FAQs on NRI Taxation

Q1. Who is an NRI?

A1. an Indian staying abroad is known as an NRI i.e. Non-Resident Indian.

Q2. Who is a NRI under FEMA?

A2. FEMA defines ‘a person outside India’ and Income Tax Act defines NRI, though the term ‘NRI’ is used for both the purposes loosely.
Person Resident in India is —

A person residing in India for more than 182 days during the course of the preceding financial year but does not include,

i) Person who has gone out of India or who stays outside India, in either case

• for or on taking up employment outside India, or
• for carrying on outside India a business or vocation outside India, or
• for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

ii) Person who has come to or stays in India, in either case, otherwise than

• for or on taking up employment in India, or
• for carrying on in India a business or vocation in India, or
• for any purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.
• any person or body corporate registered or incorporated in India,

-an office, branch or agency in India owned or controlled by a person resident outside India,

-an office, branch or agency outside India owned or controlled by a person resident in India;

A Person Resident outside India means a person who is not a Resident in India.

This definition is identical to one in FERA and has tried to delete the precepts of citizenship and ‘Persons of Indian Origin’

ITA defines the period as 182 days or more whereas FEMA defines it as more than 182 days. 

Q3. What is the time limit to file the Return of Income?

A3. Every person who is not carrying on business is required to submit return of income by 31st July every year for the income earned during the prior year ending 31st March provided his income exceeds the maximum amount not chargeable to tax i.e. Rs. 2,00,000/-.

Q4. Is there any tax concession available for NRI’s?

A4. NRI’s have been offered a separate concessional tax regime in respect of certain types of income. Concessional tax of 20% is available in respect of investment income and 10% in respect of long term capital gains from the specified assets which are acquired out of convertible foreign exchange.

Q5. What are the specified assets?

A5. Specified Assets are defined under section 115c(f) as following:

Shares in an Indian company.

Any security of the Central Government.

Debentures and deposits in an Indian Company

Any other notified asset.

Q6. What is Tax Exemption Certificate?

A6. The TDS rate prescribed from NRI’s income is the maximum rate at which relevant income is taxable in India. But the actual tax liability is lower than this. However, the higher deduction of tax so made is not claimed as refund by filing of return. So to assist such situation the Income tax Act provided a procedure where an NRI can apply to the assessing officer to issue a tax exemption certificate authorizing the payer of income to deduct tax at a lower or nil rates.

Q7. Who can apply for tax exemption certificate?

A7. Any NRI who receives an income after tax being deducted at source can apply to obtain tax exemption certificate provided his income is less than Rs. 1,50,000/- p.a. in India.

Q8. Who can apply for Tax Exemption Certificate?

A8. Any Non Resident Indian from whose Income the Tax is likely to be deducted at source can apply to obtain exemption for tax deduction provided his/her taxable Income in India is less than Rs.1,50,000/- per year. Or if the tax likely to be deducted is more than the estimated tax liability, is eligible to apply for certificate permitting deduction of tax at lower rate.

Q9. What is the time taken to issue such certificates?

A9. Normally the Exemption Certificate is issued within 10-25 Days.

Q10. For how much period the exemption certificate is valid?

A10. The income tax department generally issues Exemption Certificate for a period of 1 to 3 years.

Q11. Action to be taken after obtaining exemption certificate?

A11. Any NRI who has obtained Exemption Certificate need to submit it to the Payer of the income who will follow the certificate and not deduct tax or may deduct at a lower rate as given.

If misrepresentation in the application held – consequences: If there is genuine mistake in representation for obtaining the Exemption Certificate, no penalty is attracted. However you may have to pay interest if you are liable to pay income tax later on.

Q12. How long will it take to issue such certificate?

A12. The Tax Exemption Certificate is issued within 30 days.

Q13. For how long is such certificate valid?

A13. The certificate is valid for 1 year.

Q14. What are the Tax-liabilities of an NRI leaving India for good?

