One of the most difficult things for a Non Residential Indian (NRI) is to understand the taxation process in India. It includes how the taxes are calculated, and when the income tax department considers an individual as non-resident. Let us decode the taxation process step by step.
A Taxpayer is categorized as NRI when:
1. An individual resides in India for a period of less than 182 days during the year for which income tax is accessed.
An individual, who has spent 365 days or more in India for 4 preceding years spends less than 60 days in India during the year for which income tax is accessed
Let’s take few scenarios to understand the definition of NRI as per Income tax department
1. You got a job last year and left India, and spent 9 months abroad till the end of the financial year which roughly equates to 210 days, then you would be considered as NRI.
2. You have been living in US for years, and have visited India and lived here for a total of 365 days in last 4 years, spending 61 days in India last year, then you would be considered as resident.
3. You moved to London a few years ago, and have lived a total of 250 days in last 4 years out of which you spent about 100 days in India last year, even then you would be considered as NRI, as the consideration of 60 days only applies when you have lived for an aggregate of 365 days in last 4 years in India.
Filing Returns for Assessment Year 2015-16 for NRIs
It is compulsory to file tax returns for this year’s assessment if your taxable income earned in India is over the basic exemption limit of Rs 2,50,000 or if you have earned long term capital gains or sale of certain investments and assets. For NRIs, income from certain investments or assets is taxed even if it falls below the basic exemption limit.
If your taxable income exceeds Rs 5 lakhs then it is compulsory to file tax returns electronically. If you file your returns late in spite of having taxable income above the exemption limits then you would incur a flat fine of Rs 5,000 and penalty under the clause 271(F) of IT Act 1961.
Incomes that are Not Taxable OR Are Exempted for an NRI
Income tax act doesn’t have any sort of provision for taxing income earned abroad. Therefore, any income that an NRI earns abroad cannot be taxed. Furthermore, dividends from equity shares and equity mutual funds, and interest received on NRE (Non-Resident External) and FCNR (Foreign Currency Non Residential) accounts is tax free.
Long term gains on equity shares and equity mutual funds too are tax free provided you pay securities transaction tax (STT) at the time of sale. Also, if you have rented out your property, you can claim 30% of the total net annual value as cost of maintenance and repairs. All this is in addition to the provision of claiming deduction on mortgage interest.
You can also claim deduction for payments made towards health insurance premiums in India for your dependents under section 80D. Contributions to approved charities and trusts under section 80G, investments under 80C such as PPF etc. are tax free.
One noteworthy thing is that you don’t get some deductions that a resident does for example investment under section Rajiv Gandhi Equity Savings Scheme (80CCG), exemption for differently abled (80DD, 80 DDB and 80 U)
Incomes that are Taxable for an NRI
A NRI can be only be taxed for the income that he/she earns in India that includes wages, income on property and other assets, income from investments that are not exempted as mentioned in the above section etc.
If any of these incomes are also taxable in the country where you reside, then you can avoid paying taxes twice by seeking relief under Double tax avoidance agreement (DTAA).
DTAA will either give you exemption from taxes in one of the countries, or provide allow you to claim tax relief from one of the countries if it has been taxed by both of them.
Tax Rules for NRE (Non-Resident External) and NRO (Non-Resident Ordinary) Deposits
NRO account is denominated in rupees wherein only a certainly amount can be sent abroad, whereas NRE account is meant for funds that are primarily going to be sent abroad.
As far as the taxation is concerned, there is no taxation on the interest earned from NRE accounts. Also there isn’t any sort of TDS or any other tax element in income from such deposits. Whereas on NRO accounts interest earned as well as credits in the account are taxed as per the NRI’s tax bracket in India. For NRO deposits, bank do charge TDS. You can claim relief for the TDS deducted by banks for NRO deposits at the time of filing tax returns.
Filing returns isn’t really a difficult task, with advent of technology, the norms are getting easier for the taxpayers to understand the taxation better. Paying tax is a moral and legal obligation and it helps the government fund various schemes.
Important Note: The last date for efiling of IT returns has been extended to 31st August.