NRI taxation in India: Income Tax Rules, Exemptions & Deductions

An Indian who is not residing in India may still be considered a citizen for tax purposes. But the tax rules are significantly different from the ones applicable to an Indian resident. Non-resident Indians (NRIs) must, therefore, understand NRI taxation. This will help the person to adhere to Indian tax laws and plan his or her finances, keeping the tax implications in mind.

Who is an NRI?
 

Before you understand the NRI taxation rules and regulations, let us find out when you become a tax-paying NRI. 

• A person is a resident in India if he or she has resided in India for 182 or more days during the financial year, OR 
• Was in India for 60 days in the financial year and a total of 365 or more days in four financial years. 

Only the first condition applies to Indian citizens working abroad or on an Indian ship, and for People of Indian Origin (PIO) with a total income of ₹15 lakh or less (excluding foreign sources).

People who don’t meet any of these criteria are NRIs. Besides, an individual can also be a Resident but Not-Ordinary Resident (RNOR) if the person,

• Is an NRI in 9 out of 10 years preceding the previous year, or,
• The person has stayed for 729 days or less in India during the seven years preceding the previous year

Indian citizens and PIOs will be considered RNOR if they meet the following conditions,

• Total non-foreign income is ₹15 lakh or more
• The person has stayed in India during the previous year for more than 120 days but less than 182 days
• The person has stayed for 365 or more days in the four years preceding the previous year

Also read - NRI deposits in India: Your guide to smart and safe investing

India and NRI taxation
 

NRI taxation in India follows the ‘source rule.’ This means that income that accrues or arises in India or through an Indian source is taxable here. This could include,

• Salary received in India
• Salary received for services rendered in India
• Rent received from property situated in India
• Capital gain on transfer of property or asset in India
• Interest on deposit in India
• Interest on savings account in India

• Profits or Gains from a Business in India

Thus, the income of a non-resident which accrues or arises outside India is not taxable in India. An NRI must file tax returns in India if the annual income exceeds ₹2.5 lakhs. NRIs can file their income tax return in India using either ITR-2 or ITR-3. ITR-2 is used to file income other than income from business or profession. ITR-3 is filed if the NRI has any income from business or profession carried out in India.

Deductions and exemptions in NRI taxation
 

The following NRI taxation-related deductions are allowed under the taxation rules. 

• Income from property situated in India is taxable in the hands of the NRI owner. However, a standard deduction of 30% is allowed on such income
• Interest on deposits and savings accounts is taxable. However, interest earned on NRE and FCNR accounts is tax-free
• Exemptions are available on long-term capital gains earned from the sale of a house property. 
  - Section 54 allows exemption on long-term capital gains on the sale of residential property
  - Section 54F provides exemption on capital assets other than a house property
  - Section 54EC also allows exemption on the sale of residential house property up to ₹50 lakhs

The capital gain exemptions are subject to the fulfilment of the terms and conditions mentioned in the respective sections and sub-sections. Besides, several of the Chapter VI A deductions are also available under NRI taxation in India. These include,

• Section 80C – Up to ₹1.5 lakhs on LIC premium, tuition fee, home loan principal repayment, stamp duty and registration charges on purchase of property, unit-linked insurance policy and equity-linked saving scheme. Options like PPF, NSC, Post-office five-year deposit and senior citizen saving scheme are not available to NRIs
• Section 80D – Medical insurance 
• Section 80E – Education loan interest
• Section 80G – Eligible donations paid
• Section 80TTA – Interest on savings bank account

NRI taxation slab and rates
 

Indian citizens are taxed at different rates, depending on their age, i.e., below 60 years, 60 to 80 years, and 80 years or above. However, NRIs, irrespective of their age, are taxed uniformly. The only slabs applicable are the ones based on income levels, which is different for the old and new tax regimes.

Old regime
 

• Up to ₹2.5 lakhs – Nil
• More than ₹2.5 lakhs and up to ₹2.5 lakhs – 5%
• More than ₹5 lakhs and up to ₹10 lakhs – 20%
• Above ₹10 lakhs – 30%

New regime
 

• Up to ₹3 lakh - Nil
• More than ₹3 lakhs and up to ₹6 lakhs - 5%
• More than ₹6 lakhs and up to ₹9 lakhs - 10%
• More than ₹9 lakhs and up to ₹12 lakhs - 15%
• More than ₹12 lakhs and up to ₹15 lakhs - 20%
• Above ₹15 lakhs - 30%

The section 87A rebate is not available in NRI taxation.

Surcharge in NRI taxation
 

• On total income exceeding ₹50 lakhs and up to ₹1 crore - 10% of income tax payable
• On total income exceeding ₹1 crore and up to ₹2 crores - 15% of income tax payable
• On total income exceeding ₹2 crores and up to ₹5 crores - 25% of income tax payable 
• On total income exceeding ₹5 crores - 37% of income tax payable

The surcharge is subject to marginal relief. 

Advance tax rules in NRI taxation
 

Apart from the rates of income tax and surcharge applicable, an NRI must also keep the advance tax due dates in mind. If the estimated tax liability of the NRI is more than ₹10,000, he or she must pay advance tax during the financial year in four instalments. The advance tax payment schedule is,

• Up to 15% of total advance tax - on or before 15th June     
• Up to 45% - on or before 15th September
• Up to 75% - on or before 15th December
• Up to 100% - on or before 15th March    

DTAA - The tax sweetener
 

The Double Taxation Avoidance Agreement (DTAA) helps people avoid paying taxes for the same income in two countries. DTAA treaties between India and other countries establish the country with a primary right to tax the NRI. It reduces the total tax burden on the person and may also allow tax credits and exemptions.

Also read - A guide to invest in Indian stocks for NRIs

Concluding thoughts
 

NRIs must keep their Indian taxability in mind to avoid tax-related queries on their income. Their income is also subject to tax deduction at source (TDS). By filing an ITR they can claim the excess amount deducted as TDS. Your ITR will also serve as proof of your residential status. 

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