A14. All those individuals who leave India for good have to complete certain formalities in relation to their financial affairs in India. They have to inform the banker that the local bank accounts shall be treated as NRI accounts.  They have to inform the companies concerned about the change in their status as NRI. He shall inform the income tax department about the change in the residential status within the meaning of Income Tax Act.

Q15. What are the tax liabilities of returning NRI’s?

A15. NRI returning India for good should be aware of the various aspects of Foreign Exchange Regulations Act (FEMA) and Banking regulations in order to rearrange his financial affairs in India. He should also inform those related to his residential status according to income tax act i.e. inform the banker and the companies concerned regarding the change of status from Non resident to Resident.

Q16. What are the different Residential Status of an Individual under Indian Income Tax Act, 1961?

A16. Under the Indian Income-tax Act, 1961, Residential Status of an individual depending upon his period of stay in India are –

1. Resident

2. Non-Resident (NR)

Resident is defined as a person who during the financial year (April to March) satisfies any one of the following two basic conditions:

He is in India for at least 182 days in the financial year

He is in India for at least 60 days in the financial year and his total stay in India for last four preceding previous years is 365 days or more.

Individuals leaving India for employment, as member of crew of an Indian ship, and who resides abroad and is on a visit to India in any year, the period of 60 days is extended to 182 days. In other words, such a person should be residing in India for at least 182 days or more. Residents are of two types:

1) Resident and Ordinarily Resident - An individual who satisfies either of the conditions mentioned above is ROR.

2) Resident but Not Ordinarily Resident - An individual who satisfies either of the conditions mentioned above and also the following conditions –

He has been non-resident in India in 9 out of 10 years preceding the relevant previous year; or,

He is in India for 729 days or less during 7 previous years preceding the relevant previous year.

Thus, a person returning from overseas to settle down in India can be treated as “Resident But Not Ordinarily Resident” for a maximum period of two years after he returns to India.

Non-Resident - An individual, who does not satisfy any of the basic conditions mentioned above, is a “Non-Resident”.

Q17. Who is a person of Indian origin?

A17. Under the Foreign Exchange Management (Deposit) Regulations, 2000, Person of Indian Origin (PIO) means, a citizen of any country, other than Bangladesh or Pakistan, if –

He at any time held Indian Passport. He or either of his parents or any of his grandparents at any time was citizen of India. The person is of Non-Indian origin or parentage, and married to a PIO, an NRI, or an Indian citizen.

For the purpose of investment in partnership firm or proprietary concern, the definition of PIO is curtailed. PIO means, a citizen of any country, other than Bangladesh, Pakistan and Sri Lanka, if –

He has at any time held an Indian Passport

He or either of his parents or any of his grandparents at any time was citizen of India. The person is the spouse of an Indian citizen or a person who falls in any of two categories mentioned above.

For the purpose of investment in immovable properties in India, the scope of PIO is further restricted. PIO means, a citizen of any country, other than Bangladesh, Pakistan, Sri Lanka, Afghanistan, China, Iran, Nepal, and Bhutan, if –

He has at any time held Indian Passport

He or his father or his grandfather at any time were citizen of India

2) Section 80C deductions- This section has been introduced by the Finance Act 2005. Broadly speaking, this section provides deduction from total income in respect of various investments/ expenditures/payments in respect of which tax rebate u/s 88 was earlier available. The total deduction under this section (alongwith section 80CCC and 80CCD) is limited to Rs. 1 lakh only.

Q18. What are the tax benefits available to an NRI?

A18. Tax benefits available to NRI are as follows:-

1) Bank Deposits are free from wealth tax in India.

