NRI Taxation and Tax Liability in India 2020
India is a big family of Resident Indians and the Non-Resident Indians; both are citizens of India and enjoy the same rights. Non-Resident Indians or simply NRIs are part of the Indian diaspora (over 21 million), the most widely spread and diverse diaspora in the world that maintain strong cultural and social linkages with India, besides engaging economically.
So the huge and increasing number of NRIs through their various types of financial transactions have become an integral part of the Indian economy and therefore, liable to pay income tax, just like Resident Indians.
However, while a Resident Indian is required to pay taxes on incomes from within or outside the country, an NRI is only required to pay taxes on incomes generated within the country. This difference in tax implications has necessitated clarity on their definitions to avoid their wrong uses.
This article talks about NRI taxation in India. We’ll first highlight the various conditions that help to identify an NRI in the eyes of the Income Tax authority and then look at the income tax criteria for them.
Let’s break down the whole matter into questions and answers. This’ll make it easier for you to relate to and understand the salient points.
Q1. How are a Resident Indian and a Non-Resident Indian defined?
Your residential status is a key factor in determining your income tax liability in India. From Income Tax point of view, an Indian citizen can be either Resident Indian or Non-resident Indian. Resident Indian is further divided into two types – Ordinary resident(ROR) and Not Ordinary Resident(RNOR). The residential status can change each year.
You’ll be considered a Resident Indian if:
- You are an Indian citizen who has stayed in India for more than 182 days during the financial year in question, or
- You are an Indian citizen who has spent 60 days in India in the previous financial year and 365 days in the last four years cumulatively
- Also, if you are on the payroll of an Indian company but have been sent to a foreign country on an assignment, or as a crew member of an Indian ship, you’ll be considered a Resident Indian.
If you don’t satisfy any of the above conditions you will be considered a Non-Resident Indian (NRI).
Q2. How and why the status of a Resident Indian is further classified?
As said earlier, your tax liability is a factor of your residential status. Resident Indians are further divided into two classes – Resident And Ordinary Resident (ROR) and Resident But Not Ordinary Resident (RNOR).
You’ll be considered a ROR if:
- You have lived in India for at least 2 complete years out of 10 years preceding the FY in question, or
- You have spent 730 days or more in India, during the 7 FYs preceding the FY in question.
You’ll be considered an RNOR if your status doesn’t match with the above.
If you are a ROR, your income from activities outside India will be taxable in India. However, if you are considered an RNOR, you’ll be exempt from paying tax on income that is not accrued or arisen in India. But there is a caveat – if your income from outside India results from a business/professionally controlled set up in India, you’ll be liable to pay tax on that income.
There lies the advantage of an NRI over an RNOR. For the same condition mentioned above, an NRI would be exempt from paying tax on global income from business activities within India.
The eligibility for the RNOR status is further amended through the FA 2020 that now allows an Indian citizen or a PIO (person of Indian origin), who comes on a visit to India from outside in any FY shall be considered an RNOR if:
- His/Her total income, accrued and arisen in India in that FY, exceeds Rs.15 Lakh, and
- His/Her stay in India is 120 days or more but less than 182 days.
Q3. What is Deemed Residency?
This new status has resulted from an amendment provided through the FA 2020 to curb tax evasion. This says that an Indian citizen shall be deemed to be Resident of India(ROI), if:
- His/Her total income in an FY, other than income from foreign sources, exceeds Rs.15 Lakh, and
- He/She is not liable to pay tax in any country or territory due to domicile or residency in that country, or any other criteria of similar nature.
The residential status of an individual who is deemed Resident Of India will be the same as that of an RNOR.
Taxability at a glance based on Residential Status
|Income||Ordinary Resident(ROR)||Not Ordinary Resident (RNOR)/ Deemed Resident||NRI|
|Income generated in India||Taxable||Taxable||Taxable|
|Foreign Income from the business set up in India||Taxable||Taxable||Non-taxable|
|Foreign income from business activities outside India||N/A||Non-Taxable||Non-Taxable|
NRI Tax liabilities at a glance
|Nature of Income||Taxable to NRI|
|Income earned in India||Yes|
|Income deemed to accrue or arise in India||Yes|
|Income earned outside India but received in India||Yes|
|Income earned outside India but received outside India||No|
Q4. What are the common types of taxable income for the NRIs?
NRIs are entitled to have incomes the same way a resident Indian has, such as:
- Salary received in India
- Capital gain on realty and other assets in India
- Receipt of gifts
- Income from interests in the resident accounts
- Income from interests earned from NRO, NRE, and FCNR accounts
- Interest from savings account/ Bank or non-Bank FDs
- Income from rent in India.
Q5. What tax rebates are available to the NRIs?
Most of the Tax Rebates under section 80 are also applicable to the NRIs, such as:
However, NRIs are not allowed to get deductions from the following schemes:
- Investments in NSC, Post office schemes, PPFs and Senior Citizen schemes under section 80C
- Investments under RGES scheme under Section 80CCG
- Deductions for differently-abled under section 80DD, 80DDB, and 80U
Q6. Why should NRIs file Tax returns in India?
Irrespective of whether you are a Resident Indian or Non-Resident Indian if your income in India enters the tax slab, you should file tax returns. If you are an NRI, filing tax returns (mandatory in some cases) helps you in many ways such as:
- Maintaining a clean image and financial accountability to continue to have incomes from India.
- It helps if you ever decide to return to India and start a business.
- Carry forward losses or claim a tax refund
- Ownership of two or more house properties
- Selling your only house property in India
Hope, this article helped you understand some of the essentials of NRI taxation, but there are much more in this realm. Kindly mail us to learn more at firstname.lastname@example.org. We are a virtual CFO service provider specialized in NRI taxation services. If you are an NRI and looking for an able partner to take care of your financial, legal, and tax requirements in India then you have come to the right page. Surely we can talk and take it forward.
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