Taxation of Non-Resident Indians (NRIs)

Before we take a closer look at how taxation of NRIs works, let us consider the definition of a non-resident Indian as per current tax rules.

As per current tax rules, you will be considered an Indian resident for a financial year if you meet both of the following conditions:

• You resided in India for at least 182 days in the previous year
• You have resided in India for at least 60 days in the current financial year and have resided in India for no less than 365 days in the last four years.

Additionally, if hold Indian citizenship but are a crew member on an Indian ship, working abroad, or a PIO (Person of Indian Origin) visiting India, the first condition will be applicable to you being an Indian resident.

A further amendment to the 60 days criteria has been introduced in the Finance Act 2020. As of AY 2020-21, an Indian citizen or PIO with total income exceeding Rs. 15 lakhs (except income from income from foreign sources) in the previous year will be considered a resident if they have resided in Indian for at least 120 in the current FY and not less than 365 days in the past 4 years.

In case you do not satisfy both the above conditions including the amended criteria, you are considered as a non-resident Indian.

A non-resident Indian, as per the Income Tax Act, can be classified into three different categories. These are:

Before the implementation of section 89A of the Indian Tax Act in 2021, tax year discrepancies caused issues with foreign tax credits and the Double Tax Avoidance Agreement (DTAA). This is specifically designed to

Section 89A is a provision of the Income Tax Act that assists individuals returning to India after working overseas and depositing money in a foreign retirement account. Normally, India taxes income on the basis of accrual, but this can be a problem if the country you were working in, taxes the income after you make a withdrawal. This scenario may lead to double taxation, but with the implementation of Section 89A of the Indian Tax Act, this is no longer the case. Under this provision, tax authorities in India will not tax the money in your foreign retirement account till withdrawal.

Read More About: Section 80CCD of Income Tax Act

According to Section 89A of the Indian Tax Act, income from foreign retirement accounts will not be considered taxable on an accrual basis in India. The foreign country will subject this income at the time of withdrawal. As per section 89A, the Central government prescribes the manner and the year the income of a specified person from a specified account will be taxed. In this case, specified person, means the individual who opened the retirement account outside the country while being a NRI.

As per the Central Board of Direct Taxes (CBDT), these countries that are covered u/s 89A include the US, UK, and Canada. Additionally, this benefit can only be claimed for income from specific overseas retirement accounts such as 401(k) and IRA (Individual Retirement Account). The CBDT has also notified rule 21AAA and use of Form 10EE for NRI pensioners who want to claim relief from taxation u/s 89A. This rule mandates adding accurately reported overseas retirement income to the previous year's total income. This will then be liable for tax only on withdrawals being made from the account.

The Indian NRI tax here will exclude income that has already been taxed overseas in previous years. It also contains provisions for income that was not taxable in India due to valid reasons, like being a Non-Resident or due to the applicability of DTAA, if any.

When the Taxpayer is ready to file NRI Income tax in India, they must e-file Form no. 10-EE before filing the ITR. Once this is done, the tax on foreign as well as domestic income .

Direct tax is only applicable when the income earned by a NRI is sourced from India. So, capital gains such as those received from the sale of capital assets including property, stocks, mutual fund/ETF units, etc. are taxable as per capital gains taxation rule in India. The amount of tax payable depends on both the holding period and the type of asset from which gains were obtained:

• In the case of Equity Mutual Funds and Equity Shares, short term capital gains (STCG) tax is applicable if holding period is less than 12 months. Long term capital gains (LTCG) tax is applicable on these assets if holding period exceeds 12 months.
• For debt Instruments such as Bonds and Debentures, STCG Tax is applicable for holding period shorter than 36 months, otherwise LTCG tax is applicable.
• In the case if immovable property such as land and buildings, if holding period is less than 36 months, STCG Tax is applicable, while LTCG is applicable for holdings over longer periods.

India focuses on the “Source rule” when it comes to NRI taxation. This means that all income that accrues or comes through or from a source in India will be taxable in India. So, identifying the source of the NRI income in India is essential.

If the income is sourced from inside the country (whether directly or indirectly), it will be taxed in India. Let’s take a look at the list of income sources that a NRI can have in India:

• Salary received in India
• Salary received from any services rendered in India
• Rent received from self-owned properties located in India
• Capital gains from an asset is transferred in India
• Interest from fixed deposits and savings accounts in India
• Dividend received from Indian stocks held by the NRI

Note: The above list is for illustrative purposes only and not exhaustive in nature.