• Life Insurance Premium For individual, policy must be in self or spouse’s or any child’s name. For HUF, it may be on life of any member of HUF.
• Sum paid under contract for deferred annuity For individual, on life of self, spouse or any child .
• Sum deducted from salary payable to Govt. Servant for securing deferred annuity for self-spouse or child Payment limited to 20% of salary.
• Contribution made under Employee’s Provident Fund Scheme.
• Contribution to PPF For individual, can be in the name of self/spouse, any child & for HUF, it can be in the name of any member of the family.
• Contribution by employee to a Recognised Provident Fund.
• Sum deposited in 10 year/15 year account of Post Office Saving Bank
• Subscription to any notified securities/notified deposits scheme. e.g. NSS
• Subscription to any notified savings certificate, Unit Linked Savings certificates. e.g. NSC VIII issue.
• Contribution to Unit Linked Insurance Plan of LIC Mutual Fund e.g. Dhanrakhsa 1989
• Contribution to notified deposit scheme/Pension fund set up by the National Housing Scheme.
• Certain payment made by way of instalment or part payment of loan taken for purchase/construction of residential house property.Condition has been laid that in case the property is transferred before the expiry of 5 years from the end of the financial year in which possession of such property is obtained by him, the aggregate amount of deduction of income so allowed for various years shall be liable to tax in that year.
• Contribution to notified annuity Plan of LIC(e.g. Jeevan Dhara) or Units of UTI/notified Mutual Fund. If in respect of such contribution, deduction u/s 80CCC has been availed of rebate u/s 88 would not be allowable.
• Subscription to units of a Mutual Fund notified u/s 10(23D).
• Subscription to deposit scheme of a public sector, company engaged in providing housing finance.
• Subscription to equity shares/ debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions.
• Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for the purpose of full time education of any two children. Available in respect of any two children.

(i) ELSS (Tax saving Equity Mutual Fund schemes) – ELSS are equity-oriented mutual fund schemes that invest in a diversified portfolio of Indian stocks. ELSS schemes can be purchased online and come with a lock-in period of 3 years. They are ideal for long-term tax-free savings.

(ii) House property – Buying a house property in India is a good investment if you plan to come back in the future. The principal and interest payments made every year for a home loan availed in India are allowed as deductions subject to an overall limit of Rs 1 lakh per year on principal payments (under section 80C) and full interest payments made during the year (under section 24b) – in case of let-out property.

(iii) Life Insurance and Pension Plans – There are many life insurance and retirement/pension plans of Insurers that can be bought by an NRI. You can buy retirement plan with or without life cover and also choose between a traditional plan (endowment, money-back) and a unit-linked plan depending upon your risk appetite. Point to note is that the policies are issued in Indian Rupees only. There is also a facility available with few insurers like LIC for NRIs to obtain insurance cover from their present country of residence where all formalities are completed in their present country of residence, subject to fulfilment of certain rules and restrictions on sum insured amounts and add-on riders.

2. Section 80D - [Health insurance premium payment] –

NRIs can purchase health insurance policy in India for themselves, their family and also dependant parents and claim deduction for the premium paid up to Rs 35,000 per annum [Rs 15,000 in case of non-senior citizens and Rs 20,000 for senior citizens];

3. Other Deductions u/s 80 –

(i) Deduction under 80G – for specified donations;

(ii) Deduction under 80E – for interest payment towards Educational loan taken from any bank/approved financial institution for higher studies (comprising full time as well as vocational studies pursued after passing senior secondary examinations studies) for self or any of immediate family members (children, spouse).

• Investments not available for NRIs – PPF (Public Provident Fund), NSC (National Savings Certificate), SCSS (Senior citizens savings account), tax saving infrastructure bonds under section 80CCF and POTD (Post office time deposits) are not available for NRIs.However, if you had already opened any of these accounts when you were a Resident Indian, you can continue to service the account(s) till maturity.
• The overall limit on section 80C, 80CCC is Rs 1 lakh per annum.
  Q19. Is NRI liable to Wealth-tax in India?A19. Wealth tax, in India, is levied under Wealth-tax Act, 1957. NRIs are taxed for their wealth in India alone. (Foreign wealth being entirely exempt from tax).Q20. Can NRIs purchase RBI Relief Bonds?A20. NRIs could previously purchase RBI Relief Bonds. However, NRIs are presently not entitled to purchase these bonds.Q21. Are indexation benefits available to NRIs?A21. Rates chargeable under Income Tax Act, 1961 is 20% with Indexation and 10% without indexation. NRIs are allowed 10% tax on LT gains arising out of only listed shares and securities. The same privilege is also applicable to units of UTI/MFs. On all the rest of the assets, such as residential flats, land, the rate is 20% with the protection against inflation through cost inflation index.Q22. Is it necessary for NRIs to file Return of income in India?A22. For any individual, Resident or an NRI, there is no legal obligation to file the income-tax returns in India unless the taxable income exceeds the minimum tax threshold of Rs.2,00,000.Q23. What is due date of filing return in India for NRI ?
  
