Income Tax for NRIs in India: A Comprehensive Guide

Non-Resident Indians (NRIs) earning income in India are subject to specific taxation rules under the Income Tax Act, 1961. These rules differ significantly from those applicable to resident Indians. This guide outlines the key tax obligations, filing requirements, and available deductions for NRIs to help ensure compliance and avoid unnecessary tax liabilities.

Who is Required to File an Income Tax Return in India?

NRIs must file an income tax return (ITR) in India if their total taxable income exceeds Rs 2,50,000 in a financial year. The due date for filing ITR is July 31st unless extended by the government.

Income earned or accrued outside India is not taxable for NRIs unless it is received in India or has a direct source in India. This ensures that NRIs are only taxed on income originating from India.

Taxability of Income Earned Abroad

The taxability of an NRI’s income depends on their residential status:

• If an individual qualifies as a resident, their global income is taxable in India.

• If an individual qualifies as an NRI, only income earned or accrued in India is taxable in India.

  
  

Examples of taxable income for NRIs include:

• Salary received in India or for services rendered in India

• Income from house property situated in India

• Capital gains from transferring assets located in India

• Interest earned on Indian bank accounts (except tax-free NRE and FCNR accounts)

Income earned abroad is not taxable in India for NRIs.

Situations Where NRIs Must File an ITR, Even Below the Taxable Limit

Even if an NRI’s taxable income is below Rs 2,50,000, they must file an ITR if they:

• Have deposited more than Rs 50 lakh in an Indian savings bank account.

• Have deposited more than Rs 1 crore in a current account with an Indian bank or cooperative society.

• Have TDS or TCS exceeding Rs 25,000 in a financial year.

• Have incurred a travel-related expenditure from India exceeding Rs 2 lakh.

  
  

Advance Tax Liability for NRIs

NRIs must pay advance tax if their total tax liability exceeds Rs 10,000 in a financial year. Failure to pay advance tax attracts interest under Sections 234B and 234C.

Taxability of Different Income Sources for NRIs

1. Income from Salary

• Salary is taxable in India if the services are rendered in India, irrespective of where the salary is credited.

• Salaries of diplomats and ambassadors are exempt from tax.

2. Income from House Property

• Income from house property in India is fully taxable.

• NRIs can claim deductions:

  • Standard deduction of 30%

  • Property tax deduction

  • Interest deduction on a home loan

  • Principal repayment deduction (Section 80C)

  • Stamp duty and registration fee deduction (Section 80C)

• Rent paid to an NRI landlord is subject to TDS at 30% + surcharge + 4% cess.

3. Income from Other Sources

• Interest on NRO accounts is fully taxable.

• Interest on NRE and FCNR accounts is tax-free.

4. Income from Business & Profession

• Any income from a business controlled or set up in India is taxable for NRIs.

5. Income from Capital Gains

• Capital gains on Indian assets (property, shares, securities) are taxable in India.

• Long-term capital gains tax:

  • 20% with indexation

  • 12.5% without indexation

• TDS on property sales by NRIs is 20%.

• NRIs can claim capital gains exemptions under Sections 54 (investment in another house property) and 54EC (investment in capital gain bonds).

  
  

Deductions and Exemptions Available to NRIs

Deductions Under Section 80C (Maximum limit: Rs 1.5 lakh)

• Life insurance premiums (for self, spouse, or children)

• Children’s tuition fees (for schools/colleges in India)

• Principal repayment on home loans

• ULIPs and ELSS investments

Deductions Under Section 80D

• Health insurance premiums

  • Up to Rs 25,000 for self, spouse and children

  • NRI can also claim deduction for parents insurance upto Rs 25,000

  • Preventive health check-up deduction of Rs 5,000

Deductions Under Section 80E

• Interest on education loans (for self, spouse, or children) – no limit on deduction amount.

Other Deductions

• Section 80G: Donations to eligible charities

• Section 80TTA: Deduction up to Rs 10,000 on interest from savings bank accounts

Deductions Not Available to NRIs

Certain deductions available to resident Indians cannot be claimed by NRIs:

• Investments in PPF, NSC, Post Office deposits, SCSS (Senior Citizen Savings Scheme)

• Section 80DD: Maintenance of handicapped dependents

• Section 80DDB: Medical treatment of specified diseases

• Section 80U: Disability-related deductions

• Section 87A rebate is not applicable to NRIs.

How Can NRIs Avoid Double Taxation?

NRIs earning income in both India and their country of residence may face double taxation. This can be avoided using Double Taxation Avoidance Agreements (DTAA) between India and other countries.

Methods to Claim Tax Relief under DTAA

1. Exemption Method: Income is taxed in only one country.

2. Tax Credit Method: Income is taxed in both countries, but tax paid in one country is adjusted in the other.

Conclusion

Understanding tax rules for NRIs is crucial to ensure compliance and minimize tax liability. By filing returns on time, declaring all Indian-sourced income, and utilizing available deductions, NRIs can efficiently manage their tax obligations. Consulting a Chartered Accountant (CA) can provide valuable guidance in tax planning, compliance, and optimizing tax-saving opportunities under Indian tax laws.