Taxes are a certainty of life. Whether your income is INR or USD, paying tax is mandatory if you are an Indian resident, or NRI. NRIs, short for Non-Resident Indians, are Indians who live outside the country, but hold an Indian passport. For NRIs, income tax is payable only on income earned in India. This includes salary or compensation received for rendering services provided in India, rent from property in India, interest from Indian bank accounts, or money made from selling assets in India. It is important to note that income earned outside India is not taxable in India for NRIs.
In this blog post, we will discuss the process of filing Income Tax Returns (ITR), taxable income for NRIs, and exemptions and deductions available for NRIs in India. Read on to stay informed about filing income tax returns as an NRI.
A step-by-step guide to filing income tax returns as an NRI
Filing income tax returns for NRI differs from standard income tax filing. It may appear complicated, but following a step-by-step guide can make it much easier. If you’re an NRI, follow the steps below to file your ITR correctly and on time.
Step 1: Determine the residential status in India
The first thing one must consider is to confirm the residential status. Put simply, one qualifies as an NRI for a financial year based on the number of days of stay in India. You can determine this by checking the number of days you stayed in India during the financial year (April 1 to March 31). If you stayed in India for over 182 days a year, you are deemed a resident Indian for taxation purposes. If not, you are an NRI and only your income earned in India is taxed.
Step 2: Reconciliation of Income & Taxes with Form 26AS
Next, NRIs must match their income and TDS (Tax Deducted at Source) details with Form 26AS to ensure accuracy. Form 26AS is a consolidated annual information statement for a particular financial year that shows all tax deducted at source (TDS), tax collected at source (TCS), and advance tax payments. It can be downloaded from the Income Tax Department’s website, net banking, and TRACES portal.
Step 3: Ascertain taxable income and determine your tax liability
As mentioned, NRIs need to pay income tax only on income earned in India. Calculate your taxable income in India under heads like salary, rental income, interest from bank deposits, or capital gains and compute your tax liability. Next, apply the tax rates, and claim applicable deductions under sections 80C and 80D.
Step 4: Claim double taxation treaty relief
NRIs can avoid double taxation using the Double Taxation Avoidance Agreement (DTAA) provisions. Essentially, DTAA enables an NRI to avoid paying tax twice on the same income if India and the specific foreign country are signatories to the treaty.
Step 5: Choose the correct ITR form
NRIs should carefully select the correct income tax return (ITR) form based on their income sources, such as ITR-2 or ITR-3. They must use ITR 2 to file tax returns unless they have business income, in which case they must use ITR-3.
Step 6: Disclosure of bank account details
NRIs must disclose all Indian bank accounts, including savings and current accounts, in their tax returns. Make sure the details are correct to avoid problems.
Step 7: Provide details of assets and liabilities in ITR
While filing the ITR, NRIs with income above ₹50 lakh must declare their assets and liabilities in India. You should provide details on all your assets, like property, investments, and liabilities, such as loans.
Step 8: ITR Verification
The final step is to e-verify your return via the Income Tax Department’s e-filing portal. Alternatively, you can also send a physical copy of the signed ITR-V form to the Income Tax Department. Ensure you complete this step within 120 days of filing your return to avoid penalties or delays.
Taxable income for NRIs
For NRIs, the Indian income tax rules differ from those for resident Indians. NRIs are only required to pay tax on income that is earned in India, which includes:
Income from capital gains
If an NRI has capital gains from selling assets like property, shares, mutual funds, or other capital assets in India, they are taxable. However, it is to be noted that tax rates depend on the asset’s classification and if the gains are short-term or long-term.
Income from salary
Even if you are an NRI, if you receive a salary for services rendered in India, your income is taxable in India. For instance, if your work for a government of India project, your salary will be taxed in India even if you are based abroad.
Income from house property
NRIs are liable to pay tax on income from property situated in India. However, they can claim a 30% standard deduction on rental income, deduct property taxes, and reduce the interest component on a home loan from their taxable income. In addition, principal repayment for the housing loan is also eligible for deduction under Section 80C.
Income from other sources
Income earned by NRIs from sources such as interest on fixed deposit (FD) and savings accounts in India is liable for taxation.
Income tax exemptions and deductions for NRIs in India
Let’s look at the income tax exemptions and deductions available for NRIs in India:
Section 80C Deductions:
Most of the deductions under Section 80 are also available to NRIs. NRIs can claim deductions under Section 80C for eligible investments and expenses, such as:
- Payment of premium for a life insurance policy. However, the catch is that the policy must be in the name of the NRI, spouse, or children.Â
- Principal repayment of a home loan for property owned in India.
- Payment of tuition fees for children.
- Investments in specific government schemes like Equity Linked Savings Scheme (ELSS) and Unit Linked Insurance Plan (ULIP).
Home loan interest
NRIs can claim tax benefits of up to ₹2 lakh a year on home loan interest paid for self-occupied properties in India. For a rented property, the entire interest amount paid, without any upper limit, can be deducted from taxable income. The property must be in India, and the loan must be from an approved lender. Joint borrowers can claim benefits individually.
Income from FCNR accounts
Interest earned from FCNR (Foreign Currency Non-Resident) term deposit account is tax-free for NRIs in India. After maturity, you can transfer the funds to a Resident Foreign Currency (RFC) or resident rupee account without paying tax. However, once your status changes to that of a regular resident, the interest becomes taxable in India.
Education loan
NRIs can claim a deduction on interest paid for education loans taken for higher studies under Section 80E of the Income Tax Act. However, this deduction is available only if the loan is taken in the name of the NRI, spouse, or children. Besides, the loan must be from a recognized financial institution.
Charitable donations
NRIs can claim deductions for donations to eligible charitable institutions in India. The donation must be to institutions listed under Section 80G of the Income Tax Act to avail the tax benefit.
Savings bank account
Like resident Indians, NRIs with savings bank accounts in India can claim a deduction of up to ₹10,000 per year on the interest earned from those accounts. However, this deduction is available only for savings accounts held with banks, cooperative societies, or post offices.
Deductions unavailable to NRIs
NRIs cannot claim tax exemptions from investments listed below:
- Senior Citizen Savings Scheme
- National Savings Certificates
- Post Office 5-Year Deposit Scheme
- Public Provident Fund
- Investments under Rajiv Gandhi Equity Savings Scheme (RGESS)
Conclusion
Filing income tax returns as an NRI may appear daunting, but it is not complicated if you follow logical steps. Regardless of the source of your income or your resident status, fulfilling tax obligations is a must for every Indian resident and NRI. More importantly, filing your tax returns on time should be a priority to avoid legal penalties, delays, or other complications. NRIs can avail most of the tax deductions available to resident Indians, further simplifying the process.