  A23. NRI is required to file the return of income in India by 31st July.
  Return for the Financial Year ended on 31st March 2012 has to be filed by 31st July, 2013.Q24. What is Double Taxation Avoidance Agreement?
  
  A24. A person earning any income has to pay tax in the country in which the income is earned (as Source Country) as well as in the country in which the person is resident. As such, the said income is liable to tax in both the countries. To avoid this hardship of double taxation, Government of India has entered into Double Taxation Avoidance Agreements (DTAA’s) with various countries DTAA’s provide for the following reduced rates of tax on dividend, interest, royalties, technical service fees, etc., received by residents of one country from those in the other.
  Where total exemption is not granted in the DTAA’s and the income is taxed in both countries, the country in which the person is resident and is paying taxed, the credit for the tax paid by that person in the other country is allowed.
  Where tax relief has been given by one country, the country of residence generally allows credit for the tax so ‘spared’, to avoid nullifying the relief.

Q25. What is the basic exemption limit for NRIs?

A25. For resident Indians, tax is deducted at source only when the income exceeds a certain limit. There are different thresholds for different income sources. For instance, TDS on rent is applicable only when the total rental income exceeds Rs 1.2 lakh per annum. TDS on bank interest is applicable only where interest earned from a particular branch exceeds Rs 10,000 per annum. In case of NRIs however, every single rupee earned is subject to TDS, that too, at a rate of 30%. In case of bank interest, if India has a Double Taxation Avoidance Agreement (DTAA) with the NRI’s country of residence, the NRI may claim a lower TDS rate of 15%.

Q26. Do Individuals require to deduct TDS on payments to NRIs?

A26. In case of rental income or capital gains from sale of property, the person who pays either the rent or the sale consideration to the NRI is liable to deduct tax at source. Even if that person is an individual, he is expected to obtain a TAN number (Tax Deduction and Collection Account number) and deposit the TDS with the Government.

There is no such requirement in case of rent paid or sale consideration paid to a resident Indian. The income tax laws clearly state that if it is an individual or an HUF who is paying the rent to a Resident, no TDS needs to be deducted.

Q27. What is the easy route to claim exemption?

A27. If a resident Indian expects his total income for the year to be less than the basic exemption limit of Rs 2 lakh, he can submit form 15G and 15H to his bank and get exemption from TDS on his interest. However, for NRIs, the process is not so simple.

An NRI might want an exemption under two circumstances: either his Indian income is exempt due to benefit available under a DTAA or his total income in India is expected to be less than the threshold of Rs 2 lakh.

If the DTAA between the country of an NRI’s residence and India allows a lower rate or zero rate of TDS, the NRI would need to submit a tax residency certification from the tax department of the country of his residence.

This will certify that he is a tax paying resident in that other country and that tax on that income is being duly paid in that country. In countries like the US, if an Indian resident is earning income from a US source, and he wants to claim exemption from US withholding tax, he does not need to submit a tax residency certificate issued by the Indian tax authority. He must only fill up a form W8Ben to his payer.

Q28. What are the TDS provisions for NRIs living in countries where there is no tax?

A28. There is a peculiar scenario of DTAAs that India has signed with countries that do not have personal tax.

In such cases, currently each bank might have its own way of handling this. Some banks like the SBI require NRIs to submit a self-declaration form if they reside in a country that has zero tax, but has a DTAA with India that offers a lower rate of TDS. On submitting this self declaration, the bank will deduct tax at source at the reduced rate instead of the mandated 30% rate.

Dear NRIs,

We trust you find the above information useful. If you still have any specific query concerning NRI Taxation related matter, please feel free to mail us at- info@taxmantra.com .

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