Many Indians spend a significant portion of their year abroad. This raises an important question: Are these individuals still required to pay taxes in India? The answer is nuanced and depends on several factors.
The Indian Income Tax Act of 1961 applies to anyone earning income outside their home country, not just residents. However, the tax regulations and benefits available to Non-Resident Indians (NRIs) differ markedly from those applicable to resident Indians. This guide will explore the various provisions, rules, and regulations concerning NRIs and their taxation.
As NRIs navigate their financial journeys across borders, they must untangle the complexities of the Indian taxation system. The determination of one’s residential status is crucial, as it directly influences tax liabilities. The Income Tax Act outlines a specific fiscal framework tailored for NRIs.
In this article, we will break down tax slabs and detail capital gains taxes for NRIs, addressing both short-term and long-term investments. We aim to clarify which earnings are taxable and simplify the complexities surrounding capital gains taxes in India.
Understanding NRI Taxation in India
NRIs are subject to unique taxation rules within India, which are contingent upon residential status, income type, and source. Familiarity with these regulations allows NRIs to manage their tax liabilities effectively while ensuring compliance with Indian tax laws.
Example Scenario
Consider Mr. Raj, an NRI residing in the USA. He owns a property in India that generates a rental income of ?40,000 per month. This rental income is taxable in India, but his salary earned in the USA is not subject to Indian taxes.
Determining Residential Status for Tax Purposes
Understanding one’s residential status is essential for navigating NRI taxation. This status is primarily determined by the number of days spent in India during a financial year.
Basic Rule
If an individual resides in India for more than 182 days in a financial year, they are considered a resident for tax purposes. Conversely, if they spend less than 182 days in India, they are classified as an NRI.
For instance, if Mr. Raj lived in India for fewer than 182 days during the financial year 2022-23, he would be categorized as an NRI for that year.
Reporting Changes
It’s vital to promptly update one’s residential status on the Income Tax Department’s website. NRIs must declare their non-resident status as soon as they leave India for employment or other long-term commitments abroad. This ensures accurate reflection of tax obligations and helps avoid legal complications.
Taxable and Non-Taxable Income for NRIs
Taxable Income
As an NRI, you are only liable to pay taxes on income earned or accrued in India, which includes:
- Salary income from services rendered in India
- Income from house property located in India
- Capital gains from the sale of assets situated in India
- Interest from fixed deposits or savings accounts in Indian banks
Example Scenario
If Mr. Raj sells a property in India, the capital gains from that sale will be taxable in India. However, any capital gains from a property sold in the USA will not be taxable in India.
Non-Taxable Income
Income that is generally not subject to taxation in India includes:
- Foreign income earned outside India
- Interest earned on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts
- Gifts or inheritances received from relatives
NRI Tax Slabs
Here’s a breakdown of the income tax slabs applicable to non-resident Indians in India:
|
NRI Income Range in India
|
Tax Rate
|
|
Up to ?2.5 lakh
|
Nil
|
|
?2.5 lakh to ?5 lakh
|
5%
|
|
?5 lakh to ?10 lakh
|
10%
|
|
Above ?10 lakh
|
30%
|
These tax slabs indicate the applicable rates based on different income ranges for NRIs. Notably, NRIs are subject to tax only on income earned in India; foreign income is typically exempt.
NRIs are not eligible for certain deductions available to resident taxpayers, such as standard deductions or deductions under Chapter VI-A.
Example Scenario
If an NRI earns ?7 lakh during the financial year 2022-23, they would fall within the ?5 lakh to ?10 lakh income range. Consequently, the applicable tax rate would be 20%, and the NRI would owe taxes based on this rate.
Given that tax laws can change, it’s advisable to consult with a tax professional or refer to the latest regulations for accurate and up-to-date information regarding NRI tax slabs in India.
Capital Gains Tax for NRIs: Short-Term vs. Long-Term
Capital gains tax applies to NRIs upon selling property or investments in India. The tax rate is contingent upon whether the gain is short-term (assets held for less than 24 months) or long-term (assets held for more than 24 months).
Short-Term Capital Gains
- Holding Period: Up to 24 months
- Tax Rate for NRIs: As per applicable income tax slabs
Example: If an NRI sells a plot of land after 18 months and earns a profit, this profit will be taxed as short-term capital gains according to their income tax slab.
Long-Term Capital Gains
- Holding Period: More than 24 months
- Tax Rate for NRIs: 20% with indexation benefits
Example: If an NRI sells a residential property after three years for a profit, this profit will be taxed at a flat rate of 20%, with indexation benefits applied to adjust for inflation.
Summary of Capital Gains for NRIs
Capital gains arise when an NRI sells an asset such as land, property, or securities at a profit. The taxation treatment hinges on the asset's holding period. Short-term capital gains are taxed according to the applicable income tax slabs, while long-term capital gains benefit from a lower tax rate and indexation.
Long-term capital gains for NRIs are also subject to a TDS (Tax Deducted at Source) of 20%. NRIs can also claim exemptions via 54EC (Capital Gain) Bonds.
Illustrative Examples
- Short-Term Capital Gains: An NRI purchases land and sells it after 18 months for a profit of ?5 lakh. Since the holding period is under 24 months, it qualifies as short-term capital gains, taxed according to applicable income tax slabs.
- Long-Term Capital Gains: An NRI buys a residential property and sells it after three years for a profit of ?50 lakh. With a holding period over 24 months, this profit is taxed at 20%, with the benefit of indexation.
For accurate calculations, it’s best to consult a tax professional or review the most recent regulations regarding capital gains tax for NRIs.
Filing Income Tax Returns (ITR) for NRIs
NRIs must file an income tax return in India if their taxable income in the country during the financial year exceeds the basic exemption limit of ?2.5 lakh.
Filing Deadlines
The due date for filing the return is generally July 31 of the assessment year.
Key Considerations
- Residential Status: NRIs need to clarify their residential status as per the Income Tax Act. NRIs are typically categorized as "Non-Residents" if they do not meet the criteria for "Resident" or "Not Ordinarily Resident" status.
- Taxable Income: NRIs must report and pay taxes on income generated within India, such as salary, rental income, business income, and capital gains from Indian assets.
- ITR Filing: NRIs must file their income tax returns if their total income in India exceeds the basic exemption limit or if they wish to claim a refund for excess TDS. NRIs can file ITRs online or offline, depending on their preference and eligibility.
Example Scenarios for ITR Filing
- NRI with Rental Income: An NRI owns a property in India generating a rental income of ?6 lakh in a financial year. Since this income is sourced in India, the NRI is obliged to file an income tax return regardless of their total income.
- NRI with Salary Income and TDS: An NRI worked in India for several months, earning a salary of ?4 lakh. The employer deducted TDS from this salary. Although the total income is below the exemption limit, the NRI must file an ITR to claim a refund for the excess TDS withheld.
Compliance Calendar ®