Know More About: NRI Investment Options

While income earned in India by a NRI is taxable as per applicable income tax slab rates, non-residents can also benefit from tax deductions provided they have opted for the old tax regime. Below is a list of some key deductions available to non-residents taxpayers in India:

Under Section 115E of the Income Tax Act, if you are a non-resident Indian and have earned income from investments in India, such income will be taxed at a rate of 20%. Additionally, in such cases LTCG tax rate is currently 12.5% on the income earned. It is important to understand that these rates are fixed, and such income is completely taxable without any tax deduction benefits (eg. u/s 80C to 80U) or basic exemption limit benefit being applicable.

However, under section 10(4B) of the Income Tax Act, NRIs get the option to defer the payment of Long Term Capital gains. However, this provision is only applicable if the long term gains from the sale of an asset are reinvested within the next six months in specified assets such as foreign exchange or an eligible savings certificate.

The process of filing NRI income tax return in India can be summarised in 8 key steps as mentioned below:

• 1. Understand your residential status in India
  The first and most important step is to determine your residential status in India. Knowing whether you are a NRI or a resident can impact the ITR Form you use as well as the income tax payable by you.
• 2. Reconcile your Income and Taxes with Form 26AS
  With the help of form 26AS, you should reconcile and check the TDS that has already been paid by you. This is crucial for determining any due taxes or refunds that you might be eligible for.
• 3. Confirm Taxable Income and Understand Tax Liability
  In this step, you need to determine your taxable income and your income tax liability as a NRI. This may include rental income in India, dividends received, investment income or interest earned from bank accounts, etc.
• 4. Claim Double Taxation Treaty Relief
  Check if your foreign income or income in India qualifies for Double Taxation Avoidance Agreement (DTAA). Remember, this relief is offered on income of NRI residing in specific countries only and not all types of foreign/domestic income may be eligible for DTAA benefit.
• 5. Select ITR and fill required details
  In the most recent assessment year, the Income Tax Department has notifies that NRIs need to fill ITR 2 under all circumstances except for business income. However, in cases where NRI receives business income, then form ITR 3 needs to be filed.
• 6. Provide Bank Account Details
  If you have an active Indian Bank Account, do ensure you add details of the Indian bank account in order for smooth processing of tax refunds. If you don’t have a bank account in India and are claiming a refund, then you need to provide details of your foreign bank account along with applicable SWIFT code.
• 7. Provide Details of All Assets and Liabilities
  In the ITR, the NRI is required to enter all applicable details of their assets and liabilities. If the total income during the fiscal is above Rs. 50 Lakh, the NRI would be required to provide information of all his/her movable and immovable assets in India.
• 8. ITR Verification
  The final step is to upload and verify your ITR within 120 days of submission. If you fail to do so, your ITR will be declared invalid and will not be processed.

According to the latest updates from the Income Tax Act 2024-2025, NRI tax payers can file their income tax return via 2 forms:

NRIs can easily avoid Double Taxation in India with the help of the Double Taxation Avoidance Agreement (DTAA). This is an agreement signed between India and select foreign countries in order to avoid double NRI taxation. Let’s take a look at how to determine if DTAA is applicable to NRI Income in India:

• Find out whether a transaction is taxable in the country you reside in as well as in India. Do note that in order to qualify for DTAA, at least one of the parties involved should be a non-resident or a foreign company.
• If your residential status is confirmed as a non-resident Indian, then DTAA will be applicable.
• Once you are eligible to claim DTAA, you must file for ITR and claim DTAA during the process on income earned overseas that has already been taxed outside of India.

Note: Tax laws are subject to periodic change, so do seek the assistance of a tax professional, if required.

NRIs must file income tax returns (ITR) in India whenever there is a total income above the basic exemption limit (which is Rs. 3 lakh under the new tax regime and Rs. 2.5 lakh under the old tax regime).

If annual income of a NRI does not exceed Rs. 2.5 Lakh but the cost of foreign travel exceeds Rs. 2 Lakh, the individual is liable to file returns even if they fall below the tax slab exemption limit. There are certain other cases where filling for ITR can be mandatory for NRIs, like:

• If the individual has over Rs. 1 crore cumulative balance in current accounts with banks in India.
• If the individual has spent more than Rs. 1 lakh on electricity bill during the fiscal.