How NRIs can do intelligent tax planning in India - Motilal Oswal
How NRIs can do intelligent tax planning in India - Motilal Oswal

How NRIs can do intelligent tax planning in India

Non resident Indians (NRIs) have always been a very privileged set of people due to the foreign exchange that they brought into India. Even today, the RBI normally falls back upon the expatriate Indian community in the event of a foreign exchange crisis. We saw that in 2013 when the rupee weakened sharply to the 68/$ level, it was the NRIs who were called upon to infuse foreign exchange into India through a special deposit scheme. What exactly is an NRI and should NRI file tax returns in India? What are the income tax rules for NRI returning to India? Let us look at some basics of tax planning for NRIs.

 

Who exactly is an NRI?
To understand an NRI, let us first understand who is a Resident Indian for Income Tax purposes. According to the Income Tax Act, an individual has to meet one of the following 2 conditions to be classified as a resident Indian..
1.  You have been in India for a minimum period of 182 days during the last financial year (or)..
2.  You have been in India for at least 60 days in the last financial year and for a total of 365 days in the previous four financial years.
An NRI is different from a PIO because a PIO (person of Indian origin) is one whose parents or grandparents were born in undivided India.

Any person who does not meet the above conditions is a Non Resident Indian (NRI) for tax purposes. So which income is taxable in case of a NRI?

Incomes in India which are taxable in the hands of a NRI..

Any salary received in India or payable for services rendered in India

Income from a house property located in India, whether rented or lying vacant

All capital gains in India including on equities, mutual funds and bonds

Income from FDs or savings accounts in India

Interest earned on a Non Resident Ordinary (NRO) account

Any income from business controlled by an NRI in India

Any gift received in India from a relative in excess of Rs.50,000

However, it needs to be remembered that incomes earned outside India will not be taxable in India under the Double Taxation Avoidance Agreement (DTAA). Similarly interest earned by the NRI on Non Resident External (NRE) accounts and Foreign Currency Non Repatriable (FCNR) accounts are also not taxable in India.

 

NRI taxation is fairly more complex and also stringent. Here is what you need to know about NRI taxation in India and the exemptions available to NRIs.

 

Understanding tax planning for NRIs in India..

Any individual who earns more than Rs.250,000 as income in India needs to file tax returns in India. In addition, NRIs are required to file tax returns in case they want to claim refund or in case they have losses that they want to carry forward for future years. Like in the case of resident Indians, NRIs are also required to file returns before July 31st and they are liable to pay advance tax if their tax liability is more Rs.10,000 per year.

When an NRI is paid salary for projects abroad, it makes more sense to get the salary abroad, especially if the country of the project has a lower tax rate. If the salary is paid in India then it will be taxed at the peak rate in India.

When it comes to income from property situation in India, the NRI can claim standard deduction of 30% against the rental income. Additionally, the NRI also gets a deduction for property taxes as well as deductions for interest and principal on the loan in the same way as resident Indians.

There is one more thing to remember when you are giving out your property on rent. The tenant is required to deduct TDS at 30% on rent paid to the NRI and any failure to do so will be treated as a breach of rules in case of the tenant and the NRI. In case a single payment to an NRI is less than Rs.50,000 and if the full year payment is less than Rs.250,000 then Form 15CA can be submitted. For deducting lower TDS, the NRI will have to obtain certificate under Section 197 or a letter from the AO.

When an NRI has long term capital gains, he is permitted to claim exemption from tax either by reinvesting the proceeds in another property under Section 54 or in select infrastructure bonds under Section 54EC. This is useful to NRI in reducing tax. Otherwise, all the other exemptions that are available to a resident India are also available to an NRI like Section 80C, Section 80D, Section 80E etc.

There are, however, certain investments where NRIs are not granted exemptions under Section 80C like PPF and NRIs are not allowed to open new PPF accounts. NRIs are also not given 80C benefits for investing in NSC, SCSS and Post Office 5 year deposit scheme.

While NRIs are also treated like residents in most cases for income arising in India, some of the rules on TDS are a little more stringent for NRIs. Knowledge of these rules helps you plan your tax better!
 

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