are capped at Rs. 50 Lacs. Also, investments in foreign currency bonds are taxed at 20% vis-à-vis the maximum tax rate of 30%. So, you can claim a lower tax rate by investing in these bonds.

How H&R Block can help you?

Saving taxes and filing income tax return accurately becomes very easy when you have professional help. This is where we come into the picture. We have a team of in-house tax experts who can e-file your tax return accurately while giving you maximum tax benefits.

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Niteesh Singh
Niteesh Singh
Niteesh is a Tax Researcher and Content Lead at H&R Block (India). He holds an MBA with a specialisation in BFSI domain. In his career spanning over six years, he has helped thousands of people understand taxes in a simple and effective manner. Outside work, Niteesh is an astronomy geek who is also involved in wildlife conservation activities.